History of National Debt

Report
History of National Debt
• Some History
• http://www.publicdebt.treas.gov/history/history.htm
• http://www.treasurydirect.gov/govt/reports/pd/histdebt/hist
debt.htm
• Current News on National Debt
• http://www.fms.treas.gov/bulletin/index.html
Debt vs. Deficit
• A budget deficit occurs when government revenue in a given
year is less than government spending in the same year.
• The national debt is the accumulation of budget deficits over
time.
• For example….
• if a government received $10 and spent $15 in a given year, the
budget deficit would be -$5
• if a government repeated this same budget deficit for 10 years,
the national debt would be -$50
• Since World War II, the U.S. has had a budget deficit (i.e. spent
more than it received) in virtually every single year.
• The last time the budget deficit vanished was in the latter
years of the Clinton administration (late 1990s).
Past and Future Deficits
http://www.cbo.gov/publication/45229
Government Revenue and Spending
http://www.cbo.gov/publication/45229
U.S. Budget Deficits as
Percentage of GDP
Deficits as
percentage of GDP
Deficits and debt relative to GDP
provide measures of a country’s ability
to pay off a deficit and service its debt
5
10
Colander, Economics
Colander (2013)
0
-10
-20
-30
1900
McGraw-Hill/Irwin
1920
1940
1960
1980
2000
2020
DEBT HELD BY PUBLIC
HTTP://WWW.CBO.GOV/PUBLICATION/45229
http://www.businessinsider.com/facts-about-debt-and-deficits-2013-10
Debt in the 19th century
• The U.S. has had debt since its inception. Records show that debts
incurred during the American Revolutionary War amounted to
$75,463,476.52 by January 1, 1791.
http://www.publicdebt.treas.gov/history/history.htm
• The National Debt in 1816 was $127 million
• Andrew Jackson reduced the National Debt to zero (or virtually
zero) in 1835 THIS IS THE ONLY TIME DEBT WAS ZERO – AND IT
DIDN’T LAST FOR MORE THAN A COUPLE OF YEARS. SO THE U.S.
HAS BEEN IN DEBT CONTINUOUSLY SINCE 1837.
• The National Debt in 1839 was $10 million
• The National Debt in 1851 was $68 million
• The National Debt in 1866 was $2.77 billion
• By 1891 the National Debt had fallen to $1.546 billion (the lowest it
was from the Civil War to World War I)
Debt in the 20th century
• The National Debt in 1919 was $27.4 billion
• The National Debt in 1930 was only $16.2 billion
• By 1946, the National Debt was $269.4 billion (as we will note… this
was when the nation’s debt-to-GDP ratio was at its highest)
• 1957 was the last year – in the data set examined in class – the
National Debt fell. It was $270.5 billion that year.
• 1963: $305.9 billion
• 1972: $427.3 billion
• 1975: $533.2 billion
• 1982: $1.14 trillion
• 1986: $2.13 trillion
• 1992: $4.06 trillion
• 2000: $5.67 trillion
Debt in the past decade
•
•
•
•
•
•
•
•
•
•
•
•
•
Note: numbers taken from December of each year.
2002: $6.4 trillion
2003: $7.0 trillion
2004: $7.6 trillion
2005: $8.2 trillion
2006: $8.7 trillion
2007: $9.2 trillion
2008: $10.7 trillion
2009: $12.3 trillion
2010: $14.1 trillion
2011: $15.2 trillion
2012: $16.5 trillion
2013: $17.4 trillion
What Causes the national debt to rise?
• Debt occurs when government revenue
(primarily from taxes) is less than
government spending.
• Therefore debt will rise whenever..
• revenue falls: this happens when the
economy goes into recession and when
we decide to cut taxes
• spending increases: this can happen
when we go to war
Sources of Federal Revenue
http://www.theatlantic.com/business/archive/2014/04/how-america-pays-taxes-in-10-not-entirely
depressing-charts/360647/
What does the federal government
currently spend money on?
• http://www.whitehouse.gov/taxreceipt
• National Defense: 24.6%
• Health Care: 22.5%
• Job and Family Security: 17.3%
• Everything Else is less than 36%
• everything else includes education, veterans benefits, national
resources, foreign aid, NASA, Immigration, response to natural
disasters, and interest on the debt.
