One indicator that economists use to measure the relative health of an economy is the national debt to GDP ratio. If this ratio is within an ideal zone, a country is set for growth. However, if the ratio is above a certain level, a country could suffer negative effects. The U.S. debt to GDP ratio has fluctuated over time, but has been a major indicator of the overall state of the economy.

National debt is fairly self explanatory: it’s the total debt a country owes to public and private parties. Governments issue debt to help pay for programs to stimulate economic growth, private investment and social programs, among various other items. Ideally a country’s tax revenues would be enough to cover expenditures, though often times deficit spending is necessary which increases the national debt.

Economists measure GDP, which stands for Gross Domestic Product. This is the total value of all goods and services produced by a country. GDP growth is generally a good sign, as when it increases a country is growing. Growth typically implies jobs and investment into the country.

The national debt to GDP ratio therefore measures a country’s debt vs its total output. Economists disagree where the ideal range for this ratio is. Ideally this ratio would be as close to zero as possible (ie – no national debt). However, most economists agree that some public debt is necessary to spur growth and investment.

U.S. National Debt to GDP Ratio by Year (1929-2022)

The U.S. debt to GDP ratio has fluctuated greatly since 1929, beginning at a low of 16% that year, and rising to a high of 129% during 2020. A few other select years include:¹

Economists typically cite the ideal range for this ratio to be somewhere between 40-80%. Where a country falls on that scale depends on its development, the primary drivers of its economy, and what kind of debt is owed. After 80%, countries usually face a risk of adverse effects from the high levels of debt.

However, some debt is much more risky than others. For instance, foreign owed debt is much worse than internal debt (where the debt is held by a country’s own citizens.) Internal debt can be held by public citizens, but also can be held by social programs designed to pay citizens back (like social security).

As you can see in the chart, the US ratio has varied greatly over the last century. During World War II the ratio skyrocketed due to higher government spending as well as efforts to rebuild Europe such as the Marshall Plan. In the years following the ratio lowered due to spending cuts, as well as the US economy’s postwar boom.

The U.S. national debt to GDP ratio began to rise once again during the 1980s following President Reagan’s tax cuts and subsequent increased government spending. Despite touting “trickle-down economics” as a success, it began a long trend upwards of the U.S. debt to GDP ratio, only briefly paused by the surpluses of the Clinton administration.

In recent years the US ratio has greatly increased once again due to the 2008 global financial crisis and COVID-19 pandemic relief. This would suggest that in future years, taxes will need to increase, or spending lowered to help bring the ratio down to more reasonable levels.²

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To learn more about US history, check out this timeline of the history of the United States.

Sources

1) The Balance

2) Bohn, Henning. “The Economic Consequences of Rising U.S. Government Debt: Privileges at Risk.” FinanzArchiv / Public Finance Analysis, vol. 67, no. 3, 2011, pp. 282–302. JSTOR, http://www.jstor.org/stable/41303592.