With all the kerfuffle over raising the debt ceiling, a lot of the blustering is that we’re approaching a 90% debt to GDP ratio. “We’re going broke!” “We’ll be the next Greece!” are the cries. Neither statement is true, but they make for good bluster to pursue a hidden political agenda. The Greece analogy is particularly bad. Perhaps a better analogy would be the dept to GDP ratio at the end of WWII.
In 1946 the debt to GDP ratio was 121%. Understandable as we’d just spend years fighting WWII. So what did the government do? First FDR signed the Servicemen’s Readjustment Act of 1944, known as the GI Bill of Rights. This allowed returning servicemen and women to attend college or trade schools, loan guaranty for homes, farms or businesses, and unemployment pay. Next Truman signed off on the Marshall Plan, designed to rebuild war-devastated Europe, and return them to prosperity. Eisenhower instituted the largest infrastructure program ever with the interstate highway program followed by the Advanced Research Projects Agency, ARPA (later renamed Defense Advanced Research Projects Agency).
Like any investment, all of these programs cost money. Lots and lots of money, at a time when we had a huge debt to GDP ratio. But the payoff was huge. Millions of Americans returned from service looking for work. The GI Bill allowed Americans to be trained for good paying jobs. Coupled with the home loan guarantee these servicemen could afford homes in record numbers, which put a lot of tradesmen to work. The interstate highway system not only put people to work, it enabled construction of the suburbs for all those new homes being bought by returning GIs. Much of the loan money from the Marshall Plan came back to the U.S. to industries that helped rebuild and modernize Europe. ARPA employed our newly educated scientists and engineers, not only directly, but indirectly through grants to industry and universities. The resulting technological explosion speaks for itself.
In short, we cut the debt to GDP ratio not by cutting spending, but by investing in America. The investment allowed the GDP to grow faster than the debt, and when the economy got back on track, then and only then were small deficits put back into place.