Should We Pay Off Our National Debt?

Wayne,

Here’s a graph from a Paul Krugman blog post. This shows the ratio of the United Kingdom’s national debt to its gross domestic product, GDP. Over more than three centuries it never goes to zero.

You can see the major events of British history in this graph, when the British state and nation felt that they were in mortal danger. There’s the Napoleonic Wars around 1800 to 1815, and a big jump for World War I and then for World War II. If you are sharp you can even pick out what we can the French and Indian War, and our Revolutionary War.

What about the major and long decline during the 19th century, between the Napoleonic Wars and WW I, or the one after WW II? The British paid off any particular single bond when it came due, but the reason for those declines is that they were increasing the denominator of the ratio debt/GDP. The 19th century, of course, was the time of the Industrial Revolution.

When a person or business applies for a bank loan, or when the ratings agencies evaluate a business’s proposed bond issue, the bank compares the potential borrower’s income to his (or hers or its) monthly payments. This is similar to the ratio of debt/GDP in the graph for the British government because a nation’s GDP is also its total income. Thus, this ratio is an indication of the burden of the debt.

But not exactly because, unlike any other British debtors, the British government issues its own currency and borrows in that currency. Over the three centuries shown in the graph, however, the British government was, as they  say, on the gold standard, but it is still the case that it never bothered to pay off all of its debt. These days, the British are not on the gold standard, but issue a fiat currency. So does the United States.

The Krugman post links to an article about Sen. Rand Paul telling us that it is just a disgrace that the United States government has not been out of debt since 1835. If you take a look at that article, by a knowledgeable economic reporter, you will read about what happened when President Andrew Jackson paid off our debt.

While the British are in the European Economic Community, they are not a part of the Eurozone. The nations that are in the Eurozone no longer have their own currency. They use the Euro. Thus they are analogous to US states, which use Uncle Sam’s dollars. This is the key reason why individual members of the Eurozone may have debt crises of the type faced by Greece. It’s also why Puerto Rico is in trouble these days.

Bernard

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One response to “Should We Pay Off Our National Debt?

  1. Pingback: More on Vote for the Crook | two heads are better

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