It is an open secret that the United States is among the nations with a huge national debt, both relative to its gross domestic product as well as in absolute terms. In fact, the dollar value of its debt is the highest in the world.

The total American debt stands close to $16 trillion and is equal to its GDP. Furthermore, it is rising much faster than national output. Of course, almost the entire world is awash in debt, especially some nations in Europe. The so-called PIIGS nations Portugal, Italy, Ireland, Greece and Spain have larger debts relative to their GDP.

However, there is a major difference between the debt situation in the U.S. and other nations. While PIIGS are trying to reduce their indebtedness, the United States seems to be in no hurry to do so.

There was a time when economists disliked the idea of a persistent budget deficit, but the Great Depression in the 1930s led to a change in this thinking. A British economist named John Maynard Keynes wrote a book in 1936, arguing that recessions and depressions could be mitigated with the help of temporary budget deficits. He recommended balancing the budget over the business cycle rather than each year. When unemployment disappeared in the 1940s despite huge budget deficits, Keynesian economics became popular, and temporary deficits became acceptable.

Another change in government policy occurred in 1981 — supply-side economics, which argued that high income taxes on individuals and corporations were the cause of high inflation as well as unemployment. This theory suggested that income tax rates should be cut sharply not only to improve the performance of the economy but also to balance the federal budget. And the theory was put into practice in 1981, 1986 and again in 2001.

Then came the Great Recession and this time Keynesian economics was reactivated in the form of an $800 billion bailout of major banks in 2008. Another bailout and further tax cuts occurred in 2009 and the federal deficit ballooned. So it was that by 2012 the U.S. debt reached a huge $16 trillion.

But why should the debt keep rising? The Congressional Budget Office expects a continued increase in spending on social programs. By 2037 social programs and interest payments alone would exceed federal revenue.

At a minimum, a modified debt-reduction law should be considered. Otherwise, the United States could face the dire economic situation that is now occurring in the PIIGS nations of Europe, with Spain, Portugal and Greece suffering from vast unemployment.


Hamid Beladi is a professor of economics at UTSA.