Bigger than GDP

By: Dr. M. Ray Perryman
Published in syndication September 09, 2020

According to a new report from the non-partisan Congressional Budget Office (CBO), the amount of federal debt held by the public is projected to exceed gross domestic product (GDP) for the first time next year. This assessment is consistent with current and projected patterns and, thus, likely to occur.

The CBO is projecting a federal budget deficit of $3.3 trillion in 2020, more than triple the shortfall recorded in 2019. Most of the spike is due to the economic disruption caused by the coronavirus pandemic and the initial legislation enacted in response. Such a deficit would be about 16% of GDP, the largest since 1945. The deficit is financed by increasing federal debt held by the public, which the CBO expects to be 98% percent of GDP in 2020, over 100% in 2021, and 107% in 2023, which would be the highest in the nation's history.

Gross domestic product is the final value of all goods and services produced in the US economy, which can be thought of as somewhat parallel to a household's total income but on an economy-wide scale. From an economic perspective, the fact that debt will be larger than GDP is frankly not all that significant. Many households with a mortgage, for example, have experienced periods when the amount of their debt exceeded annual income (lenders anticipate this situation in making home loans) - and, unlike the government, households are not able to legally print money. For the US to have debt greater than GDP is not, in and of itself, a major concern.

Clearly, the pandemic sped up the pace, but the trajectory of debt growing faster than GDP has been in place a while. The current situation merely causes the lines to cross a couple of years sooner. The US has long been mismanaging finances, allowing deficits to spiral during a lengthy expansion. Ultimately, getting a handle on deficits is essential for fiscal health, but now is not the time to focus on them.

The US economy is in a precarious position, with many of the temporary COVID relief measures expiring even though the virus is not yet controlled and millions of Americans remain out of work. Pressure is mounting, and many are facing evictions, foreclosures, food insecurity, business closures, loss of health insurance, and other severe dislocations. The economy was structurally sound going into the pandemic, but without support could experience growing problems. Folks who had no problem exploding spending and cutting taxes during a decade of prosperity should not suddenly be gripped by austerity at a time of unprecedented crisis. The simple fact that the debt will exceed GDP next year is no reason to ignore a genuine national emergency. Stay safe!