Are We Really Drowning In Red Ink? A Closer Look At Our Non-Exceptional Debt And Deficit Crisis

April 22, 2011 5:36 a.m.

For the next several weeks, and likely through election season, Washington will continue to be gripped by the debate about how to reduce federal deficits and the national debt. It’s a common focus of legislative preening, particularly after economic downturns, and even more particularly when Democrats control the White House.

So it’s worth keeping in mind how current and projected deficits and debt stack up to their historic levels, relative to GDP. The answers will surprise you.

The following graph tracks annual deficits as percentages of GDP over the last several decades. Unsurprisingly, what you see is that they spike during economic downturns, with the most severe spike after the United States entered World War II — a spending effort that provided the economic stimulus the country needed to finally break the back of the Great Depression.

National surpluses shrank as the country entered a mild recession at the end of the Clinton administration, got worse after President Bush spearheaded deficit financed tax cuts, wars, and domestic spending, and ballooned just as Obama took office thanks to the double whammy of a sharp decline in revenues, which plunged when the bottom fell out of the economy after the financial crisis, and stimulus spending to salvage the economy.

Because debt is cumulative and generates interest, it has shot up dramatically in the past three years and is at its highest levels in about 70 years.

The above graphs are based on data collected by Office of Management and Budget. The Bureau of Labor Statistics provides the data that suggests Congress’ priorities are out of whack. Currently, civilian unemployment is higher than at any point in the post-war period save for a brief spike in the early 1980s when the Federal Reserve briefly used contractionary monetary policy to fight inflation. Already its clear that unemployment is falling much more slowly than it did in 1981. And when people get back to work, revenues will climb, and deficits will shrink on their own.

So as this debate enters its most important phase, remember that by historical standards the debt and deficit numbers aren’t nearly as startling as some would have you believe. But also keep in mind that current projections, particularly for debt, will be driven by soaring health care costs to exceed historical highs dramatically.

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