The US national debt officially passed $26.7 trillion for the first time in the country’s history.
The landmark came just over three years after President Trump – who once promised to eliminate the federal debt in 8 years – got sworn in to office. President Trump will have contributed over $3 trillion to the deficit. These deficits mean that Trump is right on track to overtake Obama’s first four years office – a time when the economy was in the teeth of the Great Recession.
Before we compare the numbers, it should be pointed out that the first year’s deficit when the Presidents are in office is out of their control.
First Four Years
All Presidents inherit the previous administrations debt. As we noted above, Obama dealt with a recession, while Trump has to deal with COVID-19. During Obama’s first year, the deficit went up by almost $1 trillion to nearly $1.4 trillion. Then it increased at a slower pace during the course of his term topping $5.1 trillion for Obama’s first term in office.
By comparison, Trump’s three years of deficit went up from $585 billion in 2016 to $984 in 2019. This is an increase of 68% and a grand total of $2.4 trillion. Had the pandemic not hit, this year’s deficit was projected to hit $1.1 trillion, based on data by the Congressional Budget Office. This would make Trump’s first four years of deficit come to around $3.5 trillion.
At $1 trillion or higher, this would break all records of budget deficit in a growing economy. It would have been the largest as a percentage of GDP, outside of wars and recessions.
However, this year’s deficit is projected to be $3.3 trillion, making Trump’s first four total deficits at $5.8 trillion compared to Obama’s $5.1 trillion.
Obama’s Last Three Years Compared to Trump’s First Three
Perhaps a more fair comparison of the deficits during the presidencies of Obama and Trump is to add the last three years of Obama’s term with Trump’s first three. This makes sense because the economy was in the same state during those six years.
During the last three years in Obama’s presidency, the total deficits stood at $1.5 trillion compared to Trump’s $2.4 trillion. These periods lie outside of the Great Recession and before the pandemic hit.
The Debt as a Percentage of the GDP
It’s also worth comparing the deficit with the GDP to see a fuller picture of the economy.
In Obama’s first year in office, the deficit was 9.8% of the GDP. This decreased to 6.6% in his fourth year and 3.1% in his last.
During Trump’s presidency, the deficits as a percentage of the GDP continued to increase year-on-year and will skyrocket at the end of his term. It started with 3.4% in the first year, increased to 3.8%, and 4.6% over the course of the next two years (the tax cuts did not help). This year, the CBO projects the deficit to be 16% of the GDP and will fall to 8.6% the next fiscal year when the deficit is projected to reach $1.8 trillion.
One major difference between Trump’s debt figures and Obama’s is that Trump contributed significantly to the debt even when the economy was going strong.
Experts argue that the quickest way to fix the federal debt is to increase federal government spending, thus adding more debt, during times of economic slowdowns, and then pay off the debt when the economy improves. So while the economic theory would support Obama’s spending to support the economy, Trump’s debt binge isn’t doing anything to help.
How do Bill Clinton and George W. Bush Hold Up?
Bill Clinton added about $1.396 trillion to the federal debt, which is a 32% increase from the $4.4 trillion debt at the end of George H.W. Bush.
George W. Bush added about $5.849 trillion, which is a 101% increase from the $5.8 trillion debt at the end of Clinton’s term.
Bush believed that the taxes were too high and pushed for major tax cuts and an increase spending. The combination didn’t work and pushed the US budget into the red and the debt reached $458 billion in Bush’s last year in office.
How Much Debt is Too Much?
While it suffices to say that excessive debt hurts future generations, it’s important to reference a 2011 study by the Bank of International Settlements, jointly controlled by 62 central banks in different parts of the world. The study says that moderate levels of debt can improve a country’s welfare and growth. But it also mentions that extreme levels can be dangerous for the economy.
The research closely looked at data from 18 countries for 1980 to 2010. They concluded that economic growth slows down when debt exceeds 85% of the GDP. Currently, the debt to-GDP ratio for the US, as of March 2020, was 82%. The figure is up from 79% at the end of 2019, making it the highest since the 1940s. Thus, it can be argued that the economy’s growth prospects aren’t looking good in the future.
The report goes on to state that when federal debt exceeds this threshold, the country’s ability to handle unexpected crisis is decreased.
America is at a pivotal moment in time. If the national debt continues to increase as projected ($78 trillion in 2028), the average citizen will feel its effects as labor markets deteriorate, and the gap between the top 1% and the bottom 50% increases, giving rise to social unrest.
Regardless of who wins the November election, whether it’s Trump or Biden, Washington will have to get the budget under control, probably by raising taxes. However, taxes aren’t the end-all and be-all of economic headwind.
If Trump wins, he’ll continue to cut taxes and deregulate to boost economic growth. A Biden presidency means more taxation, regulation, and increased spending on social programs. Either way, time is of the essence. If the debt is expected to increase substantially in the years to come, the growing financial instability will breed civil unrest and systemic issues that may spiral out of control.