America’s 21st century challenge

| July 7, 2011 | 0 Comments

Troy Media – By Livio Di Matteo

With the August 2nd deadline for raising the United States public debt ceiling looming, it might be useful to take a longer-term view on exactly how bad the U.S. debt situation is, at least with respect to the past.

There has always been a public debt in the United States and its size has been subject to ebbs and flows despite the preoccupation with the recent surge. At 92.5 per cent of GDP, the U.S. public debt is currently at its second highest point in history, exceeded only by the Second World War period when the debt to GDP ratio hit 121 per cent.

However, the Second World War is a unique historical period, given the American leadership war effort, and if it is removed from the picture the current the debt to GDP ratio is indeed the highest it has ever been.

Aside from the Second World War and the immediate post-war era, the U.S. public debt to GDP ratio was historically rarely above 40 per cent. When real per capita debt is examined, the U.S. public debt is now the highest it has ever been at about 20,000 dollars per capita in 1982/84 dollars. The current incline is part of an increase that began in the mid-1980s, reversing nearly 40 years of declining real per capita public debt after the Second World War.

What is interesting is that, when you look at the annual growth rates of real per capita public debt, it was much higher in the 19th century. The average annual growth rate of real per capita public debt was 21 per cent from 1790 to 1899 and about five per cent from 1900 to 2010.

The last five years, however, have seen some double digit increases in real per capita debt, suggesting a shift in growth trends. Higher per capita debt growth is not unexpected in the 19th century, given the United States was a young country with a vast frontier and lots of infrastructure to build. Road and railway building take a lot of money and the United States, like many other countries, provided government assistance for transportation and communication infrastructure.

However, accumulating large amounts of debt when your economy is rapidly expanding is quite a different situation from doing it when your economy is stagnating. And that is the crux of the problem facing the U.S. today.

The last three years, in particular, have seen a stagnant economy, making the accumulation of large amounts of debt a more serious burden to the economy.

In the short term, the U.S. dilemma must be to deal with the politics of raising the debt ceiling to avoid what could be a default on its debt. In the medium term, the United States has to raise government revenues as well as reduce spending to close the fiscal gap that is fueling the debt. In the longer term, and most importantly, the United States has to start growing its economy again. This is its challenge for the 21st century.

Livio Di Matteo is Professor of Economics at Lakehead University.

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