In 1946, President Harry Truman confronted an economic downturn and a whopping bill for the Second World War. The country’s debt level stood at 119% of GDP—meaning the U.S. owed more than its total annual economic output.
This year, as a result of massive federal spending and the economic toll of the coronavirus, the ratio of debt to GDP is even higher. According to research from The Balance, that ratio will reach 136% by the end of the third quarter.
The figure is a source of concern because interest payments on that debt could eventually crowd out other national priorities such as health or defense.
The new 136% figure reflects an acceleration of a trend that has been taking place since 1979 when the U.S. debt-to-GDP stood at 31%. While debt levels dipped between 1995 and 2005, figures from the St. Louis Federal Reserve show the overall trend has been steadily upwards:
The current fiscal situation raises the question of whether the U.S. economy will be able to replicate its performance of the years following World War II when debt levels shrunk rapidly thanks to rapid growth.
Unfortunately, that scenario is unlikely since most economists believe 1950s style growth rates, which averaged over 4%, are not achievable, in part because of the country’s changed demographics. Compared to the post-war era, the U.S. population is significantly older, meaning there is a smaller share of younger workers to help drive the economy.
In the absence of strong growth, the U.S. will likely to have to rely on cutting spending in order to prevent its debt levels from becoming unmanageable.
In the short term, though, spending cuts are unlikely as the U.S. seeks to protect the country and the economy from the ravages of the coronavirus. In an interview with the Wall Street Journal, one expert likened the fight against COVID to what the U.S. faced during World War II.
“The war analogy is exactly the right one. We were and are fighting a war. It’s a virus, not a foreign power, but the level of spending isn’t the problem,” Glenn Hubbard, a former chairman of the Council of Economic Advisers, told the Journal.
