Friday, March 13, 2009

Charting Debt as a % of GDP

To put the deficit and debt into further perspective, it is necessary to show the relationship of debt to the underlying economy as represented by GDP (gross domestic product). Naturally, larger economies can support higher debt just because they are larger.

In the chart to the right, the annual deficit (and a few surpluses) are shown relative to the annual GDP each year. Again, WW2 deficit spending shows as a spike that shifts to periodic surpluses in the years after the war.

While the 2009 spike does drop down in the 2009-2019 budget, it remains at a high deficit level. Many economists claim that a strong economy can support deficits that range from 3 to 4% of GDP. However, if such deficits continue without ever having a surplus, the debt level will continue to climb with no end in sight.

This situation is reflected in the 2009-2019 budget as charted as debt as a percent of GDP. Even though the budget continues with 3-4% deficit levels, the debt continues to grow without a correction for the 2009 stimulus spending. This is unlike the deficits during WW2 that were brought back in line during the 25 years after the war.

This analysis then brings up the question: What percent of GDP are we as a nation comfortable with for our debt level? Are we comfortable with carrying debt at 90-100% of GDP? To what extent does this level of debt reduce our ability to do emergency borrowing in the event of war or another extended recession in the future? Will there be sufficient economic slack for the nation to respond?

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