It is conventional wisdom among many that a good economy will make government deficits decrease if not disappear altogether.
On the surface, it makes sense; it’s easier to pay for things when you have more money. Additionally, the government doesn’t have to pay out as much money for welfare programs when more people are employed.
The truth is, however, the relationship between the economy and government debt is not that simple. And the last time the government had a surplus was in 2001.
In the late 1990s, the US government had balanced its budget. National debt began decreasing, and the National Debt Clock was taken down. Soon enough, however, debt was again on the rise, and in 2003 the National Debt Clock was reinstalled. What happened?
It is usually better to look at relative rather than absolute debt. Economists usually look at the debt-to-GDP ratio. This is the total amount the government owes as a percentage of our entire economy. It is currently at roughly 108%. It reached its lowest level in the late 1970s and early 1980s at roughly 31%.
The debt-to-GDP ratio reached its highest point in recent memory after World War II. But from 1950 through 1975, due primarily to economic growth, this number went down.
Reagan came into office in 1981 on a pledge to manage the debt. Although the economy performed well under his administration, the debt that had been flat up to the point began to rise.
Large increases in spending and tax rate cuts led to a rise in the debt-to-GDP ratio. The strong economy did bring in more tax revenue, but not enough to offset these other changes.
Bush and Clinton
The late 1980s and early 1990s saw relatively poor economic growth, which helped to increase total debt held by the government. But by the middle of the 1990s, debt had leveled off. And the boom of the late-90s saw the debt-to-GDP ratio decrease substantially for the first time since the early 1970s.
It was the combination of the excellent economy and relatively conservative spending that kept the budget balanced.
Bush, Obama, and Trump
Bush and Obama both governed under mercurial economies. The most notable volatile period was the Great Recession of 2008-2009 that saw the debt-to-GDP ratio skyrocket from 64% to 84%.
Saying that great economic growth leads to lower debt simplifies an issue that is much more complex.
A great economy does tend to help lower overall governmental debt. However, a thriving economy is just one piece of the overall puzzle.
Several times in recent years debt has gone up even while the economy was doing great. Why? Because a good economy alone isn’t enough if we simply spend more or otherwise reduce the amount of money the government collects.