Today is the perfect day to be writing about government debt, the last installment in my series on debt. We have just seen in the most dramatic fashion why the US is such a great country. As I pointed out in my election day post, there will be some voices that will focus primarily on the constraints that Obama will face as president and most of those will point to government debt (and the cost of the Iraq war and the bailout of the financial sector). So do we also have a governmnent debt crisis? The answer here is slightly more encouraging than one might think. For starters, the Clinton administration did an amazing job cutting down on the debt level, which meant that in 2000 government debt (local, state & federal combined) calculated as a percentage of household income was back to around 80%. Despite the huge runup under Bush and even accounting for the bailout already committed to brings us back to around 100% of household income as shown on the following chart.
Now obviously housholds are also carrying the weight or their own debt, which as we saw had a big run up. So how bad is the combined weight? I did not find good data that would let me push this analysis back further to the time right after World War II when the US had built up a large debt due to financing first the war and then European reconstruction (under the amazing Marshall Plan). But I did find data on national debt as a percentage of GDP. The post war percentage rose to 110% for federal debt and assuming household debt of 30% would give us a total of 140% of GDP. Here is a chart that shows household debt and government debt as a percentage of GDP over time.
It looks like we will end 2008 at a level of 150% of GDP. Now we had no problem getting off the post war level in only 10 years. It would seem that there is room for the government to finance the programs that we badly need, such as investment in renewable energy and education. The amounts required here to make a huge difference are small – for instance, $150 Billion over 10 years for renewable energy. So I believe that the Obama administration will in fact be in a position to pursue many of its initiatives.
