The national debt is the debt that the federal government holds - this includes public debt, federal trust funds, and various government accounts. In simpler terms, the national debt includes both what the government owes others and owes itself. This is the total amount of deficit that the government has accumulated over the years.
What is the National Debt?
Measuring the national debt can be broken into three parts: debt held by the public, gross federal debt, and debt subject to a limit.
Debt held by the public is the amount of money that the U.S. treasury borrows from external lenders through financial markets. The money gathered funds the government’s activities and programs. Gross federal debt includes public debt and federal trust funds and other government accounts. Debt subject to limit is similar to gross federal debt but does not include debt issued by agencies other than the Treasury and Federal Financing Bank.
National Debt and Budget Deficit
The federal government creates an annual budget that allocates funding towards services and programs for the country. This is made up of mandatory spending on government-funded programs, discretionary spending on areas such as defense (which makes up more than half of spending) and education, and interest on the debt. The budget deficit can be thought of as the annual difference between government spending and revenue. When the government spends more money on programs than it makes, the budget is in deficit.
The Federal Debt Ceiling
The federal debt ceiling is the legal amount of federal debt that the government can accumulate or borrow to fund its programs and pay for fees such as the national debt interest. Since its creation through the Second Liberty Bond Act in 1917, the debt ceiling has grown about 100 times. These instances have included permanent raises, temporary extensions, and revisions to what the debt limit can be defined as. When the debt ceiling isn’t raised, the federal government is unable to issue Treasury bills and must rely solely on tax revenues to pay for its programs; this has occurred 5 times since 2013.
U.S. National Debt to GDP
The gross domestic product (GDP) of a country is a measurement of economic activity. This can be further defined as the value that goods and services of the United States holds. The U.S. debt-to-GDP ratio was 110% in the first quarter of 2020. This ratio is important as it helps to assess the rate of production and value of goods and services in the United States; a high number means that the country’s rate of production is not sufficient to be able to pay off debt.
U.S. National Debt Over Time
National Debt by President
The National Debt has always been an area of interest for the United States; President George Washington appointed future President Alexander Hamilton to understand and solve the $80 million debt that had accrued due to the Revolutionary War. Hamilton came up with the plan to pay off the debt through taxes and the creation of the national bank. Since then the United States has steadily increased its budget deficit, and the national debt has continued to rise.
The first time that the national debt hit the $1 billion mark was in 1863 while the Civil War was occurring; it hit the $2 billion was two years later when the civil war ended in 1865. As the country went to battle during World War I and World War II, the national debt hit the $10 billion mark and $100 billion marks respectively. By 1982 after the Vietnam War and the Cold War, the national debt hit the $1 trillion mark for the first time in history. By the 21st Century, the national debt got to $20 trillion after major events such as the War on Terror and the Great Recession. Today (as of May 2020), the national debt stands at $25 trillion and public debt is about 80% of the country’s GDP.
Which President Created the Most Debt?
In terms of the amount of debt added, President Barack Obama has the highest amount at $9 trillion. President Obama’s policies such as the American Recovery and Investment Act, increase in military spending, tax cuts, and Patient Protection and Affordable Care Act contributed to the increase in debt. In terms of percentage raised, President Ronad Reagan is the winner with a national debt tripled the amount of his predecessor. A large part of this could be attributed to Reaganomics, a term coined by the media to describe President Reagan’s tax cuts. These policies were later reversed and taxes increased over time.
Why is the U.S. in Debt?
Countries around the world currently hold a national debt; in order to grow the economy and the country, debt is oftentimes needed to fund expansions and programming. The United States debt levels are extremely high, and can be attributed, in part, to income inequalities and trade deficit. These two factors indicate that some level of debt must be taken on in order to keep the economy moving. The U.S.’s national debt increased 800% during the period from 1989 to 2019. Factors that affect the level of debt that the U.S. takes on include federal budget deficits, low interest rates, and investment in other countries.
Can the U.S. Pay Off its Debt?
