Matt Yglesias wants us to stop worrying because the national debt is still less than our national assets:
[O]n a net basis the United States of America does not have any public debt and perhaps never did.
The conventional way for debt scaremongers to measure the national debt is to compare gross public debt to GDP. But the normal way you measure the debt load of a business or a household is to ask for a net figure. Just because you have hundreds of thousands of dollars in mortgage debt doesn’t mean you’re a pauper. In fact it probably means you’re a rich person who owns an expensive house. It is of course possible to take out a large mortgage and then end up “underwater” because house prices decline, but it’s simply not the case that a large amount of gross debt is a sign of overextension. It’s typically a sign of prosperity and creditworthiness.
But “net debt” doesn’t mean the difference between assets and liabilities – that’s the definition of net assets. Because when liabilities are greater than assets, you are technically bankrupt. I doubt that anyone is reassured by the fact that the United States is not technically bankrupt – I should hope nobody thinks that we needn’t worry about public indebtedness until that happens.
“Net debt” on the other hand means liabilities minus current assets – assets that are either cash or readily convertible to cash. If Yglesias’s chart is labeled correctly – and I can’t see his underlying data, so I may simply be misinterpreting what he’s trying to show – then we’re looking at overall public assets versus public debt. Most public assets are certainly not readily convertible to cash. And the public debt is frequently quoted as a net debt figure – that is, debt minus short-term receivables, cash and other marketable securities – so I wouldn’t be entirely surprised if the red line is already a net debt figure. Without access to the underlying data and clear definitions thereof, I can’t be sure, but it certainly doesn’t look like a chart showing that the United States never had any net debt – and it couldn’t be, because the US did, and does, have net outstanding debt.
Yglesias disparages the debt-to-GDP ratio, but it’s a pretty good rough-and-ready tool for measuring fiscal health, because your GDP is your tax base, and you service your debt out of taxes. If interest rates are very low, you can service a higher debt more cheaply, but over the long term rates should have a close relationship to nominal GDP, so if you’re projecting very low rates for a very long time, you’re also probably forecasting very low nominal GDP for a very long time. Which would be another reason to worry about a high degree of indebtedness.
For a business or household, you’d also pay attention to leverage – that is to say, not merely how above water you are, but how close to the water line. If you own a house at 5% down, you have a more risky financial position than if you own a house at 25% down, regardless of the value of your house. If you’re a bank with only 3% true equity capital, you’re running a riskier bank than if you have 10% true equity capital. To a certain extent, this is true for countries as well; there’s generally no way for foreigners to foreclose if the value of national assets drops below net debt, but currency crises aren’t exactly a picnic either. In the context of banking, Yglesias understands the importance of leverage. Why, here, does he suggest that the only thing that really matters is whether you’re in the money or not?
Here’s what I see when I look at the chart: from 1850 to 1950, both public debt and the value of public assets grew at a much faster rate than the economy as a whole. Debt expanded rapidly in wartime (Civil War, World War II, War War I), and tended to contract (as a percent of GDP) thereafter. Since 1950, however, the value of public assets has been relatively more stable (rising modestly through 1970, then falling through 1990, then rising again to somewhat above the 1970 peak) while the public debt first dropped dramatically (by nearly 50% to 1970, measured as a percentage of GDP) and then shot back up to around its 1950 peak. We’re not yet as leveraged as we were after the Civil War or after World War II, but our “net national equity” is smaller than it was in any other period, and (if you extrapolate out) shrinking.
Piketty’s argument is (in part) that the 1970-2010 period is much more representative of what trends in wealthy countries are going to look like for the foreseeable future than was the period from 1900 to 1970. That’s a period in which public indebtedness was rising rapidly while public assets rose barely at all. Why that’s a basis for complacency, I have no idea.