What Is the National Debt?
Three Ways to Visualize the National Debt
The national debt is the public and intragovernmental debt owed by the federal government. Two-thirds of the U.S. debt is the Treasury bills, notes and bonds owned by to the public. They include investors, the Federal Reserve, and foreign governments.
One-third is the Government Account securities owned by federal agencies. They include the Social Security Trust Fund, federal public employee retirement funds, and military retirement funds.
Those agencies held surpluses from payroll taxes that they invested in the Government Securities. Congress spent it. Future taxpayers must repay these loans as employees retire.
The federal government adds to the debt whenever it spends more than it receives in tax revenue. Each year's budget deficit gets added to the debt. Each budget surplus gets subtracted. See How the Deficit Affects the Debt.
The only way to reduce the debt is to raise taxes or cut spending. Either of those can slow economic growth. That's because they are two of the tools of contractionary fiscal policy. Find out more ways to reduce the national debt.
The debt should be compared to the nation's ability to pay it off. The debt-to-GDP ratio does just that. It divides the debt by the nation's gross domestic product. That's everything the country produces in a year. Investors worry about default when the debt-to-GDP ratio is greater than 77 percent.
Current National Debt
The current national debt is over $20 trillion. The national debt clock and the U.S. Treasury Department's website "Debt to the Penny" will give you the exact number as of this minute. The public debt is $14.8 trillion, and intragovernmental debt is $5.7 trillion. Find out Who Owns U.S. Debt?
The national debt is so large it's hard to imagine. Here are three ways to visualize it. First, it's almost $60,000 for every man, woman, and child in the United States. (That $19 trillion divided by 320 million population.) That's double the U.S. per capita income of $28,757.
Third, the debt is more than the country produces in a year. That means the United States couldn't pay off its debt even if everything it produced this year went towards it. Fortunately, investors still have confidence in the power of the U.S. economy. Foreign investors like China and Japan keep buying Treasuries as a safe investment. That keeps interest rates low. Once that falters, interest rates will skyrocket. That's why Congress did so much damage when it threatened to default on the U.S. debt. Read more on the Relationship Between Treasury Notes and Interest Rates.
Deficit spending boosts economic growth over the short-term. That's why politicians and their voters have become addicted to it. But an ever-increasing national debt slowly dampens growth over the long term.
That's because investors know in the back of their minds that it must be repaid one day. That's already happened with some municipal bonds. Cities have had to choose whether to honor pension commitments and raise taxes, cut retirement benefits, or default on their debt. That is looming with the United States with Social Security. If investors ever lose confidence, the federal government will have to face the same choices as these cities.
The debt-to-GDP ratio rose above 77 percent for the first time to finance World War II. That expansionary fiscal policy was enough to end the Depression. It remained below the safe level until 2009 when the Great Recession lowered tax receipts. Congress increased spending for the Economic Stimulus Act, TARP, and two wars. The ratio has remained above 100 percent despite the economic recovery, the end of the Afghanistan and Iraq Wars, and sequestration.
One reason is the high level of required spending for mandatory programs like Social Security, Medicare, and Medicaid. Second, the Federal government already pays more than $250 billion a year on interest payments alone.
That level of spending usually boosts GDP enough to reduce the debt-to-GDP ratio. That hasn't happened in this recovery. First, Congress imposed austerity measures that destroyed business confidence. These included the debt ceiling crises, the fiscal cliff, and the government shutdown. That halted the growth momentum between 2011-2013. Second, the Federal Reserve has created too much expansive monetary policy. That's created a liquidity trap. It's like flooding the car engine by pushing on the gas pedal too much.
The National Debt When Bush Left Office
When President Bush left office in 2008, the debt was $10.5 trillion. That was a 60 percent increase from the $6 trillion debt he inherited from President Clinton. First, Bush fought the 2001 recession with the EGTRRA and JGTRRA tax cuts. Then, the 9/11 attacks demanded a military response. Bush added $928 billion with the War on Terror. He spent $600 billion on the War on Terror during the boom years of 2005 and 2006. He should have cut spending instead to cool the economy down. Here's when governments should use expansionary versus contractionary fiscal policy.
Bush also increased non-war military spending to record-high levels. In FY 2006, the base budget for the Department of Defense and its support departments (VA, Homeland Security, etc.) was $518 billion. That helped create a $248 billion deficit in a year that should have seen a surplus. The 2008 financial crisis required a solution. But the government only spent $350 billion of the $700 billion bailout by the time Bush left office. Most of Bush's contribution to the debt came from tax cuts and military spending. Bush is responsible for the FY 2009 budget. It created a $1.4 trillion deficit, the largest on record. For more, see U.S. Debt by President
President Obama added more than $6 trillion to the debt. In FY 2010, he extended most of the Bush tax cuts with the Obama tax cuts. That helped to create a $1.3 trillion deficit. He increased military spending to $800 billion a year. For more, see National Debt Under Obama.
President Reagan was third. He cut taxes and increased defense spending. He raised Social Security taxes but significantly expanded Medicare costs and benefits. All of these presidents received lower tax receipts due to recessions. For more, see National Debt by Year.