More innovation, creativity & business-building, leading to a new wave of growth!! Here’s how it works.
Yesterday, I read an awesome article by Morgan Housel on how the US (or any nation for that matter) is expected to manage trillions of new national debt that is getting created due to this crisis. It traces events back from WW II and has some really interesting insights.
Essentially, national debt is different from the “personal” debt of individuals. The latter have finite career spans and lives; therefore, debt has a repayment end-date. Nations have an infinite life span and can technically remain indebted indefinitely, even with rising debt.
For nations, debt management, not repayment, is the key concern. As long as nominal GDP growth is higher than the budget deficit growth, the debt/GDP ratio will keep doing down. So, the focus becomes “growing out of debt”, not reducing debt.
Here’s how the US managed its WW II debt:
- Due to the war, Govt. debt as % of GDP rose from ~20% in 1929 to ~120% in 1946.
- Post-war, tax rates were kept high: a) tax as % of GDP rose from ~8% pre-war to ~14% avg. post-war till now, b) top marginal tax rate rose from ~24% pre-war to 80–90% levels post-war for about 20 years.
- So, even though spending as % of GDP kept increasing from ~3% levels pre-WW I to ~17% for 80 years post-WW II, debt/ GDP ratio kept falling.
That’s how the war debt effectively got “paid off”, even with high annual fiscal deficits. It never really got repaid in the traditional finance sense, but the US grew out of it by increasing GDP at a faster rate than debt, via unlocking innovation & creativity.
Morgan’s article predicts a high likelihood of tax rates increasing over the coming years, with a simultaneous increase in Govt. spending to drive growth. There is a post-WW II like economic scenario possible where deficit keeps rising but is also accompanied by faster GDP growth.
My Take: $10 trillion+ of stimulus is unavoidable, as is ongoing welfare benefits for the next several quarters, maybe even years. The bet then is — can the US maintain its democratic, innovation & entrepreneurial DNA to unlock the next wave of economic productivity-led growth? If it’s able to do this — GDP growth outpacing debt growth, this COVID debt will again be maintained and eventually outgrown out of, over this generation.
My bet is YES, there is an extremely high likelihood that this will happen. There will be medium-term pain for all of us. And yes, a more equitable redistribution of wealth will be an ongoing policy challenge. But, based on my socio-economic experience as an immigrant and thinking at a fundamental level, I believe that the US is still the most strongly positioned nation globally to unlock the next phase of human ingenuity & creativity for our planet.
A combination of democratic values, civil liberties, technical innovation, entrepreneurship, and access to capital is extremely potent. Besides the US, I don’t see any nation in the world that offers this holistic combination in a compelling way. Even with all its challenges around economic inequality, social divide and a currently-unimpressive political landscape, over the long term, I expect the US to emerge stronger from this crisis.