PRESS RELEASE: February 23, 2012
Dr. Robert Carreira
Director, Center for Economic Research
Cochise College
901 N. Colombo Ave.
Sierra Vista, AZ 85635
Phone: 520-515-5486
Myths and facts about the national debt
As the election year heats up we'll hear much about the national debt. As I write this, it stands at $15,416,593,980,013.04. As you read it, it'll be several billion higher.
In most years, the national government spends more than it takes in through taxes. This is called a budget deficit. The accumulation of deficits over time is the national debt.
There are some important prerequisites to understanding the national debt objectively. First, Facebook postings blaming one or the other political party for it are most often false or greatly distorted. The same goes for cable news commentators.
Facebook posts that liken the national debt to household credit card debt are also inaccurate. The appropriate comparison to household debt as a share of income would be national debt as a share of GDP. Currently, the U.S. national debt is about 100 percent of annual GDP. It'd be as if your household debt were equal to one year's income—so if you make $50,000 a year, you'd owe $50,000. But that would include the total outstanding balance on your home mortgage, car loans, student loans, and credit cards—not just credit cards as portrayed in the popular Facebook postings. For most American households that'd be a better situation than they are in.
A common myth is the national debt is a recent phenomenon. But the United States has always had a national debt. George Washington, as president, was a deficit spender. When he took office the debt was about $76 million; when he left it was about $82 million. The closest we came to eliminating it was in 1835, when on Jan. 1 that year it was $33,733.05. Andrew Jackson was president at the time.
Which brings up an important point: We tend to blame presidents for the debt because it's easy to point one finger. But presidents can't spend a dime without congressional approval. It's also Congress that passes tax laws. But it's easier to point one than 536 fingers.
The current president has taken flak for the present size of the national debt. It's easy to forget that a few years ago, when the national economy was on the brink of disaster, there was broad bipartisan support for the tax cuts and spending that increased the debt. Most economists agreed drastic measures were needed, both on the taxing and spending side, to help lessen the effects of the Great Recession.
Which leads to another important point: The national debt results from two factors—taxing and spending. One way to reduce the debt is to cut spending; the other is to raise taxes.
A popular question is whether the United States should strive to eliminate the national debt altogether and have a balanced budget each year. From an economic standpoint, the answer is probably no. To do so, in recessions when spending requirements are high but tax revenue is low, we would need to raise taxes and cut spending, which would make the recession worse. In good times, we'd cut taxes or increase spending, which would stoke inflation. If we wanted a balanced budget, it would make more economic sense to balance it over the business cycle—that is, from economic peak to peak or trough to trough.
But a balanced budget would mean current taxpayers would pay for all current expenditures. If we build a highway that'll last for 30 years and be used by future generations, or fight a war that will bring peace to future generations, only current taxpayers would pay. The point is this: If we spend money on things that'll be passed to future generations, it's probably fair to pass along a portion of the costs, just as a portion of the costs for World War II, the Cold War, and the national highway system were passed to us.
A common myth is the national debt will bankrupt the country. Economists dismiss this notion. The national debt isn't a debt that needs to be paid off, only serviced, which is done through issuing new securities. And we could always raise taxes if we had to. But while the nation has always had a national debt, it has never had to raise taxes specifically in order to service it.
Another myth is it unfairly burdens future generations. This argument has been made generation after generation. But while the debt is passed along, so are the assets. This includes the things government spends money on—buildings, highways, or peace—as well as the debt instruments, which are a form of savings. If you've ever owned a U.S. savings bond, you've owned a piece of the national debt. In other words, the government borrowed money from you. If you've ever bought a savings bond for your child, grandchild, niece, or nephew, you've passed along both the national debt and the asset.
Which brings up an important point: About two-thirds of the national debt is owned by U.S. people, banks, governments, and businesses. That means we owe the money to ourselves. In addition to savings bonds, if you have a 401k, mutual funds, or are a member of a state retirement system, you probably own a portion of the national debt.
The fact we owe ourselves most of the national debt means we could pay off most of it today by raising taxes in the morning and requiring investors to turn in their securities in the afternoon, and doing so would not change the purchasing power in the United States. But that means we'd have to cash in our savings bonds, which most people would probably prefer not to do.
There is the question of the portion of the national debt owned by foreign people, businesses, and governments. The interest payments go to them, but this gives them the ability to purchase U.S. goods, services, and assets, or otherwise invest in the U.S. economy. If they didn't want to do so, there'd be no demand for U.S. government securities. And many Americans also own foreign debt.
All things considered, foreign ownership probably beats the alternatives, which would include raising taxes on Americans to meet current government spending, or cutting spending. While the latter sounds attractive, the problem is deciding what to cut. Every government program is someone's favorite, whether it's education, military spending, healthcare, social security, or law enforcement.
This isn't to say there aren't problems with the national debt. One is it transfers wealth from low- to high-income people. Although our nation's tax structure is slightly progressive, meaning the wealthy pay a larger portion of their income toward taxes and thus interest on the national debt, they collect an even greater share of interest payments on the national debt because they own disproportionately more government securities.
Another problem is greater government borrowing could drive up interest rates, crowding out private business investment. This is less of a problem in the current economic environment since the Fed has pushed unprecedented amounts of money into the banking system driving interest rates to record lows. But in good economic times this could be a problem.
In good economic times, our debt was about 60 percent of GDP, and should eventually be closer to that for economic prosperity. Part of the way to achieve that is to grow GDP, which will happen as the economy moves forward.
Now is probably not the best time to drastically cut government spending to reduce the debt, though stimulus spending programs should probably be wound down. And it's always a good time to cut spending through increased efficiency and elimination of fraud and waste. It's easy to jump aboard the cut-government-spending bandwagon, but remember jobs are tied to each dollar spent and the labor market is still shaky.
It's probably not the best time to raise taxes to pay down the debt either. But when the economy improves markedly, we should look both at cutting spending and raising taxes to bring the debt to a more manageable level.
Dr. Robert Carreira is director of the Center for Economic Research at Cochise College. If you have any questions on the economy, please contact the CER at (520) 515-5486 or by email at cer@cochise.edu. Check out the CER's website at www.cochise.edu/cer.
