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Critics of the federal deficit should recognize the imperfect nature of the debt-to-GDP ratio. By a more reasonable measure, our fiscal indebtedness is not high by historical standards.

The measure of the inherent risk of the U.S. federal government's debt most commonly used is the ratio to gross domestic product. It is certainly the one that provokes the greatest concern from financial commentators and scholars. As the data from the St. Louis Fed illustrates, we are living in a country whose debt-to-GDP ratio has been increasing rapidly for four straight decades. From a low of .31-to-1 in 1974 and the early 1980s, the debt-to-GDP has risen to 1.03-to-1.

If the U.S. were a private corporation, the debt-to-GDP ratio would be expressed as the ratio of total debt to annual revenues. But that is not a commonly-used yardstick in analyzing the creditworthiness of a for-profit company. Instead, analysts use the ratio of debt to cash flow and other measures that calculate how much money a company collects and keeps, after taxes. If this kind of yardstick were used to evaluate the federal government's credit rating, the measure would be the ratio of national debt to federal tax revenues. Craig Eyermann at The Independent Institute recently produced a picture of that relationship for the entire history of the U.S., using the historical data from the census, Treasury and OMB.

Since Congress began authorizing the Treasury to sell IOUs (debt), the ratio of national debt to annual tax revenues has averaged 5-to-1. When the U.S. began borrowing money in 1791, the country's debt-to-taxes ratio was over 20-to-1. It took a third of a century – until 1820 – for that ratio to decline to what would become the historical average. Whether President Monroe or any chief executive is to be given credit for the country's balance sheet and income statement, there is no question that the voters approved of what Monroe had done in his first term. When he ran for re-election, he not only won every state – as Washington had – he would have won every electoral vote but for William Plumer of New Hampshire, who, contrary to the voters’ instructions, chose John Quincy Adams. Monroe and Adams and Jackson combined to produce the only period in American history in which the federal government entirely paid down its debts.