This is another post in response to a student request. Here are some links that provide background information about the U.S. national debt.
First, the definitive sources:
- for the exact amount of debt by year: U.S Treasury Direct – Reports: http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm
- this site also has links, graphs, charts on the makeup of the debt by maturities, interest rates, types of bonds, etc. Even has detailed info on U.S. Savings Bonds
- for the official story of how the debt happened, how it was managed throughout U.S. history: U.S. Bureau of Public Debt – http://www.publicdebt.treas.gov/history/history.htm – a series of 6 pages, covering the whole history.
- for some more facts, graphs, and some analysis: see Wikipedia: http://en.wikipedia.org/wiki/United_States_public_debt
- Be warned, however, the Wikipedia article repeats a lot of commonly believed, but factually incorrect statements such as “spending must be financed by borrowing” and that “entitlement spending such as Social Security” pose a “risk” – see below.
- for a decent, factually correct analysis, albeit a politically biased toward progressive policies analysis see: Z Facts – http://zfacts.com/p/1195.html – several other links and pages explaining some misconceptions
Overall, anybody researching or thinking about the U.S. national debt, should keep in mind that there’s a LOT of nonsense circulating about U.S. government debt. To correct these misconceptions, keep in mind the following:
- Debt is the accumulation of past deficits, if those deficits were “financed” with borrowing. Deficits are the difference between government money-in and money-out. Money-in is Taxes. Money-out is GovSpending + GovTransfers. If money-out exceeds money-in, you have a deficit.
- Deficits do not necessarily have to be “financed” by borrowing, but the U.S. government has long voluntarily followed a policy of borrowing each year to cover the deficit, although it doesn’t necessarily do so month-by-month. The alternative to borrowing to “finance” a deficit in a modern system is to issue checks to pay for spending and let the central bank (Federal Reserve) create bank reserves when the checks are cashed.
- Any analogy between a household’s finances and the national government is false. There is no such valid comparison.
- As long as a national government issues it’s own currency, that currency is not fixed in value (convertible) to anything else (other currency or gold), and the government borrows in it’s own currency, then it cannot default or go “bankrupt” or “insolvent” unless it voluntarily chooses to do so to screw the bondholders. This applies to US, Australia, Japan, UK, Canada, etc, but not to countries inside the “eurozone” – they don’t have their own currency.
- National deficits, and hence debt, almost always goes up during a war. Vietnam war was a bit of exception.
- When comparing debt levels between different years/eras, it is critical to adjust for:
- inflation – use “real dollars” or “constant x year dollars” if looking at the debt in dollars
- size of population and the economy. – The best measure of the relative size of the debt is: debt-to-GDP ratio.
- Three things that really balloon the size of deficits and hence debt levels:
- Depression or recession – since tax receipts are generally based on economic activity (income tax), anything that slows the economy slows tax collection and raises the deficit.
- Major income tax cut programs when combined with major new spending intiatives. This was rare in early US history, but big in Reagan years and Bush II years.
- One thing that really reduces deficits and hence, slows the growth of debt:
- a growing economy, especially as it nears full employment (explains Clinton years)
- Government bonds/debt is NOT a “burden” on children or grandchildren. It does not have to be paid back. If the borrowed money is spent on things that improve or stimulate econonic growth, then the “children” and “grandchildren” inherit a larger, more productive economy that can pay for the debt interest.
- Government bonds are not really like household debt or corporate debt, or even state-government debt. The best way to think about government bonds is that they are just like currency except they pay interest.
- It is possible to have too little national debt. Banks in particular need to have a certain amount of government bonds among their “assets” because they provide a liquid asset. In recent years, the Australian government, when running a series of surpluses was asked by the banking community to issue new bonds anyway.
I have more on the national debt and those promoting the idea that the debt is the number one problem in U.S., on tax cuts, deficits, and debt, and on how the U.S. cannot go “bankrupt”.