On Debt: Two Honest Measures, Two Different Questions

Tom Savidge expertly defends debt-to-GDP ratios as an important measure in response to my critiques. While Tom has made several excellent points in his rebuttal, he has not convinced me that I was wrong. However, he has convinced me that the question of “public debt” is much larger and more nuanced than I had initially presented it. 

Tom’s central claim is that I gave debt-to-GDP too little credit. He agrees with me that debt-to-revenue and interest-to-revenue ratios reflect pressure on the federal budget and that these numbers deserve more credit than they usually get. But GDP, he says, measures something the revenue figures miss: the size of the productive economy that Washington can actually reach. Through its power to tax, to borrow (which is just a tax on future citizens), and to inflate away what it already owes (which is a tax on holders of cash), the federal government can lay claim on the whole economy. “Full faith and credit,” in Tom’s framing, is not a comfort to people who hold public debt but a warning to the rest of us. 

There can be no disagreement that Washington can reach into the paychecks of every single American. A household cannot vote itself a raise out of the neighbors’ paychecks. Washington can and does. Because of this, Tom is correct: the danger of federal debt is very broad. 

This highlights an important insight: what denominator is appropriate depends on the question being asked. Tom points out that, with over $30 trillion in public debt, the government poses a significant risk to the broader economy because of the public's indebtedness. It would take an entire year’s worth of GDP (read: income) to pay off just this portion of the federal debt. That is a serious concern and a valuable insight. And with that being the discussion point, Tom is exactly right: debt-to-GDP is the relevant metric. 

My article was about the federal government’s indebtedness and the difficulty of repaying it. Here, debt-to-revenue is the correct metric, just as it is in the private sector. When a bank decides whether to extend a loan, it does not ask what the borrower’s whole neighborhood earns. It asks what the borrower earns. Debt is serviced by income, and the income that counts is the income the borrower earns, not the neighborhood, industry, or country. 

What Tom’s piece highlights is that there are two different, but related, questions at play. The first is how much Washington can and will get its hands on should it ever decide to pay off the debt. The answer, as Tom skillfully points out, is almost everything through their power to tax every paycheck in the country. GDP is the correct denominator for that question. The second is the question my article asked: can the government service what it owes from what it actually takes in? And there, debt-to-revenue is the correct denominator. Both questions are fair and both matter, but they do not share the same denominator. 

Walter Williams liked to say that the difference between Congress and a thief comes down to legality. Both take what belongs to one person and hand it to another. But, in his characteristic flair, Williams gave the edge to the thief because at least the thief doesn’t expect you to thank him for taking your money. Tom takes this to heart and points out that “full faith and credit” is a claim on America and that we should hear it as a warning rather than a reassurance. 

The problem I see is that Congress and political commentators reflexively reach for debt-to-GDP as a metric for describing their own debt. All else being equal, Congress will always prefer to have the lowest debt-to-whatever ratio they can, as it makes their current fiscal mess look smaller. A debt of 100 percent of GDP and a debt of 600 percent of revenues are both true, but only one of them is ever brought up in the chambers of Congress. 

Tom and I are closer than our titles suggest. He is right that the debt threatens the whole economy, and GDP is the correct way to assess that threat. I still think I am right that the debt is a burden the government must service out of its own receipts, which makes revenue the honest way to assess that burden. Debt-to-GDP is a perfectly valid measure when used correctly, and Tom reminds us of that masterfully. The problems begin when Washington reaches for it to answer every question, including ones it was never built to answer. 

So yes, Tom and I disagree, and we are better friends for it. He sharpened my thinking, and I hope that I returned the favor and that readers came away with a clearer picture of the debt than either of us could have presented alone. That is what good debate is supposed to do.   

Washington, meanwhile, has run its debt up to previously unimagined heights and still cannot talk about it without collapsing into a shutdown. In 1981, the national debt first crossed $1 trillion. In an address before a joint session of Congress in 1983, Reagan warned against an “unconscionable burden” of national debt. Today, annual federal deficits are approaching $2 trillion. The trillion dollars of national debt that took 205 years to accumulate now happens every seven months. If Congress could learn to argue the way Tom and I just did – in good faith, open to being wrong, and still friends at the end – the country would be better off. Our financial position might be better off, too. 

David Hebert is a senior research fellow at the American Institute for Economic Research.