03 January 2006

What debt/GDP means

Two months ago, I posted a graph of U.S. debt/GDP over the past 55 years. Here's my explanation.

The U.S. GDP is the total value of all goods and services produced in the U.S. each year. It measures of the size of the U.S. economy.

So the ratio of national debt to GDP (debt/GDP) is a measure of debt burden—how big the debt is, compared to the economy. This is sort of like looking at how much an individual owes, compared to his or her salary. Right now the number is 0.643, which means the national debt is 64.3% of GDP for the past 12 months.


  • Wow, did we have a lot of debt after WWII. Apparently fighting Nazis isn't cheap.
  • We never paid it down. The dollar value of the national debt, adjusted for inflation*, hovered around $2 trillion (in 2005 dollars) from 1950 to about 1980. Then it took off upwards. Today it's $8 trillion.
  • For a while, it looked like we were outgrowing the debt. By 1981, the GDP was three times what it was in 1950, in real terms.
  • We did not outgrow the debt in the Reagan years. And we're not outgrowing it now. Since 1981, except for 6 years of Clinton/Gingrich deadlock (high taxes, slow spending growth), deficit spending has outstripped GDP growth.

The higher debt/GDP gets, the greater the risk of difficulty financing the debt. This ratio is not now at an all-time high; after WWII it was actually much higher than it is today. But it is clearly headed up. This will only get worse as Medicare and Social Security costs rise.

Republicans who think the U.S. can get rid of the debt with pro-growth policies are wrong. Reagan tried it, and debt/GDP went up 36% in 8 years. You actually have to limit spending.

I think we can afford to, and should, pay down the debt in real terms. (Naturally, I think we can do it by eliminating stupid programs.)

*Using the Consumer Price Index, all items. Again, I don't know what I'm doing here, so your mileage may vary.

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