The United States spent $572 billion in interest on federal debt over the last ten months. This news from the Congressional Budget Office is not particularly alarming because $572 billion is 2.6 percent of GDP, and U.S. interest payments have averaged about 2.6 percent of GDP throughout the 2000s. In the 1980s and 1990s, interest payments on the debt were higher, peaking over 5 percent. But then again they were a little lower in the most recent past (tipping below 2.4 percent in 2015 and 2.5 percent over 2020-2021).
Since President Biden took office in January 2021, consumer prices have risen by 17 percent. Existing federal debt held by the public (today totaling $24 billion) therefore declined in real value, by some $4 trillion. The larger interest payments are, in part, returning debt principal to bondholders who have seen the value of their principal erode.
But here’s where the issue should be engaged. Interest payments and GDP are economic flows. Both series represent all transactions over a given span of time. Debt however is an economic stock number, a total at a single point in time. The appropriate comparisons for any type of analysis are flows with flows and stocks with stocks, not flows with stocks or stocks with flows (such as debt to GDP). Interest payments are at historical norms against GDP. The national debt is however best measured against another stock, such as national wealth. Just as inflation has eroded the value of the U.S. national debt, so too has it eroded the value of national wealth. The numbers are terrifying but no more terrifying than they have been in the recent past. The financial developments concerning interest payments and the real value of the debt are normal and explicable.
Ominously, government debt to national wealth has risen significantly over the past 13 years (from 14.5 percent in 2010 to 18 percent in 2023), and real GDP growth is waning. The most important—and concerning—matter is what the spending was that caused this increase in debt. In the 1980s, when the debt increased under President Ronald Reagan, it did so as GDP and national wealth grew mightily. In 1983-84, real GDP growth was an enormous 6.5 percent per year; in the five years following, it was another 3.6 percent per year. The nation gained 17 million new jobs from 1980 to 1989. Since 2005, in contrast, growth of at least 3 percent has been achieved in only three of twenty-two years, 2004-2005 and 2021. The percentage of working-age adults who have jobs has plummeted.
When Reagan increased our national debt, it coincided with an economic take-off that made the debt an increasingly diminishing financial burden on taxpayers, as well as a fantastically valuable and reliable asset to its owners. Reagan’s expenditures focused on ending the Cold War, shrinking or winding down government programs, and allowing for massive tax-rate reductions. Reagan’s debt back then was an investment. The economic response—4 percent per annum growth for many years running—proved it.
That’s not true now. Now government spending is used to pay people not to work, and investors not to invest, rather than to incentivize people to work and invest harder and better.
The debt the federal government has taken out since 2020 corresponds to unemployment benefits, pandemic stimulus payments, and so forth. Debt to pay for this kind of expenditure ensures that the economy will stagnate, making the debt a devastating burden for the future. At this point, the interest and debt statistics show that we are at the high end of a reasonable range. If, however, the United States persists in taking out debt to fund nonwork and nonproduction, the economy will become dormant, dooming future generations to miss out on the opportunity of achieving prosperity.
Inflation has averaged 7 percent per annum over the last year and a half. If the government can continue to borrow at 4 percent—the current treasury-bond interest rate—the spread of three points means that money is cheap for the borrower. If the government were to have excellent ideas for spending money, or cutting tax rates, good plans to spur economic growth, borrowing is a fine idea. But most likely, lenders at 4 percent will not persist in a 7-percent inflation environment.
The United States has gorged itself on debt in recent years, to be sure. The mistake it has made is not in the level of debt it has taken out, but in the way it has spent the proceeds. Such is the case whenever selfish pandering engulfs the political class.
Arthur B. Laffer, Ph.D., a recipient of the Presidential Medal of Freedom, is chairman of Laffer Associates and has served as an adviser to Presidents Reagan and Trump.
Brian Domitrovic is the Richard S. Strong Scholar at the Laffer Center and Professor of History at Sam Houston State University.
Laffer and Domitrovic are co-authors, alongside Jeanne Cairns Sinquefield, of Taxes Have Consequences: An Income Tax History of the United States.