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The Deficit and the Debt

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The national debt and the deficit are not the same thing.

• The national debt is the total amount of money the federal government has borrowed over the years and not yet repaid.

• The deficit is the amount the government spends each year that exceeds its revenues.

The government must borrow to cover its excess spending. Each year’s borrowing (or deficit) is added to previous years’, and the total is the national debt.

How big is the national debt right now?

As of December 31, 2010, the debt stood at just over $14 trillion. The debt more than doubled between 2000 and 2010. For a current figure, go here.

How big are our annual deficits?

The deficit for Fiscal Year 2010 (10/1/09-9/30/10) was $1.3 trillion—the second highest in U.S. history. (2009’s was higher.) Huge deficits in 2009 and 2010 have prompted calls for drastic reductions in spending. But deficit spending is a standard practice during recessions, as a way to stimulate the economy; federal borrowing between 2007 and 2009 was widely seen as a necessary response to the financial crisis.

How fast is the debt growing?

Between 9/07 and 11/10, it grew by an average of $4.18 billion per day. During this period, we were fighting wars in Iraq and Afghanistan, and bailing out banks, insurance companies, and auto-makers—but even during better times, the debt has tended to grow.

How much do we pay in interest?

In Fiscal Year 2010, the government paid $414 billion in interest on the debt. (For comparison, that’s twenty times the amount we spent on NASA, and more than four times what we spent on education.) By 2020, the interest payment is forecast to reach $840 billion. The amount we pay in interest changes from year to year based on the size of the national debt; it also changes based on fluctuations in interest rates.

Another measure of the deficit

Many economists believe that the best way to measure the deficit is by expressing it as a percentage of Gross Domestic Product. (GDP means the total value of all goods and services produced within the country.) By this measure, the deficit peaked during WWII, then reached much smaller highs during the mid-‘80s, and now stands at roughly double those Reagan-era highs. (Go here for a graph that shows deficit as a percentage of GDP.)

How does the government borrow money? Who’s the lender?

In order to borrow, the U.S. Treasury issues securities such as savings bonds and Treasury bills. Anyone can buy these securities: U.S. citizens, foreign investors, foreign governments. Eventually, the Treasury has to pay back these investors—with interest.

Would it be better not to borrow at all?

That depends. Borrowing as an investment in the future makes sense. Developing new energy technology, repairing roads, bridges, and other important infrastructure, retraining workers for jobs that are in demand—all of these are good reasons for the government to borrow.

Here’s a further justification of “deficit spending,” from the National Priorities Project:

“During a recession, federal revenues typically fall… But even though revenues fall, most economists argue that during a recession, the government should spend more. This is called ‘deficit spending’ and it is meant to stimulate economic activity. For example, imagine that the government repaired some schools and constructed some new ones. Construction companies would hire more workers and purchase machinery, tools and materials from other businesses. Those businesses would also hire more workers and purchase materials from other businesses. Construction workers would have employment and would spend their income on household goods, entertainment, and so on. More jobs and more spending are generated. This process is known as the multiplier effect. An increase in government spending leads to more economic activity than the original increase.”

Why is the national debt a problem?

Borrowing because we can’t pay for commitments we’ve already made—for example, social security, national defense, and Medicare—means we’re passing our costs down to our children, and burdening them with a growing mountain of debt. This has serious consequences:

• Each year, we’re paying more interest on the debt than the year before. Unless current trends change, the interest payment will be more than $1 trillion by 2020—or 20% of all federal revenue. That money is needed elsewhere.

• Most economists believe that, if the deficit keeps growing as a percentage of GDP, economic growth will slow, and that would have a sharp impact on employment rates and our standard of living.

• The more we owe, the harder it will become to find lenders to keep financing us. When we do find lenders, they’re likely to demand higher interest rates… which would increase the deficit even more.

• The debt has reached record levels just as the first baby boomers are turning 65. Spending on Social Security and Medicare will soon consume an even bigger chunk of federal revenue.

• Since May, 2010, China has held a larger portion of our national debt than any other country. By buying Treasury bonds, China keeps the value of the dollar high in relation to the yuan—making it cheaper for Americans to buy Chinese imports and more expensive for the Chinese to buy anything made in the U.S., and thereby ensuring that the already large trade deficit between our two countries will keep growing.

• At some point, our debts must be paid. This will result in a lower standard of living for most Americans.

Doom ahead, or no big deal?

Commentators on the national debt take positions all over the map. Some say things are so bad that we can never recover; others say the crisis is exaggerated. Here are two links that express opposing viewpoints: an article that originally appeared in the Christian Science Monitor (“Is deficit commission wrong? Critics say there’s no national debt crisis.”) and a transcript of a Bill Moyers interview with Peter Peterson, a past chairman of the New York Federal Reserve Bank. The first piece reports on a handful of Nobel Prize-winning economists who argue that we urgently need more government spending to get people back to work, and the mounting debt can wait; in the second piece, Peterson says we’re passing backbreaking debts down to our children and grandchildren, and must address the problem now.

