What is, and isn't, worrying about 100% debt to GDP
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The United States has crossed a symbolic milestone: The national debt is now larger than its gross domestic product. But it's not the level of that ratio that is alarming — it's the trajectory.
The big picture: There's nothing inherently unsustainable about a 100% debt-to-GDP level. What matters is why it got that high, the prospects for future borrowing, and the forecast for growth and borrowing costs.
- Across those dimensions, the U.S. fiscal outlook is exceptionally gloomy, in ways not reflected in much of the day-to-day political discourse.
Catch up quick: The Commerce Department last week reported $31.9 trillion annualized GDP in Q1. That surpasses the $31.4 trillion in debt held by the public on the last day of the quarter.
- The U.S. debt-to-GDP ratio briefly topped 100% during the early days of the COVID-19 pandemic when economic activity collapsed. But before that, it hadn't exceeded that ratio since the aftermath of World War II.
- The ratio is on track to continue rising, with the Congressional Budget Office projecting it will reach 120% in 2036.
Zoom in: Consider a family with $100,000 in debt and an annual income of $100,000. Is their debt excessive? The answer, of course, is that it depends.
- If the family ran up that debt due to one-time expenses that won't recur and has a low interest rate, rising income and day-to-day spending in line with what they bring in, they're probably fine.
- If, on the other hand, they ran up that debt to support routine living expenses in excess of their earnings and have a high interest rate and stagnant income, it would raise serious alarm bells.
Zoom out: The U.S. government is more like the latter family. The CBO projects federal revenue in the next few years will be 17% to 18% of GDP, while expenditures will be north of 23% of GDP.
- That gap, of around 6% of GDP, is higher than the CBO's GDP growth projection, which would imply an ever-rising debt-to-GDP ratio.
- In those projections, the federal government's interest expenses soar to new heights as a share of the economy — surpassing $1.5 trillion and 4% of GDP in 2031.
- That assumes interest rates remain broadly in their current zone, with a 10-year Treasury note yielding about 4.4% — and that bond investors prove willing to continue financing an ever-growing debt at those levels.
Flashback: At the end of World War II, by contrast, the debt-to-GDP ratio was set to plunge as wartime spending wound down and the private-sector workforce exploded, thanks to returning soldiers and a population boom.
- Now, the share of Americans at retirement age is surging, labor force growth has slowed precipitously amid restrictive immigration policy, and the Trump administration seeks to increase military spending.
Yes, but: One potential saving grace would be if artificial intelligence brings the kind of surge in productivity that its biggest enthusiasts predict.
- That would help the denominator of the debt-to-GDP equation by expanding economic activity.
- That said, it could create its own problems on the numerator, as federal government revenues are heavily dependent on taxing labor income.
The bottom line: The national debt hitting 100% of GDP isn't a worry in and of itself, and it isn't some magical threshold. What is worrying are the details of how it got there, and what comes next.
