A Skeptical Optimist on the Federal Debt/GDP Ratio

CalculatedRisk continues his excellent coverage of how rapidly the total Federal debt has been increasing:

For the first nine months of the 2006 fiscal year (starts Oct 1st), the National Debt has increased $487.3 Billion. The record is $491.1 Billion for the first nine months of fiscal 2004 … If someone says the deficit is falling – laugh (or cry). Its not true.

The comment section provides a couple of interesting links. CR reader Belinda has some hope for our fiscal future after reading the Skeptical Optimist:

I continue to wonder why more politicians don’t pick up on the overwhelming importance of economic growth. I’ve recalibrated the Debt Clock (at upper right) accordingly. The revised growth rate, combined with a month of little change in debt, reduced the debt-to-GDP ratio by a full half point from 65.1% to 64.6%.

His National Debt burden: Full history provides a nice graph of the debt/GDP ratio since 1792, which makes the same point noted by Robert Barro in his 1979 Journal of Political Economy article “On the Determination of the Public Debt” – U.S. fiscal policy from 1789 to 1980 strived to retire any debt created during major wars or recessions. Note this statement cannot be made about fiscal policy during the 1980’s or since 2001 – although we did have a temporary return to fiscal sanity during the 1990’s.

Besides this very long-run historical chart, the Skeptical Optimist tries to provide us with a second by second account of the debt to GDP ratio, which is as absurd as it is ambitious. We observed GDP only at quarterly intervals. In that vein, I provide a graph of the debt to GDP ratio by quarter since early 2000. I cannot provide an observation for 2006QII even if CR has given us the numerator already because the BEA will not provide us a measure of the denominator for a while. But notice something, the debt to GDP ratio was 64% as of 2005QIV and rose to 64.2% in 2006QI.

CR reader Wimpie directs us to a chart provided by Bud Conrad. This chart suggests the under current fiscal policy, Federal debt will continue to grow relative to GDP with the debt to GDP ratio surpassing 100% over the next generation. Skeptical Optimist is optimistic that growth can keep the debt to GDP ratio can stay near 60%. I remain skeptical unless we have some real political leadership in Washington, D.C.