The deficit and the debt in the news

4/22/11: A new study by the nonpartisan Congressional Budget Office says that most of the deficit will disappear as the economy improves, without any action by Congress. New York Times columnist Floyd Norris writes: “It is time to calm down about the fiscal situation. There are plenty of people who want to use the scare to cut things they don’t like anyway. Those people of course see no reason to take other steps to reduce the deficit, such as raising taxes on themselves or trimming budgets for programs they support.”

Clearing up some confusions

The trade deficit is the difference in value between our imports and our exports. Since the late 1960s, we have imported more than we’ve sold to other countries. The trade deficit has grown steeply since 1997. In 2009, our trade deficit with China was $227 billion. This was the largest trade deficit between any two countries in the world. (For more on this subject, see this Wikipedia article.)

• Bonds issued by state and local governments are not included in the national debt.

• How Social Security fits into the deficit story: from Economics: Private and Public Choice (2008):

“As conventionally measured, the budget deficit includes the revenues and expenditures of… the Social Security Trust Fund… Currently, the revenues flowing into the Social Security system are… more than the benefits paid out… Thus, the inclusion of Social Security in the budget calculation makes the deficit appear smaller than would otherwise be the case. ¶This is important because the current Social Security surplus will swing to a deficit once the baby boomers start retiring beginning around 2010. As this happens, rather than reducing the federal government’s overall budget deficit, the Social Security system will add to it.”

The political side of the deficit

From Reuters.com, 10/16/10:

“High deficits have become a hot-button campaign issue in November’s congressional elections, with many Republicans branding President Barack Obama’s spending policies as ‘reckless.’ Democrats counter that bailout and stimulus spending was necessary to prevent the economy from collapse and an even worse fiscal picture.”

We’re not the only ones in trouble

In their struggle to fight the financial crisis and the recession, other countries have gone deep into debt, including Japan, Germany, and Great Britain, among others.

Proposed ways to reduce the debt

In late 2010, two different plans for attacking annual deficits were announced.

A panel led by former Senator Alan Simpson, a Republican, and Democrat Erskine Bowles (who served as President Clinton’s Chief of Staff), proposed the following measures:

• $200 billion in spending cuts

• Repeal of all current tax breaks

• Cuts in health care spending

• Major changes to Social Security

An alternative plan, developed by the Bipartisan Policy Center, included these proposals:

• reduce tax breaks for millions of Americans

• create a new 6.5% national sales tax (similar to sales taxes in most European nations)

• reduce future Social Security benefits

• turn Medicare into a voucher program after 2018

For more on the two plans, see this USA Today article.

Strong opposition to the two plans from both Democrats and Republicans makes it clear that any proposal to attack budget deficits will be hard to get through Congress.

Want to help?

You can make a contribution to reduce the national debt. Contribute online at Pay.gov, or write a check payable to the Bureau of the Public Debt. (In the memo section, note Gift to reduce the Debt Held by the Public. Mail the check to: Attn Dept G,
Bureau of the Public Debt,
P. O. Box 2188
Parkersburg, WV 26106-2188. (In Fiscal Year 2009, donations totaled about $3 million.)

When you hear about budget surpluses during President Clinton’s administration…

They’re talking about individual years (fiscal 1998-2001) when federal revenues exceeded spending. How did the Clinton Administration manage to steadily reduce annual deficits and run budget surpluses? With a major tax increase his first year in office (that fell mostly on high-income taxpayers), and through the good fortune of a booming economy (and the dot-com bubble), which resulted in more tax revenue than expected. But the national debt didn’t go away during those years: even during 2000, the year of the biggest surplus, the debt stood at $3.4 trillion.

It’s worth noting that, in fiscal 2002, the first year in which President George W. Bush signed the appropriations bills, his tax cuts resulted in a deficit of $158 billion—after four years of surpluses.

Opinions

Teresa Tritch, “How the Deficit Got This Big,” New York Times, 7/23/11: How did we go from budget surpluses in the 1990s to nine years of deficits? “The answer is largely the Bush-era tax cuts, war spending in Iraq and Afghanistan, and recessions”—not discretionary spending on education, foreign aid, etc.

William Gale, “Five myths about cutting the deficit,” Washington Post, 11/28/10

Paul Krugman, “Fiscal Scare Tactics,” the New York Times, 2/4/10

To learn more

About.com: The U.S. National Debt and How It Got So Big

Simon Johnson and James Kwak, “National Debt for Beginners,” NPR, 2/4/09

Wikipedia

“Alarm Over U.S. Debt Creates ‘Window’ For Tough Choices,” USA Today, 11/29/10

“Federal Debt and the Risk of a Fiscal Crisis,” a report by the Congressional Budget Office, 7/27/10

The Federal Reserve Bank of New York, Understanding the Federal Debt and Deficit, 1994 [a good basic introduction, though our country’s economic problems have changed considerably since then]

Charlie Rose, “The Debt and the Deficit,” interview with a panel of economists, 2/18/10

For a graph showing the growth of the national debt from 1920-2008, with commentary and explanations, go here.

Think we’ve left out an important point or gotten the facts wrong?

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Last updated 7/23/11

You may also be interested in the following News-Basics overviews: The Financial Crisis; The Debt Ceiling, the Budget and Deficit-Cutting; Health Care Reform; The Tea Party; State Budget Battles.

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