The U.S. federal government is approximately $16.8 trillion in debt, according to the Department of the Treasury.
“Gadzooks!” is the reaction of most Americans, but other than the fact that the U.S. owes a lot of money to a lot of people, most Americans don’t appear to understand much else about the national debt.
National debts are IOUs from countries. When tax collections and other sources of revenue cannot cover all the expenses of a country, they must borrow money and issue IOUs, or treasury bonds in the case of the U.S. Those IOUs accumulate as debt until they are paid off.
Two false narratives have made it difficult to discuss and debate how and when to pay down the national debt. The first is that the U.S. economy can be run like a household. Second is that if the U.S. does not shrink its debt burden it will become Greece.
First, the U.S. is not like a household at all despite the insistence of Republican leaders like Speaker of the House John Boehner.
“Let’s show the American people we understand the pain they are under and show them that we are willing to tighten our belt,” said Boehner in a speech to the House of Representatives.
John Maynard Keynes, the British economist who authored “The General Theory of Employment, Interest and Money,” famously opined that in times of economic downturns, the government should spend more.
For most of us it is counterintuitive to spend more in a time of financial crisis, but as Nobel-prize winning economist Paul Krugman, an adherent of Keynes, has said in a reiteration of Keynes’s theory, “Your spending is my income, my spending is your income, and if we all try to slash spending at the same time the result is a depression.”
If a household tried to spend more money in troubled times like the federal government, it would find itself in bankruptcy fast, not only because it wouldn’t have a gross domestic product or economic output of $15 trillion, but also because it wouldn’t have a central bank to conduct monetary policy.
Those two factors are what separate the U.S. from indebted households, and indebted countries in the Eurozone like Greece. GDP is how economists dictate countries debt loads should be measured.
The U.S. debt to GDP ratio is 84.8 percent, shows data from the Federal Reserve Bank of St. Louis (after WWII, it was 109 percent).
Greece has a lot of debt, but it is not an economic powerhouse like the U.S. Because of their EU membership, they are bound to the euro and cannot conduct their own monetary policy or print money.
Japan has a debt to GDP ratio of 211 percent according to data from the Organization for Economic Co-operation and Development. Gadzooks! Our Asian ally is deep in debt, yet people still lend them money.
Like the U.S., Japan has a powerful economy, ranked third behind the U.S. and China. Greece is ranked 34th.
The U.S. is not a household, and unlike the pleas of worry-warts like Rep. Paul Ryan, the Wisconsin Republican, we are nothing like Greece.
