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College of Liberal Arts
Daniele Tavani, PhD
Professor, Department of EconomicsColorado State University
Presentation at Rotary Club of Fort Collins September 8, 2021
US Government Debt: How much should we worry?
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US federal debt since the 1970s
The gross federal debt has been steadily rising since 1970,independent of the party of the sitting president.
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Federal debt as a % of GDP since the 1930s
Similarly, the gross debt/GDP ratio has been on the rise since the 1980s.
Total public debt is ~ 126% of GDP as of 2021, following Covid-related stimulus measures
1950 1960 1970 1980 1990 2000 2010 20201940
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PercentofGDP
FederalDebt:TotalPublicDebtasPercentofGrossDomesticProductFederalDebt:TotalPublicDebtasPercentofGrossDomesticProduct
GrossFederalDebtasPercentofGrossDomesticProductGrossFederalDebtasPercentofGrossDomesticProduct
ShadedareasindicateU.S.recessions. Sources:OMB;St.LouisFed fred.stlouisfed.org
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Is the federal government spending too much?
Federal gov’t consumption + gross investment as a % of GDP is lower today than in 1970.
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What about tax revenues?
Federal tax receipts are volatile, but on a downward trend since the late 1990s
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Top marginal tax rates ��
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The top marginal tax rate has been on a downward trend since the 1960s.
Source: Tax Policy Center
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Corporate tax rates
The steady decline in the effective corporate tax rate (from over 50% In the 1950s to less than 10% today resulted in lower revenues as a share of GDP.
Source: Tax Policy Center
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Summary • Federal Debt as a share of US GDP has been gradually rising since
the 1980s.
• Debt grows when the government operates a deficit — it earns less than it spends (we’ll return to this later).
• But federal consumption and investment spending as a share of GDP has been falling.
• The rise in the federal Debt/GDP is at least as much about lower revenues as it is about government spending.
• Decline in tax receipts also partly coincide with falling top marginal tax rates and falling corporate tax rates.
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How much should we worry? • Federal Debt/GDP ratio is currently just below 110%, up from ~
40% in 1980.
• The increase would be a problem if rising debt obligations make it harder to find sufficient demand for government debt, which in turn would require offering higher interest rates on government bonds.
• Luckily, US treasury bonds are in high demand not only domestically but also worldwide, because:
• The US dollar is still the prime international reserve currency (more than 60% of global FX reserves);
• The solvency of the United States is not questioned by financial markets: US debt is basically a risk-free asset.
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The mathematics of debt stabilization • The “least controversial equation in macroeconomics” (Nobel Prize
winner Thomas Sargent)
• Increase in Debt/GDP Ratio =
(interest rate – growth rate) x Debt/GDP + Deficit/GDP
• If the US economy grows faster than the interest rate on US debt, and the deficit stays under control, the debt/GDP ratio will stabilize or even fall.
• (one can solve the above equation for the deficit/GDP ratio that stabilizes the debt/GDP ratio)
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Short vs. long run • Both the Great Recession of 2008-09 and the Covid-19 shock prompted
increases in deficit spending and therefore the Debt/GDP ratio.
• This is what should be done during recessions, when the private sector cuts its spending, which reduces aggregate demand and growth.
• Interest rates have been low thus “accommodating” the fiscal expansion:
• Low interest rates increase the fiscal space for the federal government: • Debt can be rolled over for a while without necessarily seeing the
debt/GDP ratio increase. • When the economy returns on a normal growth (and tax
revenues) trajectory, part of the increase in debt/GDP will pay for itself.
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Spending and revenues
• As the US economy eventually recovers from the Covid-19 shock, it is best to worry about the deficit/GDP ratio than the debt/GDP ratio.
• Long-run fiscal positions implying deficits above the debt-stabilizing rate will increase the debt/GDP ratio.
• Tax revenues are also important: in 2019, total tax receipts as a share of GDP were 24.5%, compared to the OECD average of 33.7% (UK was 33% for example).
• A more progressive tax code can be used to reverse some worrying trends in income inequality affecting the US economy since the 1980s.
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Inequality: Top income shares
The share of top 1% and top .01% in US income has increased since the late 1970s, at the expenses of everyone else.
Source: Tax Policy Center
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Inequality: Stagnating middle and lower incomes
The middle class has been losing ground to higher incomes.
Source: Pew Economics Institute
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Progressivity of US tax code
The US tax code is progressive, but not so much at the very top of the income distribution.
Source: Tax Policy Center
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Conclusions. Looking ahead • Even though the federal debt/GDP ratio has been rising, I am not too worried
about it:
• Demand for US Treasury bonds (safe assets) is high, even at low interest rates;
• Low interest rates make it easier for debt to partially pay for itself through economic growth.
• As the US economy recovers (eventually!) from the Covid shock, fiscal stimulus through high deficits will no longer be necessary.
• The deficit/GDP ratio is the key indicator of fiscal sustainability to look at.
• Government spending as a share of GDP is already declining: being serious about debt reduction requires to look at the revenue side (i.e. taxes).
• A more progressive tax code can increase revenues while at the same time reversing worrying trends in income inequality.
Thank you!
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Slides for Q&A
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Who owns the US federal debt? (1) Foreign owners
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Who owns the US federal debt? (2)
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Stacy’s questions
• Social Security budget projections: https://www.ssa.gov/policy/trust-funds-summary.html
• Military spending as a share of GDP: https://data.worldbank.org/indicator/MS.MIL.XPND.GD.ZS?end=2019&locations=US&start=1970