The biggest expenditures of the federal government are Social
Security, Medicare and Medicaid, and National Defense
The biggest expenditure of the state and local government is
education.
What the Federal
Budget is Spent
Upon
http://www.theatlantic.com/business/
archive/2014/04/how-america-paystaxes-in-10-not-entirely-depressingcharts/360647/
From The Atlantic and Heritage
Military spending around the world
http://www.sipri.org/research/armaments/milex/factsheet2010
More on US Military Spending
How the government pays?
• Most Governments use both taxes and
debt
• As we have seen, the U.S. government has
been in debt for almost its entire history
• The debt from World War II – when the
GDP-to-Debt ratio reached its highest point
– was never repaid
• Still… isn’t $17 trillion in debt a significant
problem?
What can a government do when its
bonds mature (i.e. it is time to pay)?
Option One: Bonds could be redeemed with no new bonds issued (i.e.
the government can pay off its debt)
http://noahpinionblog.blogspot.com/2013/10/borrowing-from-future-exceptthat-we.html
This would reduce the amount of bonds in private portfolios, but it would give
the ex-bondholders an equivalent amount of cash to spend on something
else. The cash comes from a budget surplus, which means that taxpayers have
paid in extra. Those who don’t own bonds are now net payers to those who
do. From an accounting standpoint, however, they also gain in the sense that
they are no longer liable to pay a stream of interest on the bonds into the future.
Historically, this doesn’t happen very much. The best example is the huge
deficits that the US and Britain used to finance WWII. Neither country ran
equivalent surpluses later on to “pay off” the debt. Their economies grew,
inflation eroded debt claims, and over time the debt-to-GDP levels slid back
down to more reasonable levels.
What can a government do when its bonds
mature (i.e. it is time to pay)?
Option Two: Roll over the debt (i.e. issue more bonds to
finance the redemption of the old bonds)
This is what we did with respect to World War II debt (and
what we have essentially done with some debt since 1837).
http://noahpinionblog.blogspot.com/2013/10/borrowingfrom-future-except-that-we.html
As Noah Smith notes: That’s what happens in 99% of the
cases, and you can see this by looking at how small and
infrequent fiscal surpluses actually are.
Back to the Bank of England
SEE BRIEF VIDEO: http://www.bbc.co.uk/programmes/p00vpwhd
Key Quote: “The Bank of England was
designed to provide a long-term loan to the
government that wasn’t designed to be paid
back. People loaned money to the
government to get interest on that loan. If
they wanted their money back they simply
sold their shares.”
What can a government do when
its bonds mature (i.e. it is time to
pay)?
Option Three: Default
As Noah Smith notes: Banana republics
and governments under the influence of
suicide cults sometimes do this.
http://noahpinionblog.blogspot.com/2013/10/borrowing-from-futureexcept-that-we.html
Are we borrowing from the
future?
So where is “borrowing from the future”? Well, all government is
borrowing from some people to pay other people, and paying back these
debts, should it ever happen, simply reverses that flow. Either way,
money is making its way from one group to another at the same point in
time. Note that interest on the debt has nothing to do with present vs
future either: the current generation, which incurs the debt, begins
paying interest immediately in exactly the same way their distant
descendants will.
So there you have it. At an individual level, borrowing is truly borrowing
from the future. At a population level, borrowing is the creation of
assets and liabilities across different people. People like King are
committing a fallacy of composition.
http://noahpinionblog.blogspot.com/2013/10/borrowing-from-future-except-thatwe.html
YOU ARE NOT A GOVERNMENT!
OR… WHY THE NATIONAL DEBT MAY NOT BE AS IMPORTANT AS
PEOPLE CLAIM!!!



