Arnold Kling  

The Federal Debt/Income Ratio

U.S Government Debt Since Worl... The Decline of Freedom...
Country XCountry Y
Federal Debt$50$100
Debt to GDP50 %100 %
State and Local Debt$0$0
State and Local Taxes$20$0
Federal Taxes$20$40
Federal Debt
to taxes
250 %250 %

Think of Country X as a simplified version of the U.S. and Country Y as a simplified version of a European country with a higher debt/GDP ratio but a much smaller state and local sector. My point here is that debt/GDP, which shows country Y in much worse shape than country X, may not be the right way to compare the two countries. Instead, if you think in terms of debt/income ratio at the Federal level, they are in the same position.

My point is that the fiscal adjustments in the U.S. needed to get the Federal debt down relative to GDP might be much larger relative to the current Federal budget than is the case in Europe. I hope that point is not lost in the various ways in which the example diverges from reality.

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CATEGORIES: Fiscal Policy

COMMENTS (6 to date)
Doc Merlin writes:

Wow, good point.

Harkins writes:

Debt-to-revenue is mere finance - not worthy of an economist's attention. Changing the the discussion to debt-to-GDP opens a window to the magical realm of macroeconomics, where all things are possible.

Andrew Hofer writes:

The primary innacuracy is that State/Local debt is $3 Trillion, or a bit less than half of federal debt held by the public. State and Local taxes and fees are all headed upwards. So the adjustments you note are being made at multiple levels -

$8 Trillion of debt held by public
$1.x Trillion budget deficit
$46 Trillion of medicare liabilities (PV net of revenues)
$7 Trillion (?) of Social Security liabilities (PV net of estimated revenues)

$2.8 Trillion of debt
$400B of deficits to be funded (at least)

Around $11 Trillion of mortgage and consumer debt

A lot of "adjustment" to go around, and a major hit to GDP is possible just from a small change in the costs of servicing this debt (or the pace of realizing it, in the case of the unfunded obligations)

TDM writes:

Country X is better off. The difference is that $60 in after tax income is servicing $50 or $100 in government debt. Debt is serviced from the supply of private capital. The share of federal taxes to total debt is meaningless.

Max writes:

Isn't the ratio of private to public sector an important indicator, too? I mean, in a country where there is a private market that makes up 70% of the economy compared to a country where they have a private market that makes up 50% of the economy, there will be less impact from a bankrupt state sector.

I think this might be the easiest way out for a lot of countries. Just reduce the size and scope of the public sector and encourage the private sector to take over. Then, if the state defaults, it's easier to soak up the problem...

Matt Flipago writes:

I don't see why Federal debt to federal taxes matters. This really is Dependant on the idea that people look at tax increases as how much more revenue collected. The total tax rate increase will need to be lower in country X, then Y. So will people see the federal government is collected 50% more in taxes, or that the federal government taxes are now 10% higher. My guess is the later, or at least who thats how politicians spin it. "Ohh it's only a 3.8% increase in taxes it won't harm the economy." Even though the 3.8% is more like an 8% tax of whatever you had after taxes, the year before the tax increase.

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