The bottom line of the table shows that real GDP fell in 2020 meaning that 2020 was a recession year. The recession lasted only a single year (if we ignore quarters) and real GDP was only somewhat larger in 2022 than in 2020.
The table shows that we experienced a tripling of the government deficit from 2019 to 2020. It is not uncommon for the government to spend more and/or tax less during a recession. Both outlays and revenues recovered in 2021 but we were left with a large government deficit in 2021.
The national debt grew in both years -- by $4.2 trillion in 2020 and then by another $1.3 trillion in 2021. The total increase over two years amounted to a 33% over the level in 2019. That's a whopping increase in debt in just two years. Recent news shows the national debt now at $32 trillion.
So what? We have come to expect that governments will react this way after a recession. Governments feel the responsibility to juice up the economy and they do it by increasing national debt. It seems reasonable, right? If you lose your job and you go into a personal recession, you might borrow to carry you through the lean times.
Debt seems natural and it is. But we always have to remember that when we go deeper into debt, we take a risk. On the personal level, if you don't get another job quickly, then you might not be able to pay back the debt. There is that same risk with the government. If the economy does not recover quickly, then we may not be able to repay the debt. Creditors don't like it when they are not repaid in a timely manner and there are consequences for failure to replay.
With governments it gets more complicated. Government has the power to tax and therefore we believe that the government should and can repay. Just because the government has the power to tax and repay, however, it doesn't mean it will. With government there is the additional element of policy. If government decides not to pay down the debt, it is possible that it will incur even more debt. Government, or should I say politicians, excel at finding ways to spend the people's money. If they fail to reduce government deficits and debt, what happens next?
The recent behavior of national inflation and interest rates might give you a clue. The picture is not so rosy.
The table shows a large increase in debt following a recession. But will it end there? Will politicians find excuses to not reduce spending or to not raise taxes? If national debt continues to rise in the future, we will surely get higher inflation and interest rates. Is that what we want? Is that what we elect leaders to do? I think not!
Government Budget and Real GDP (in trillions)
2019 2020 2021
Revenues 3.5 3.4 4.0
Outlays 4.5 6.6 6.8
Deficit -1.0 -3.1 -2.7
Debt 16.8 21.0 22.3
Real GDP 19.0 18.4 19.4
Dear LSD. Any concern about U.S. debt is tantamount to whistl’n Dixie or relieving oneself into the wind. Without gitt’n to far into the seaweed lemme ‘splain using debt-to-GDP ratio, which in U.S. has risen from 40% in 1966 to 121% as of last June. A global ratio comparison as of 2020: Venezuela highest @ 304%; Japan @ 254%; U.S. wuz 6th in the world @ 134%. Apparently, a high ratio does not ring a kuntry’s death knell. Yer closing paragraph mentions higher ‘flation ‘n interest rates. Though we don’t (hey, hey) ‘lect leaderz for those gifts that’s wut we git. Bet yer bippie on U.S. debt-to-GDP continuing to rise (cuz that’s wut our ‘lected officials do best e.g. spend OPM 😊) . . . . ‘n count on income taxes increasing to pay for ‘flation, continued govomit spend’n ‘n debt increase, ‘n increased debt service. I feel relieved . . . do you?
ReplyDeleteYour death knell is always a relative thing. If things appear to be out of control then our markets could collapse. If a recession is really around the corner and you couple that with rising interest rates and inflation and higher tax rates -- then things could get pretty messy. But that's a big if. Hopefully
DeleteI meant to end with hopefully that won't happen.
DeleteDear LSD. If thingz appear ‘out’a kontrol? Huh, huh? Down here in Tunaland amongst seaweed ‘n creepy crawly non-fin kreaturz it seemz stuff up in yer U.S. terra firma that thingz are weally weally out’a kontrol ekonomickly ‘n poliktically. Me tinkz thingz are already muy muy messy up dere ‘n wen ya figger in Ukrain/Rusky and EU recession et al it don’t luk gude fer you two-legg’d air-breath’n land lubberz. Heck, makes my liver gwuiver . . . . gott’a find some gude, kold non-sea water Chardonnay. Cheerz!
DeleteAgreed. I prefer the bourbon. Cheerz!
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