Because you plan to stop working at some
point, you must eventually consume less than
you earn. In other words, individuals have to
save. Governments do not retire. So they do
not have to save.
In other words…government debt is ongoing,
but individual debt must eventually be repaid.
Because government never retires and always
earns an income, markets may be willing to
lend at very low rates. This is especially true for
very rich countries (like the U.S.). The current
interest rate on U.S. debt is close to 0%.
MORE ON HOW GOVERNMENT DEBT IS
DIFFERENT



Government can print money to pay off debt.
Although this is not generally a good idea, people –
and some nations – do not have this option. And
when this option does not exist, debt can become a
very big problem.
As we will see… most of the government’s debt is
internal debt, or debt owed to the government (yes,
the government owes money to itself) or to its citizens.
Paying interest on internal debt redistributes income,
but does not cause a net reduction in income of the
average citizen.
26
OWNERSHIP OF THE DEBT
FROM DAVID COLANDER (2013)
Other U.S.
government
trust funds,
12%
Social Security
trust fund, 18%
Federal
Reserve, 11%
McGraw-Hill/Irwin
Colande
r,
MORE RECENT DATA ON DEBT OWNERSHIP
December 2013
Dollars
Total Debt
$17.35 trillion
Federal Reserve and Intragovernmental Holdings
$7.21 trillion
41.5%
Private Debt
$10.15 trillion
58.5%
Foreign Debt (listed under private debt, DEC 2013)
$5.8 trillion
Percentages
33.4%
percent held by mainland China (DEC. 2013)
7.3%
percent held by Japan (DEC. 2013)
6.8%
Sources:US Treasury Department
http://www.fms.treas.gov/bulletin/index.html
see Ownership of Federal Securities
For Foreign Ownership:
http://www.treasury.gov/resource-center/data-chartcenter/tic/Documents/mfh.txt
THE DEBT TO GDP RATIO


The household analogy doesn’t work (again,
you are not a government). But thinking of
households does offer some insight.
Imagine a household borrows $200,000. Is
this a good decision?



If a person only earns $10,000 a year, then no.
If a person earns close to $100,000 a year, then
this is not a bad financial decision.
Key point: We need to consider income – or
GDP – in evaluating the national debt.
BACK TO WORLD WAR II




From 1940 to 1946, the national debt increased from
$40 billion to more than $260 billion. So debt went up
6 times (debt has increased about 6 times from 1987
to 2012).
The Debt-to-GDP ratio in 1946 was 1.21 (or 121%)
What happened to this debt? From 1946 to 2012, the
national debt has only declined 5 times and we only
reduced the amount by $23 billion. In other words, we
never paid the debt from World War II.
So what happened?
WHY DEBT MAY NOT MATTER OVER TIME



From 1946 to 2012, nominal GDP has
increased from about $220 billion to over $15
trillion.
That means our debt from World War II is
simply insignificant compared to the size of our
national economy.
IT IS IMPORTANT TO REMEMBER...
Decade
Beginning
1791
1801
1811
1821
1831
1841
1851
1861
1871
1881
1891
1901
Real GDP
(in millions
of 2011 dollars)
$4,847
$8,781
$12,593
$17,226
$27,212
$36,429
$60,673
$94,773
$133,407
$244,512
$366,133
$504,794
Population
(in thousands)
4,048
5,461
7,436
9,899
13,277
17,612
24,095
32,215
41,010
51,466
64,432
77,584
Real GDP per capita
(in 2011 dollars)
$1,197.44
$1,607.92
$1,693.56
$1,740.15
$2,049.56
$2,068.43
$2,518.07
$2,941.89
$3,253.04
$4,750.93
$5,682.48
$6,506.41
Decade
Percentage
Change
NA
34.3%
5.3%
2.8%
17.8%
0.9%
21.7%
16.8%
10.6%
46.0%
19.6%
14.5%
Average
Annual Percentage
(last decade)
NA
3.0%
0.5%
0.3%
1.7%
0.1%
2.0%
1.6%
1.1%
3.9%
1.9%
1.5%
