NCPA - National Center for Policy Analysis

Debt Not Rising Precipitously

January 17, 2000

Last year's record growth saw the Standard & Poor's 500 index up 19.5 percent, the Dow Jones Industrial Average up 25.2 percent and the Nasdaq index up an astonishing 85.5 percent. Some believe we are in the midst of a stock market bubble. They point to the growth of debt as evidence of a bubble that cannot be sustained.

In truth, debt growth is up slightly from the historically low levels of the early 1990s.

  • From 1991 through 1994, total debt (household, business and government) rose less than 5 percent per year.
  • In 1998 and 1999, debt grew more than 6 percent.
  • But this small uptick still puts the growth of debt well below the double-digit growth rates of the 1970s and 1980s, when inflation encouraged excessive borrowing.

Indeed, the growth of debt now is less than it was in the early 1960s, also a period of rapid economic growth, low inflation and low unemployment.

Thus, if history is any guide, there is no reason for alarm about current debt growth rates. In any case, the growth of debt is the result of tax laws that give little choice in the matter.

For individuals, debt growth results from the fact that the federal government only allows them to save in before-tax dollars in special accounts with severe withdrawal penalties. Consequently, they are virtually prohibited from selling assets to get cash when needed and are forced to borrow instead.

The tax laws also encourage business debt by making interest payments deductible, while dividends are not, and by subjecting dividends to double taxation. This encourages firms to borrow to raise capital for expansion rather than float new equity.

Those who worry about excessive debt should look to the tax code for a culprit.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, January 17, 2000.


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