Measuring Debt Increases: Percentage vs Absolute Increases

If one borrows 4 more while already owing 8, the debt percentage increase is 50%. However, the absolute increase in debt is only 4. This concept is straightforward but becomes more nuanced when applied to government and economic contexts.

The Importance of Debt Serviceability

At the governmental level, what really matters is the ability to service debt rather than the absolute amount of debt. The financial implications of servicing debt include the impact on other governmental services and the tax burden placed on the economy.

Debt Serviceability Factors

The ability to service the debt is primarily a function of the tax rate and the nation's gross domestic product (GDP). Higher GDP and lower tax rates can enhance the government's capacity to service its debt. For instance, a country with a high GDP and low tax rates can better handle and manage its debt obligations.

United States and Japan: Case Studies

The debt of the United States stands at approximately 17 trillion dollars. However, when measured as a percentage of GDP, the net public debt is around 88%, which is not ideal but still manageable. Japan, on the other hand, has a public debt burden of 124% of its GDP. Despite this, both countries maintain high credit ratings because they have robust mechanisms to service their debts.

The Role of Low Interest Rates

A significant portion of the US public debt was accumulated at a time when interest rates were exceptionally low. This has provided the US with the financial flexibility to make payments on its debt. The only major concern arises when political conflicts, notably the 'Chicken Game' in Congress, threaten the country's fiscal stability. This is more of a political issue than an economic one and would have catastrophic global implications if realized.

Simplifying Economic Understanding: Units and GDP

Physics often uses scaling units to simplify complex calculations. Similarly, in economics, scaling units and GDP to understand fiscal health is crucial and greatly aids in analysis. The graph below vividly illustrates how fiscal deficits, private savings, and imports scale with GDP.

In this graph, the red line represents the fiscal deficit, the blue line represents net private savings, and the green line represents net imports. Their respective magnitudes are scaled according to the GDP. This visualization makes it easier to understand the economic situation. For instance, a larger red line (fiscal deficit) can have no negative bearing on the federal government if it means significant benefits, such as providing universal healthcare at no additional cost to the government.

Conclusion

The nuanced differences between percentage and absolute debt increases significantly impact how we evaluate a nation's financial health. While absolute debt amounts might seem alarming, the context and the capacity to service the debt are crucial to a country's economic stability. By adopting appropriate scaling units and GDP as a benchmark, we can better grasp the complexities of national finances and make informed economic analyses.