COVID-19 Fallout: National Debt Breaks All-Time Record

by James D. Agresti: The U.S. national debt has just reached 120.5% of the nation’s annual economic output, breaking a record set in 1946 for the highest debt level in the history of the United States. The previous extreme of 118.4% stemmed from World War II, the deadliest and most widespread conflict in world history.

Today’s unprecedented debt-to-economy ratio—which is economists’ primary measure of government debt—includes $2.5 trillion in new debt since the outset of the Covid-19 pandemic. However, it doesn’t account for the vast bulk of economic damage inflicted by government-mandated business shutdowns, which will soon make the debt ratio significantly larger by decreasing its denominator. Although this decline has already begun, most of it is not yet reflected in the official data on the size of the U.S. economy.

Unlike the debt from World War II—which rapidly fell once the war ended—the modern national debt has been on a steep upward path for decades. The main driver of this has been increased government spending on social programs, which grew from 20% of federal expenses in 1959 to 62% in 2018. Without substantial reforms, social spending will increase further and drive the debt to levels that dwarf the debt from World War II.

Contrary to claims that government debt isn’t a major problem, a broad range of facts show that it can have serious negative consequences, such as lower wages, weak economic growth, increased inflation, higher taxes, reduced government benefits, or combinations of such results. These, in turn, impair people’s quality of life and can reduce their life expectancy. Some of these impacts may have already begun.

Measuring the National Debt
The U.S. Treasury’s official figure for the debt of the federal government on June 8, 2020 is $25,960,547,920,986. This measure of raw debt has grown through most of the nation’s history, but it overstates the scale of debt over time because it doesn’t account for inflation, population increases, or economic growth. These factors allow governments to carry more debt with less harm than if their economies were smaller.

To adjust for such factors across nations and over time, economists and government agencies commonly measure government debt as a portion of each nation’s annual economic output, or gross domestic product (GDP). This accounts for varying population sizes, some effects of inflation, and the capacity of governments to service their debts.

Over the course of U.S. history, the government’s debt-to-GDP ratio has averaged 30.3% and has stayed around or below this level except for a massive spike from World War II and during the modern era. The WWII record of 118.4% held for the past 74 years but was toppled on May 22, 2020 when it reached 118.5%. By the end of May, it had reached 119.5%, or four times its average over the nation’s history:

The debt continued growing in early June and reached 120.5% by the 8th day of the month. These debt-to-GDP figures are based on the latest available yearly data from the U.S. Treasury and the U.S. Bureau of Economic Analysis, the federal agency that calculates official GDP figures.

Covid-19 Responses & Impacts
From the day that the World Health Organization declared Covid-19 a pandemic (March 11) through June 8th, the U.S. national debt rose by $2.5 trillion or 11.5 percentage points of GDP. This was mainly due to:

• four federal bills passed to address the pandemic and buffer the economic fallouts of business shutdowns imposed by state governments. These will cost about $2.5 trillion, or an average of $19,000 for every household in the nation.
• lost tax revenue from business shutdowns.
• debt increases that were already baked into the federal budget for 2020.

Because the latest available GDP data is for the first quarter of 2020, and the business shutdowns didn’t begin until mid-March, they affect only half a month out of a year of data. Thus, the shutdowns have a relatively small effect on the latest annual GDP figure, reducing it by about 0.4%.

Also in response to Covid-19 and the shutdowns, the Federal Reserve created trillions of dollars in new money to purchase federal government debt and other financial assets. The effects of such policies don’t necessarily manifest in the national debt but can impact people in other ways.

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James D. Agresti is the president of Just Facts, a think tank dedicated to publishing rigorously documented facts about public policy issues. H/T Issues & Insights.

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