Buried in this New York Times article is the calculation that U.S. federal government debt, including pension and health care obligations, is about 500 percent of GDP. This may explain why political debates have become acrimonious. Investors and some politically-minded folks have at least a gut feeling that we’re ridiculously overextended. Others rely on the stated fraction of GDP and think the debt is not a big deal. So each side is behaving rationally and rationally believes opponents to be insane.
9 thoughts on “U.S. debt, including pension obligations, is 500 percent of GDP”
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That’s a dishonest statistic. Of course, national debt is a huge issue. However, you are measuring future obligations against a static measure of GDP. That’s like saying someone with a lifetime mortgage obligation of $1 million and a salary of $200K/year is drowning because his lifetime obligation is 5 times his salary, despite the fact that he can pay it down at . . .say, $50K per year. It’s not a proper comparison. Discount expected GDP over a comparable period of time to determine what the true percentage is.
thepolemarch: Are you sure that the analogy makes sense? A person with a mortgage is paying for a house gradually because he or she is living there. The house continues to produce benefits in the form of rent that doesn’t have to be paid, so it isn’t too painful to keep making mortgage payments. Paying off a government bond that was issued to build a highway would be an analogous situation to my mind. But paying off money that was borrowed to bail out Wall Street cronies is just pure pain. And paying out huge sums in the future for Social Security? Consider that a lot of that will be paid by the millions of immigrants we plan to invite to the U.S. They aren’t deriving any benefit from paying for the pensions of older Americans whom they never met and to whom they are not related.
I certainly wasn’t arguing in favor of massive debt, in fact I feel vast cuts need to happen soon. And I agree, the way we spend the money is pure pain. My only point is that it’s disingenuous to compare all future obligations to current earnings.
We all discount our future to some degree and borrow against it, at least the young, the poor, and the stupid. I have the feeling that the US will soon reach the point where lenders stop allowing it, feeling they have the stupid borrower that doesn’t know his limit. Sadly I don’t think the spending cuts will come until this happens, leaving my generation to foot the rather large bill. What is disturbing to me are people like Paul Krugman who advocate larger deficits as if they truly don’t matter.
thepolemarch: The fact that some individual Americans may sensibly choose to borrow against future income does not necessarily imply that the government should do so. If the government did not borrow so much we might find that interest rates for individuals were lower and it would be easier for those who choose to borrow to do so.
When an individual barrows over its means, the depth responsibility is lost [1] (if it is not paid off) when the individual dies.
When a government borrows over its means, the depth keep building [2] up (if it is not paid off), or until when the government dies.
[1] “lost” in this sense means, in the worse case, gets spread around.
[2] the buildup is indefinite.
The 500% figure refers to “current and future obligations” to “gdp” ratio; which indicates how difficult it will be for a country to service it’s debt and pay it’s bills in the next 5 to 50 years. Europe is similar to the usa with 425%. This is certainly different from the 80% debt to gdp ratio that the usa currently has. A run on the dollar could certainly occur, sometime in the future, due to all this debt, and I think Obama is worried about it.
Phil: Given the present interest rates on long term federal debt, I’d say that the number of investors who feel we’re ridiculously overextended is probably not very large.
Mayson: An excellent point! A lot of rich investors, especially the Chinese, still have faith in the U.S. and the dollar. The market is perhaps the best indicator of sentiment. On the other hand, wasn’t the market reasonably bullish on Greece until investors suddenly lost faith? The Efficient Market Hypothesis has not been working too well lately…
Which Efficient Market Hypothesis isn’t working? The Strong form is ridiculous: all of the information is rolled into the price? The Weak form seems to make the most sense, but unless someone is using it on a long term basis, it’s hard to exploit.
As for being bullish on Greek Bonds:
http://blogs.reuters.com/felix-salmon/2010/02/25/chart-of-the-day-greek-bonds-and-cds/