A Longer-Run Perspective
Daniel L. Thornton
The U.S. national debt now exceeds 100 percent of gross domestic product. Given that a significant amount of this debt is the result of governmental efforts to mitigate the effects of the financial crisis, the recession, and the anemic recovery, it is tempting to think that the debt problem is a recent phenomenon. This article shows that the United States was on a collision course with a major debt problem for nearly four decades before the financial crisis. In particular, the debt problem began around 1970 when the government decided to significantly increase spending without a corresponding increase in revenue. The analysis suggests that the debt problem cannot be permanently resolved without creating a mechanism to prevent the government from running persistent deficits in the future. (JEL E62, H62, H63) Federal Reserve Bank of St. Louis Review, November/December 2012, 94(6), pp. 441-55.
he U.S. debt has surpassed 100 percent of gross domestic product (GDP). This debt burden is due in part to the extremely large deficits incurred by attempts to mitigate the effects of the financial crisis, the relatively deep and prolonged recession, and the anemic economic recovery. Given the emphasis on the financial crisis and its aftermath, it is important to realize the U.S. deficit/debt problem began over four decades ago. This longerrun perspective suggests that the recognition of the seriousness of the problem and the need for fundamental change eventually would have occurred. The recent financial crisis merely brought the U.S. deficit/debt problem to the public’s attention sooner rather than later. The analysis here shows that the U.S. deficit/debt problem began during the early 1970s when the government started to increase spending significantly without a corresponding increase in tax revenue. This article also analyzes various aspects of government revenues and expenditures to better understand the different elements of the debate on preventing the U.S. deficit/debt problem from becoming the U.S. deficit/debt crisis.1
Daniel L. Thornton is a vice president and economic adviser at the Federal Reserve Bank of St. Louis. The author thanks Clemens Kool for helpful comments.
© 2012, The Federal Reserve Bank of St. Louis. The views expressed in this article are those of the author(s) and do not necessarily reflect the views of the Federal Reserve System, the Board of Governors, or the regional Federal Reserve Banks. Articles may be reprinted, reproduced, published, distributed, displayed, and transmitted in their entirety if copyright notice, author name(s), and full citation are included. Abstracts, synopses, and other derivative works may be made only with prior written permission of the Federal Reserve Bank of St. Louis.
Federal Reserve Bank of St. Louis REVIEW
The Federal Surplus/Deficit as a Percent of GNP/GDP
1800 to 1990 = GNP
1991 to 2020 = GDP
War of 1812
NOTE: GNP, gross national product.
SOURCE: The baseline budget projections to 2020 are from the Congressional Budget Office.
THE U.S. DEFICIT/DEBT PROBLEM: WHEN DID IT BEGIN?
A long-run perspective on U.S. government deficits is helpful in understanding the current deficit/debt problem. Figure 1 shows the history of U.S. budget surpluses/deficits from 1800 through 2011 and Congressional Budget Office baseline budget projections up to 2020. Three aspects of this figure are noteworthy. First, until the recent financial crisis, large deficits have been associated with great wars—the War of 1812, the Civil War, and World Wars I and II. The only large peacetime deficit occurred in 1933 during the...