PEORIA MAGAZINE June 2022

ECON CORNER An Interview with Dr. David Cleeton chairman of the Department of Economics at Illinois State University

INTERVIEW BY MIKE BAILEY

W e l come t o Peor i a Magazine’s Econ Corner, a recurring feature in which we pose questions to experts about various economic issues and how they affect our lives and careers here in central Illinois. This month’s participant is Dr. David Cleeton, chairman of the Department of Economics at Illinois State University. Peoria Magazine (PM) : The national debt surpassed $30 trillion on Feb. 1 of this year and has doubled in the last 10 years. Former Vice President Dick Cheney famously said that “Reagan proved that deficits don’t matter.” Do they, or don’t they? At what point do debt levels become “too much”?

economic sector debt. The split is approximately one third governmental and two-thirds private sector. In both cases, the debt represents a promise to pay back the borrowing with interest into the future. The interest rate reflects market valuations of the riskiness of the repayment stream. U.S. government debt typically is viewed as the least risky and has the lowest default rate across all sectors. Is private sector debt a burden? We have the recent memory of the 2008 financial crisis, when the collateral for household mortgages collapsed with a downturn in the housing market, which in turn led to defaults

Deficits must be financed by issuing debt. It is clear that future surpluses are not likely to be available to reduce the outstanding debt. Another factor to consider is the split between domestic and foreign holdings of public debt. Foreign holdings have been trending downward, whi le domestic holdings have shifted from private to central bank holdings. The Federal Reserve’s policy of quantitative easing has ballooned its balance sheet so that it now holds around 20 percent of all U.S. government debt. In addition, the Social Security Trust Fund has a large portion of its assets invested inU.S. government debt. This means the net outstanding public debt is significantly below the gross outstanding amount. The more general measure of the risk of growing debt is to frame it relative to the size of the aggregate economy. This is most commonly done by examining the ratio of debt to Gross Domestic Product (GDP), the total annual value of goods and services produced. Here we see a long-term upward trend for both public and private sectors. The private sector debt-to-GDP ratio was approximately 230 percent at the end of 2021, with a public sector ratio of nearly 125 percent. The two primary risks for these debt burdens are increases in the cost of borrowing, represented by higher interest rates, andexcessivedeficits, whichwill require additional new debt issuance. On the other hand, debt-financed expenditures associatedwith investments to enhance

US DEBT OUTSTANDING BY SECTOR END OF 2021 ■ Households ■ Business ■ Federal Government ■ State & Local Governement ■ Domestic Financial Sectors ■ Rest of the World

Source: Board of Governors of the Federal Reserve System

on mortgage-backed securities and a domino effect on financial institutions, prompting the Great Recession. So, there are problems with private debt of a significant magnitude. The different concern with public sector debt is that it is a joint liability of all citizens through government’s tax, revenue and expenditure streams.

David Cleeton (DC) : When we speak of national debt, we should be precise in what we are measuring. First, it is the outstanding face value or principal amount of existing U.S. federal government and agency securities including loans outstanding. The national debt can be compared and contrasted with other domestic

78 JUNE 2022 PEORIA MAGAZINE