Economic Growth in the
19th century
(from EH.net)
Decade
Beginning
1911
1921
1931
1941
1951
1961
1971
1981
1991
2001
2011
Real GDP
(in millions
of 2011 dollars)
$624,789
$761,841
$946,562
$1,547,433
$2,449,443
$3,282,702
$5,002,409
$6,785,210
$9,084,331
$12,860,870
$15,094,000
Population
(in thousands)
93,863
108,538
124,149
133,402
154,287
183,742
207,692
230,008
253,530
285,335
312,041
Real GDP per capita
(in 2011 dollars)
$6,656.39
$7,019.12
$7,624.40
$11,599.77
$15,875.89
$17,865.82
$24,085.71
$29,499.89
$35,831.39
$45,072.88
$48,371.85
Decade
Percentage
Change
2.3%
5.4%
8.6%
52.1%
36.9%
12.5%
34.8%
22.5%
21.5%
25.8%
7.3%
Average
Annual Percentage
(last decade)
0.4%
0.7%
1.0%
4.6%
3.5%
1.2%
3.0%
2.1%
2.0%
2.3%
0.7%
Economic Growth in the
th
20 century
(from EH.net)
• Real GDP per-capita has increased in every decade
in U.S. history.
• Growth was faster in the 20th century (relative to
the 19th century).
• Average annual growth in the 20th century was
about 2% per year.
• For the past 100 years….
• Real Gross Domestic Product has increased (on
average) 3.4% in each year
• Real GDP per capita has increased (on average) 2.1%
in each year
Growth Happens!!
Again, why does growth happen?
http://www.vox.com/2014/4/20/5624018/should-technology-define-generations
Year
2023
2033
2043
2053
2063
2073
2083
2093
2103
2113
Projected Real GDP per capita
$66,712
$82,591
$102,250
$126,588
$156,719
$194,023
$240,205
$297,379
$368,163
$455,795
Projected Real GDP
$23,394,352
$32,581,973
$45,377,833
$63,198,987
$88,019,011
$122,586,558
$170,729,755
$237,780,143
$331,163,109
$461,220,198
Projected National Debt
$17,545,764
$24,436,480
$34,033,375
$47,399,240
$66,014,258
$91,939,918
$128,047,316
$178,335,108
$248,372,332
$345,915,149
st
Here is the 21 Century
• Growth in real per capita income is 2.1% (last 100 years average)
• Growth in real GDP is 3.4% (last 100 years average)
• Projected national debt assume ratio of debt to income of 75%
http://www.businessinsider.com/facts-about-debt-and-deficits-2013-10
PUTTING U.S. DEBT INTO PERSPECTIVE: HISTORY
OF DEBT IN THE UNITED KINGDOM
38
McGraw-Hill/Irwin
U.S. Debt Compared to Foreign Debt
from Colander (2013)
82%
82%
80%
68%
52%
The U.S. debt does not
appear so large when
compared to the debts
of some other countries
in the early 2000s
42%
37%
23%
Debt as a Percentage of GDP
Colande
r,
Simple Thought Experiment…
• The simple projection says real GDP is $80 trillion in 2091
• If the Debt-to-GDP ratio is 0.75; what is the national debt in
2091?
• Is this a problem?
• Today the national debt is $17 trillion. At the end of World
War II, nominal GDP was only $228 billion (real GDP was $2.2
trillion). What do you think people in 1945 would think if they
knew the size of our national debt today?
Two Debt Myths
• Government debt must be paid so
our children will be paying the U.S.
national debt (already have seen
this is not true)
• Foreigners own a substantial part
of our debt. Specifically, we owe
the Chinese much of our national
debt.
how much U.S. Debt does china have?
• Debt held by China:
• US debt holdings: $1.2trillion
• http://www.treasury.gov/resource-center/data-chart-
center/tic/Documents/mfh.txt
• In other words, China owns about 7.3% of the U.S. national debt.
• Japan holds about 6.8% of our debt. Yes, Japan – who
has a higher debt-GDP ratio than the U.S. – owns quite a
bit of our debt
• Why do these nations hold our debt? These nations hold
U.S. debt for the same reason anyone else holds U.S.
debt: U.S. treasuries are a very safe investment and a
very liquid investment.
Promoting economic growth and stability




