How Much Debt Is Too Much?
Following the news that the U.S. national debt has increased by $1 trillion for the fifth year in a row and that Greece’s debt crisis may force it from the eurozone, The Heritage Foundation has published a primer on national debt and sovereign default.
National debt in a healthy economy should grow more slowly than gross domestic product (GDP). Thus, the key statistic is debt as a percentage of GDP. A useful benchmark is 60 percent of GDP, an upper boundary that eurozone countries vainly pledged not to cross.
U.S. national debt is currently about 71 percent of GDP—plus an additional 31 percent of GDP of “in-house” debt that the U.S. Treasury owes to the Social Security trust fund and similar funds.
A toy economic model, like a back-of-the-envelope calculation, can illustrate the potential effects of large and fast-growing debt. Although the numbers and events used in this model were made up, it can be illustrative for America’s future. The model shows a country that starts out with a national debt of 70 percent of GDP in 2013. Let’s assume that the country’s GDP normally grows 2 percent per year.