Don’t Worry So Much About The Record U.S. Government Debt

There are legitimate worries for the short term regarding the government debt, like how Washington will handle its next chance to agree on a spending bill and raise the debt ceiling.

But the long-term fears regarding the debt can probably be filed away in the archives along with the other doomsday scenarios of 2008.

There was the certainty that the government’s massive bailout of banks and automakers would not work. At worst the money was being thrown down a bottomless pit, and the banks and auto firms would fail anyway. And at best it would result in the U.S. owning (nationalizing) the largest banks and automakers and running them as continuing money-losing operations, like the postal service.

Instead they came back stronger than ever, paid back the loans (plus interest); the government made profits on the temporary investments, and is now beginning to receive additional tens of $billions in fines from banks and other financial firms for the wrongdoings that contributed to the financial meltdown.

But there is still the remaining popular scenario that the resulting record government debt will eventually either sink the nation, or at least result in huge cuts in the safety nets of social security and Medicare, and leave the next generation struggling for decades with the unmanageable debt burden.

By looking through the rear view mirror it’s easy to reach that conclusion.

The alarming situation is that U.S. government debt had already almost doubled from $5.7 trillion in 2000 to $10.0 trillion in 2008. And since then it has almost doubled again, reaching $19 trillion in 2013.

If we extend that trend endlessly into the future, which many analysts and critics are, obviously there could be nothing but catastrophe down the road.

But it’s like most doomsday scenarios. They are created by extending past trends in a straight line into the future, without consideration of how conditions change. And there are now dramatic changes taking place related to the government debt.

It is true that the debt is still growing, since the government is still spending more than it’s taking in. However, the annual deficit is shrinking dramatically.

According to the most recent Treasury Department report, the deficit, at $680.3 billion for fiscal year 2013 (ended September 31), has fallen to its lowest level in five years, as government spending has declined, while tax revenues increased to $2.77 trillion, a record high.

The reversal of the trend is not unprecedented.

In the 1980s and early 1990’s government debt reached then record levels, and for similar reasons. The Reagan administration had undertaken massive government spending programs to pull the economy out of the 1970’s malaise; the 1970’s string of recessions, stagflation, and repeated cyclical bear markets during that long 1965-82 secular bear market.

The huge government spending efforts worked that time too, even though at the time the popular opinion was also that there would be no way to escape the consequences. Economists competed with each other in the 1980’s with dire forecasts of how the nation was headed inevitably into bankruptcy.

But in the early 1990’s, as the economy began to recover, although like now very anemically, the fractional improvement in the economy and increase in tax revenue from improving employment, rising stock market profits, etc., had the annual budget deficits trending lower each year. Like now, even though the annual deficits were smaller, the national debt was still rising, but at a much slower pace.

As we know now those annual deficits continued to come down until they disappeared, actually turning into increasing annual surpluses by the late 1990’s.

That time the previous doomsday predictions of the end of social security, the need for massive cuts in education and healthcare, and the inevitable bankruptcy of the U.S., soon reversed to expectations by 1999 and 2000 that the national debt would be completely paid off within ten years, social security would be funded forever, and so on, and Congress began planning how they would spend the windfall reversal to budget surpluses.  

There’s no guarantee it will happen again, but the trend has reversed quite dramatically in a similar manner and under similar conditions of only a slow and anemic economic recovery (so far).

So worry about normal concerns like when the Fed may consider the economy strong enough to stand on its own and it’s time to begin tapering back the QE stimulus, and about normal business cycles, even the possibility of another recession when interest rates begin to rise. Maybe even worry about the declining global respect for the U.S.

But don’t worry about the demise of the U.S. because it can’t recover from record debt again.

That’s not going to happen.