What Is the National Debt?

What Is the National Debt?

What Is the National Debt?

Answers to your questions about the news.
Oct. 26 2000 1:38 PM

What Is the National Debt?

Now that the federal government is rolling in surpluses, politicians are arguing about what to do about the national debt. Just what is the national debt?

Advertisement

When the government spends more than it collects in taxes, it covers the shortfall by issuing debt in the form of Treasury bills, notes and bonds, and U.S. savings bonds. This debt is purchased by, for example, individuals, or pension funds, or foreign investors. This accumulated amount of money owed to creditors, the net public debt, is about $3.5 trillion. This is what almost everyone is talking about when they refer to the national debt. But right now the total national debt is about $5.67 trillion.

Where's the other $2.2 trillion come from? (You're going to be sorry you asked.) The $2.2 trillion is money the government owes to itself. For example, the Social Security Trust fund is currently running a surplus--meaning that it collects more in Social Security taxes than it pays out in benefits. By law, that surplus must be invested in government securities. For bookkeeping purposes, all the securities the government issues to itself get included in the gross national debt. And no, our current Social Security obligations are not part of the debt.

Today the debt--the $3.5 trillion net public debt--is going down because the flush Treasury can pay off debt as it comes due and issue less. The Treasury is also saving money by buying back some particularly high-interest securities before their date of maturity. This declining portion of the debt is causing the size of the debt relative to the size of the overall U.S. economy to shrink. Today the debt is about 40 percent of the Gross Domestic Product; five years ago it was near 50 percent. (Before getting too cocky: In 1974 it was 25 percent.) Another benefit for the economy is that the interest that's paid to service the net public debt is also going down, allowing that money to be used more productively. Last year that interest payment was about $230 billion; this year's it's expected to be $220 billion.

The U.S. has almost always run a national debt. As the new country was being formed, the debt was needed to pay off the cost of the Revolutionary War. In 1835 Andrew Jackson was the last president to preside over a debt-free country. Economists differ over the need to eliminate, as opposed to reduce, the debt. Debt itself is not necessarily bad. The problem comes when debt runs beyond means. A family is probably better off taking out a mortgage than trying to save enough money to buy a house outright, as long as that monthly mortgage bill is covered by income. Similarly a government may want to build battleships or fund school lunches with money it doesn't have on hand, so it pays for it with debt. But when a government takes on too much debt it often resorts to printing money, resulting in high inflation. Al Gore's plan is to take advantage of the booming economy by paying down the national debt by 2012 (George Bush wants to eliminate it, too; he's just not saying when). But economists warn unless baby boomers suddenly revert to a Colonial America life expectancy, their retirement will deplete the now flush Social Security trust funds. The money will have to come from somewhere, making an increasing national debt a near certainty.

Explainer thanks Rudolph Penner of the Urban Institute, Robert Bixby of the Concord Coalition, and Bill Gale of the Brookings Institution. And reader Gavin Bridge for suggesting the question.