Understanding the Federal Debt

The National Memo has an article from ProPublica (the very best of the non-profit news organizations, winning two consecutive Pulitzer prizes and deserving them very much) that explains the federal debt, what the inputs are to it and some of the historical context behind it. First, how did it come to grow so much in the last few years?

The 2012 deficit was actually the smallest one since 2008. But it’s still a giant shortfall.

As Binyamin Appelbaum noted in The New York Times, the federal government has run a deficit in 45 of the last 50 years. (The exceptions were 1969 and 1998 through 2001.) The financial crisis in 2008, however, caused the deficit to skyrocket, as tax revenues fell because of the slump in incomes and production, and government spending on the stimulus and safety net measures such as unemployment insurance shot up. The deficit for the 2008 fiscal year was $455 billion. In 2009, it surged to more than $1.4 trillion.

Since then, the deficit has been falling, albeit very slowly. The government took in 6.4 percent more in taxes in 2012 than in 2011, as the economy improved a bit and several tax breaks expired. And it spent less on Medicaid, unemployment insurance and the continuing operations in Iraq and Afghanistan.

So how much of this is actually attributable to actions taken by President Obama? Not much.

The debt has grown by nearly $6 trillion since Obama took office, from $10.5 trillion to $16.4 trillion.

Figuring out how much of that is due to Obama is tougher. The Washington Post’s Ezra Klein, working with the Center on Budget and Policy Priorities, calculated in January that the legislation Obama had actually signed — as opposed to factors like the economy — had added about $983 billion to the debt.

Klein has also rounded up several charts that break down exactly what’s caused our debt to grow so large. The biggest single factor has been the weak economy; President George W. Bush’s tax cuts and the wars in Iraq and Afghanistan also fueled the debt buildup, as did President Obama’s stimulus.

It has often been said, even by me I’m pretty sure, that the 2009 deficit should be attributed to Bush, not Obama, but that isn’t entirely true. Yes, most of the spending for 2009 was set in place before Obama took office, but not all of it. The $787 billion stimulus package was advocated for and signed by Obama, so at least that portion of the debt can be put on his plate. It appears that the figures cited above do include that, as the Ezra Klein article does put the American Reinvestment and Recovery Act (the stimulus bill) on Obama’s side of the ledger. But he also includes the two year extension of the Bush tax cuts, which Obama signed but did not want (as now, he wanted to extend all the cuts for those making $250,000 or less). But he also includes policies signed by Obama that reduced the deficit, which are rarely included in such discussions (and ought to be, of course).

So what is the debt as a percentage of GDP?

Economists like to talk about a country’s debt in relation to its gross domestic product (a measure of the economy’s total annual output). And instead of using a country’s total outstanding debt to calculate this debt-to-GDP ratio, economists typically use the amount of debt held by the public. (Somewhat confusingly, the federal government holds about $5 trillion in obligations to itself, most of which is money owed to the funds that support Social Security and other programs.)

Using this measurement, our debt was about 67.7 percent of GDP last year.

I don’t like this way of calculating the debt ratio. I don’t think government-held debt — mostly the Social Security trust fund, which is invested in Treasury bills — should be excluded, because that is still money that has to be paid out. Those treasury bills have a payback schedule and the money invested in them has to be paid back later on, even if it is to ourselves. Nearly all of it will have to be paid out as Social Security benefits in the future. Just as an underfunded pension is a liability for a corporation because it will have to be paid out whether it’s funded or not, this government-held debt will have to be paid back just like the publicly-held debt will. So it should be counted.

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