Sen. Judd Gregg, a Republican senator from New Hampshire, has been making the rounds on political news programs this week, criticizing President Barack Obama's budget as too costly.
Gregg has repeated one statistic over and over to make his point: that Obama's budget plan would increase the national debt to 80 percent of gross domestic product.
"Seventeen trillion dollars worth of debt at the end of 10 years, $11 trillion at the end of five years," Gregg said. "This translates into a debt-to-GDP ratio which we have not seen in this country since the end of World War II when we were trying to pay off the war debt. Basically, you take national debt up to about 80 percent of gross national product. That's the public debt. Historically, it's been about 40 percent."
At 80 percent, Gregg has been fond of saying this week, the United States would be getting into "banana republic" territory.
Debt-to-GDP ratios may not get a lot of public attention, but economists follow them closely as a good indicator of economic health.
"Over the long haul, that is the most important number," Brian Riedl, a research fellow in federal budget policy at the conservative Heritage Foundation.
Gregg's numbers come from an analysis of the Obama budget by the nonpartisan Congressional Budget Office, which concluded that the national debt would grow by $9.3 trillion between 2010 and 2019 under Obama's plan. According to the CBO, the debt held by the public would rise, from 41 percent of gross domestic product (GDP) in 2008 to 57 percent in 2009 and then to 82 percent of GDP by 2019. That comports with Gregg's statement.
Projections put out by the administration's Office of Management and Budget in February were a little more optimistic, due largely to differing assumptions about the future growth of the economy. According to the White House forecasts, the national debt-to-GDP ration would rise to 67 percent in 2019.
Still, by either count, the debt-to-GDP ratios are climbing.
Gregg is right that since the post-World War II years, debt-to-GDP has averaged about 42 percent. He's also right that if the debt-to-GDP ratio rises to 82 percent in 2019, that would be a level we have not seen in the United States since World War II. According to historical budget tables, the debt-to-GDP ratios actually climbed over 100 percent, peaking at 109 percent in 1946. Since then, the ratios have spiked occasionally as a result of recession or war, but have never gone above about 50 percent. That will change this year.
It's less clear if that 82 percent would put us in the "banana republic" range. According to the CIA World Factbook, the United States has the 22nd highest level of public debt as a percentage of GDP in the world. There are no separate statistics for banana republics, but it's worth noting that many Latin American countries have a lower public debt ratio than the United States.
Regardless, Gregg is right that 82 percent would be remarkably high and put the country in unenviable company.
So why should we care?
If the debt-to-GDP level were to go to 82 percent, Heritage's Riedl said, "It's a simple fact that interest rates would go through the roof."
Moreover, he said, it would be harder for companies to borrow money; harder for people to get mortgages. It would decrease productivity and overall economic growth.
"It's just not a sustainable ratio," Riedl said.
Jonathan DeWald, a spokesman for the Concord Coalition, a nonpartisan organization that specializes in analysis of budget deficits, also cautioned that as interest rates increase in coming years, interest payments on the growing national debt will continue to eat up more and more of the overall budget.
Obama has warned not to place too much stock in the "out years" of budget projections because "none of us know exactly what's going to happen six or eight or 10 years from now." And Obama has said that making investments today in education, health care and energy will pay off down the road with a stronger economy, which presumably would create a better debt-to-GDP ratio.
Gregg is on solid ground, relying on projections from the CBO, a highly respected, nonpartisan arm of Congress, about the long-term debt-to-GDP ratios. We rate his statement True.