In 1946, Congress officially made it the federal
government’s responsibility to promote economic
growth and maintain economic stability (with the Full
Employment Act)
The economy has been more stable since the end of
World War II (see the slides on the history of
economic growth for the evidence)
Both Republicans and Democrats support
government intervention in the economy when an
economic downturn begins.
Interventions, though, can increase the National
Debt
How should we stimulate the economy?
OR Should we Increase Government Spending or Cut
Taxes?





Imagine the government decided to increase the pay of
Professor Berri (because he is so wonderful). This is an
increase in government spending.
Imagine the government decided to cut the taxes of
Professor Berri (because he is so wonderful). This is a
decrease in taxes.
Both policies put more money in Professor Berri’s pocket.
And if that money is spent, both policies will stimulate the
economy (so if you like tax cuts, you should like increases
in government spending).
When does government want to stimulate the economy?
What happens if the government keeps trying to stimulate
the economy?
What is the impact of government borrowing on an economy
at full-employment?

If an economy is at full-employment (and we are not at the moment), then a
large national debt crowds out private investment.





This increases interest rates and depresses the
economy.
Hence, we don’t want the government borrowing
large sums of money forever.
Yes, as the economy grows, debt doesn’t matter. But
if the government is borrowing large sums in a fully
employed economy, you won’t stay fully employed for
long because higher interest rates will depress the
economy.
In sum, government debt can have adverse consequences. But it is not the
case that it will destroy the nation.
So DON’T PANIC!!!
Two last observations
•Markets are willing to “give”
the U.S. government money
for free
•Debt in the long-run is driven
by one specific item in the
national budget
How markets evaluate U.S. Debt
• from Ezra Klein… “The
“yield” on Treasury debt is
how much the government
pays to borrow money. The
“real yield” is how much it
pays to borrow money after
accounting for inflation.
When the “real yield” turns
negative, it means the
government isn’t paying to
borrow money anymore.
Rather, the situation has
flipped, and the government
is getting paid to keep
money safe.”
• When the current real yield is
negative, markets are saying
that government debt is
willing to give money to the
government for free.
• Why would they do this?
http://www.treasury.gov/resource-center/datachart-center/interestrates/Pages/TextView.aspx?data=realyield
Daily Treasury Real Yield Curve Rates
DATE
5 YR
7 YR
10 YR
20 YR
30 YR
11/01/13
-0.33
0.20
0.50
1.11
1.41
11/04/13
-0.35
0.18
0.50
1.12
1.42
11/05/13
-0.33
0.21
0.55
1.18
1.48
11/06/13
-0.43
0.12
0.48
1.13
1.46
11/07/13
-0.45
0.09
0.46
1.11
1.43
11/08/13
-0.35
0.23
0.59
1.24
1.54
11/12/13
-0.32
0.25
0.62
1.25
1.55
11/13/13
-0.38
0.20
0.58
1.23
1.54
11/14/13
-0.46
0.13
0.51
1.18
1.50
11/15/13
-0.44
0.14
0.53
1.19
1.51
11/18/13
-0.47
0.11
0.48
1.15
1.47
11/19/13
-0.40
0.16
0.53
1.20
1.51
11/20/13
-0.36
0.24
0.64
1.31
1.63
11/21/13
-0.38
0.21
0.60
1.27
1.59
11/22/13
-0.39
0.19
0.56
1.21
1.52
11/25/13
-0.38
0.19
0.56
1.20
1.51
11/26/13
-0.37
0.19
0.54
1.18
1.49
11/27/13
-0.35
0.22
0.58
1.22
1.52
11/29/13
-0.32
0.24
0.60
1.23
1.53
Forecasting the Future?
• The primary factor influencing our
projections of the National Debt is
healthcare.
• What will be the cost of health care in 30
years? To answer this question, we need to
forecast technology.
• In other words, we probably shouldn’t just
assume costs will continue to rise as costs
have risen in the past.
Politicians and the National Debt
• Imagine we think the National Debt is a huge problem.
• How can this be lowered?
• We could focus on revenue: So we can raise taxes. Taxes on the
richest have been much higher in the past without any observable
impact on economic growth rates.
• We could focus on costs: Federal government primarily spends
money on
• National Defense
• Social Security
• Medicare
• Do people who focus on the debt typically discuss ALL
options? Or do they focus on only one or two aspects of
the budget?
The U.S. is a relatively low tax nation
http://www.theatlantic.com/business/archive/2014/04/how-america-pays-taxes-in-10-not-entirely-depressing-charts/360647
HISTORY OF HIGHEST MARGINAL TAX RATES
eml.berkeley.edu/.../Labortaxes/taxableincome/taxableincome_attach.pdf
Effective Tax Rates
http://www.theatlantic.com/business/archive/2014/04/how-america-pays-taxes-in-10-not-entirely-depressing-charts/360647
Is there a link between
economic growth and
taxes?
The empirical evidence
doesn’t find much of a link.
The Word of Dick Cheney
Back
in 2002, Vice
President Dick Cheney
was quoted as saying...
“Reagan proved that
deficits don’t matter!”
10 LESSONS LEARNED
1.
The United States has almost always been in debt. The United Kingdom has been in debt since the
17th century.
2.
The size of the debt depends on the level of GDP (i.e. what matters is the debt-to-GDP ratio)
3.
The highest debt-to-GDP ratio in U.S. history was after World War II (it was about 1.2). This debt was
never repaid.
4.
The UK has had a debt-to-GDP ratio in excess of 1.2 for decades during its history. Japan currently
has a ratio above 2.0.
5.
Debt matters much more to nations that do not have their own currency. One should not compare
nations with a currency to a nation that does not have a currency (i.e. comparisons of the U.S. to
Greece reveal the person doing the comparison is missing something important).
6.
China only owns 7% of U.S. debt.
7.
Part of the federal government – including the Federal Reserve – own about 40% of the national debt.
8.
In recent years, markets have paid the U.S. government to lend the U.S. government money (i.e. real
interest rates have been negative)
9.
Because the economy tends to grow about 2% per year, the U.S. economy will be much bigger in the
future (doubling about every 36 years). So the U.S. National Debt will also likely be much bigger in the
future.
10.
Health care may be a very big part of government spending the future. Whether or not this is true,
though, depends on the future technology employed.

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