The Deficit Crisis Is Really A Recession Problem

The graph provided offers a clearer understanding of the US fiscal deficit by showing the ratio of federal debt to GDP. The red line on the graph represents the current ratio of federal debt to GDP, which is at the same level as it was in 2021. Before the pandemic, the ratio had been relatively flat for seven years, indicating that the current deficit problem was exacerbated by recession-prompted fiscal stimulus and a temporary decline in GDP. To better illustrate this point, a green line was created, which assumes zero change in the ratio during recessions and uses the same growth rates as the all-inclusive debt-to-GDP ratio. The green line shows that the ratio today is the same as it was over 10 years ago and is close to levels seen in the mid-1990s. By comparing the two lines, it is clear that the ratio of debt to GDP follows a stairstep pattern, remaining flat during periods of growth and accelerating during recessions. The deficit problem is primarily associated with recessionary stimulus, and it may be beneficial to consider how stimulus funds are spent during recessions. A focus on productive stimulus during recessions could provide a greater long-term economic boost. If there is no recession in the near future, the current deficits may not be significantly worsening, and some pundits may be too focused on the deficit amount stated in dollars rather than as a ratio to the ability to pay for it. The key takeaway is that the deficit problem should be considered in the context of economic growth, rather than just the absolute dollar amount, to gain a more accurate understanding of the situation.