As budget deficits are one of the factors that contribute to the national debt, the U.S. can take measures to pay off its debt through budget surpluses. The last time that the U.S. held a budget surplus was in 2001. Much of the world depends on U.S. bonds to fund their own countries, and it has become a way of life for governments around the world. While it is unlikely that the U.S. will stop doing this, measures can be taken in other areas to decrease the national debt.
National Debt Consequences
A positive, strong fiscal outlook is an important aspect of a successful, growing economy. Without this, a nation is subject to negative outcomes that can affect the wellbeing and future of its citizens. Some of these factors include decreased savings and income, higher interest costs, and lack of flexibility. It is apparent that fiscal policy matters, and there is a need to act.
Since national debt is on such a large level, it may seem far removed from our everyday lives. National debt, however, does have the ability to affect individuals. One way that it can do that is through the growth of income. The rising debt could reduce income per person by 6% in 2048. This is because lower investment slows down income growth, and that crowding out will occur as the U.S. looks to borrow more money.
How does the National Debt Affect Me?
Interest payments also have an important role as it currently is a large chunk of the national debt. As the government allocates more funds towards paying off interests, other investment areas could get crowded out. Areas such as education, research and development, and infrastructure may not progress at sufficient or adequate levels due to interest payments. Interest payments currently take many of the dollars that are raised through income, estate, and federal excise taxes.
Net worth is also an important and interesting factor that can be affected by the national debt. The cost of borrowing money to purchase large assets such as homes will increase due to the Federal Reserve’s interest rates. Interest rates will push down the prices of homes as individuals will struggle to qualify for mortgage loans; this will then lower prices on home values.
How Much Do Other Countries Owe the U.S.?
Public debt makes up three-quarters of the national debt, and foreign governments and investors make up 30% of public debt. The countries with the most debt owed to the U.S. are Japan, China, the United Kingdom, Brazil, and Ireland.
Though China had been the long-standing top placeholder for the country with the most debt owed to the United States, Japan currently holds $1.268 trillion worth of U.S. debt as of 2020. The second place holder, China, currently holds $1.11 trillion in Treasury holdings. Together, they hold 33% of all foreign-owned U.S. debt.
Coronavirus and the National Debt
The U.S. government has taken efforts to offset the effects of worldwide health pandemic by borrowing money to invest in individuals, businesses, and state and local governments. Of these responses, the CARES Act has been the largest stimulus package in U.S. history. This stimulus package included $2.3 trillion towards relief for large corporations, small businesses, individuals, state and local governments, public health, and education. In order to pay for the relief fund, the government needed to expand its debt; to do so, the government borrowed money from investors through the sales of U.S. government bonds.
What Will Happen to Our National Debt?
U.S. spending is currently at an all-time high to combat the effects of COVID-19. Experts estimate that the levels of debt-to-GDP will be close to that of World War II. Despite the effort to reduce the national debt, it is apparent and crucial for the government to take on the debt during times of crisis. Being able to adequately and successfully respond to emergencies is one of the many reasons why the national debt should be reduced; governments should respond to events in an appropriate and timely manner with its citizens in thought.
Solutions to Reduce the National Debt
85% of voters believe that the President and Congress should allocate more time and energy towards addressing the national debt. Americans care about the national debt, and some work has been done in order to address this issue. Solutions include raising revenue (which in turn raises taxes), cutting spending, and growing the country’s GDP.
Policy options such as the Simpson-Bowles plan (which included measures such as raising revenue, reducing spending, putting caps on defense and nondefense discretionary spending, and reducing tax rates) and the Domenici-Rivlin Task Force (which included raising revenues, reducing spending, freezing domestic discretionary and defense spending, and putting Social Security on a sustainable path) have made efforts to create plans to reduce the national debt. Centers and institutes such as the American Enterprise Institute, Bipartisan Policy Center, Center for American Progress, and Economic Policy Institute all proposed things ranging from slow growth to reduction in benefits for high-income individuals.
Young people across America are getting educated about fiscal policy and making changes at their colleges and universities with Up to Us. Sign the pledge to let local representatives know that you are concerned about the nation’s fiscal future, or get involved by learning about how you can make a difference in your own community.