Via RealInvestmentAdvice.com,
The graph below provides a clearer understanding of the US fiscal deficit.
First, focus on the red line below, graphing the ratio of federal debt to GDP.
Note that it is at the same level today as it was in 2021. Similarly, before the pandemic, it had been relatively flat for seven years. This highlights that the deficit problem we have today was exacerbated by recession-prompted fiscal stimulus and the temporary decline in GDP.
To illustrate this more clearly, we created the green line.
This version of the debt-to-GDP ratio assumes zero change in the ratio during recessions. Moreover, it uses the same growth rates as the all-inclusive debt-to-GDP ratio to calculate the growth for periods outside of recession.
As the green line indicates, the ratio today is the same as it was over 10 years ago. Furthermore, it is close to levels seen in the mid-1990s. The takeaway from comparing the two lines is that the ratio of debt to GDP follows a stairstep pattern.
It’s generally flat during periods of growth, while it accelerates during recessions.
The point in playing with the data is not to belittle the deficit problem. Instead, we think it’s essential to acknowledge that the deficit problem is primarily associated with recessionary stimulus. Thus, maybe we should consider how we spend stimulus funds during recessions. In particular, might a focus toward productive stimulus during recessions provide a greater long term economic boost?
Still, if there is no recession in the near future, we might find that today’s deficits are not significantly worsening as some pundits lead us to believe.
Might they be too focused on the deficit amount stated in dollars, rather than as a ratio to our ability to pay for it, i.e., economic growth?
Loading…
