This Week In the Mayonnaise Clinic: How Much is Too Much Government Debt?

Plus, where should a man wear shorts?

Dear readers,

First, I want to thank everyone who responded to Friday’s paywalled post about brain-dead environmentalism and yesterday’s post about the end of airplane mask rules. One of my favorite things about this endeavor is how thoughtful the reader comments (and emails) are, and I’ve been enjoying your feedback. Thank you for subscribing and participating.

Now, let’s get to today’s mail.

Ben has a question about government debt:

I'm confused on the federal debt. I genuinely do not understand how we can continue to spend ourselves into massive debt with no end in sight. Theoretically, we need to repay that debt some day, right? I know the situation is very different when it comes to federal debt compared to an individual's personal debt, but I'm still unsure how our current spending levels are at all sustainable. Would appreciate your insight!

So first of all: no, we never need to repay the debt. People have intuitions about government debt that arise from how individuals borrow and repay debt. And, we borrow and repay in a way that is influenced by our life cycles: We aspire to work roughly only in the middle parts of our lives, so we borrow early on to pay for education and housing we’ll use for the rest of our lives, and then seek to pay off all that debt and accrue a positive asset balance that can finance our consumption in retirement.

But countries don’t retire and they don’t die. Sovereign debt is a lot more like corporate debt — debt is intended as a permanent part of a company’s capital structure, and while companies may have reasons from time to time to refinance their debts or to cut (or raise) their debt loads, there is no sense in which Exxon must eventually “pay off its debt.” So long as it continues to exist as an enterprise, it can keep rolling over its bonds, which can be serviced by corporate revenues. Corporate debt is really quite similar to equity — it’s a way of financing what a company does on an ongoing basis.

While corporate debt is financed by corporate revenues, sovereign debt is financed by a government’s ability to levy taxes. So long as the US has a tax base, it can have debt. Not only do we never need to pay off the debt, we don’t even ever need to balance the budget — so long as the economy and the tax base are growing, the debt can grow and grow in a sustainable manner, because the government’s ability to service debt keeps growing. The debt just should not generally be growing faster than the economy on a sustained basis.

Now, I would note, US government debt has in fact grown substantially faster than the economy over the last 14 years, and that’s not ideal. From the 1970s through 2008, debt held by the public¹ never exceeded 50% of GDP. It was 36% on the eve of the global financial crisis, soared from then through about 2013, kept creeping upward until the pandemic hit, and then soared again. By the end of 2021, it was 97% of GDP — having come down from a peak over 100%, because even though the debt continued to grow over the last two years, GDP grew faster.

Here’s a chart showing how that went: