The Duel over the National Debt
Two things happened this week that will set the stage for the legislative battle over the next coronavirus spending and relief bill that will occur over the next few weeks.
House Speaker Nancy Pelosi (D-Calif.) released the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, House Democrats’ comprehensive list of spending and policy priorities to address the pandemic. The bill includes hundreds of billions in aid to U.S. states and localities, would provide additional financial support to American consumers and small businesses, and has a price tag of around $3 trillion, which would effectively double the amount of money spent by Washington in response to COVID-19. It is the Speaker’s first offering in the battle over the next COVID-19 bill and was written without Republicans’ input. The legislation is therefore very much a wish list—meaning the final next phase of the legislative response to the health and economic impacts of the virus isn’t likely to look a lot like the HEROES Act.
The second piece of news was that the U.S. Department of the Treasury announced that the nation’s budget deficit hit a record $1.935 trillion for the 12 months that spanned April 2019 to April 2020. The federal government spent an eye-popping $980 billion last month (a record) but, because federal tax payments were delayed and the economy was virtually shut down, the government took in revenues totaling only $242 billion, a 55 percent drop from April 2019. The sea of red ink will be piled upon an already-massive debt.
As of this writing, the national debt (the cumulative sum of the annual federal budget deficits over the nation’s history) stands at more than $25 trillion, and is about $2 trillion higher than it was just six months ago.
Like most divisive issues in Washington, bickering over the national debt is not a new phenomenon in our nation’s capital. In a letter written in 1816, Thomas Jefferson, who had left the White House seven years earlier, argued public debt is one of “the greatest of dangers to be feared.” He advised, “To preserve our independence, we must not let our rulers load us with perpetual debt” because “If we run into such debts, we must be taxed in our meat and drink, in our necessities and in our comforts, in our labor and in our amusements.” Decades earlier, however, Alexander Hamilton extolled the potential virtues of a national debt as a binding agent for a strong federal government, writing, “A national debt, if it is not excessive, will be to us a national blessing. It will be a powerful cement of our Union.”
Throughout almost the entirety of American history, policymakers have heeded Hamilton’s advice over Jefferson’s. In fact, the United States has run an annual federal deficit almost every year since its founding and, save for a one-year period between 1835 and 1836, the U.S. government has always been in debt.
That statement is particularly true in times of peril, when deficits and the national debt have been allowed to expand quite rapidly. Before reviewing that history, however, let’s first explore one of the most important metrics to keep in mind: the debt-to-GDP (gross domestic product) ratio. This number represents the size of the nation’s debt relative to the size of the nation’s economy.
At the birth of the nation, America’s debt-to-GDP was about 30 percent, according to The Atlantic. The country’s liabilities stemmed mostly from borrowing from France and the Netherlands to fund the Revolutionary War.
Hamilton, the nation’s first Treasury secretary, and Jefferson tried to dig the country out of the hole (though they differed on how to do it). By the end of Jefferson’s term as president America’s debt-to-GDP ratio was down to 10 percent.
By the time the nation erupted into Civil War in the early 1860s, lawmakers had nearly wiped out the federal debt. But, as The Atlantic explains, during the conflict “the public debt surged from about $65 million in 1860 to $2.76 billion in 1866” and “would never get below $900 million again.” To help stem the red ink, President Abraham Lincoln imposed the first-ever income tax put on American taxpayers. (It did not last. Congress repealed the levy in 1872 but attempted to implement the first-ever peacetime income tax in 1894. The Supreme Court ultimately ruled the 1894 levy was unconstitutional, which led to the ratification of the Sixteenth Amendment to the U.S. Constitution in 1913, which provides the Congress with “power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”)
Even though the United States would never be debt-free again, the debt-to-GDP ratio declined again in the half-century after the Civil War, hitting just 2.6 percent shortly before World War I. The nation’s first conflict in Europe sent debt as a percentage of GDP up to a then-record high of 33 percent. During the Great Depression, the national debt expanded by 150 percent, and by 1934 the debt-to-GDP ratio was even higher, 44 percent.
That ratio held steady during the Depression until another crisis hit—World War II. According to The Atlantic, by the time that second global conflict had ended, America’s debt-to-GDP ratio was 113 percent, meaning the size of the national debt was now, for the first time, larger than the country’s annual economic output.
The ratio went down again during peacetime—and even continued to decline during the Vietnam era – but it started to climb again during the recession in the late 1970s and early 1980s, and then grew more at the end of the Cold War as President Ronald Reagan and Congress ramped up defense spending. Still, by the end of President Reagan’s two terms in office, the debt-to-GDP ratio was only 40 percent. It fell somewhat during the prosperous 1990s and even stayed below 40 percent in the aftermath of the September 11 terrorist attacks (and recession) and the onset of the global war on terrorism.
The national debt then exploded with the Great Recession. From about 40 percent in 2008, the debt-to-GDP ratio rose to almost 100 percent by the end of 2011. It has remained at that level since and now, with the COVID-19 pandemic having swept the nation, most analysts predict it will go higher.
In fact, as bad as April’s deficit numbers were, they not likely not the worst that we will see this year. On April 24, Congressional Budget Office, the legislative branch agency that provides budget and economic information to Congress, predicted the total fiscal year 2020 federal deficit would top $3.7 trillion and the national debt would be 101 percent of the total economy at the end of this year and 108 percent at the end of next year.
Which is perhaps why Senate Majority Leader Mitch McConnell (R-Ky.) has said lawmakers must “weigh [Congress’ next COVID-19 bill] very carefully because the future of our country in terms of the amount of debt that we're adding up is a matter of genuine concern.” Speaker Pelosi’s $3 trillion HEROES Act did not do much to alleviate—or even acknowledge—those concerns.