Four facts about the national debt you may not know

Now that Congress is set to lift the current limit on how much the government can borrow, here are four facts about the national debt that, polls indicate, many people don’t know.

1. The U.S. debt burden is starting to decline. That’s right – it’s going down, not up.

The important measure of the debt is not the dollar amount, but its size relative to that of the economy. Just as a wealthy family easily can handle a mortgage that would crush a poor person, a large economy can handle a much bigger debt than can a smaller one.

Economists measure the debt relative to the total size of the gross domestic product. By that measure, the debt grew rapidly during most of President George W. Bush’s tenure and President Obama’s first term as the government borrowed money to fight two wars and the deepest recession in more than half a century. But the rapid growth ended more than a year ago.

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Debt held by the public currently stands at about 75% of the GDP and will remain at about the same level next year, according to the latest projections from the Congressional Budget Office. After that, the debt will tick down slowly to around 71% of GDP in 2018, then get back up to 74% a decade from now. In the mid-2020s, the debt will once again start to grow more rapidly, the CBO projects, although such forecasts of the economy a decade hence come with a big measure of uncertainty.

2. China holds only a relatively small fraction of U.S. debt.

The U.S. owes money to anyone who owns a savings bond, a Treasury bill or any other form of U.S. government security either directly or by having money invested in a fund that invests in Treasury securities. That amounts to a fairly large percentage of the U.S. population. Slightly under 40% of the total debt is owned by people or institutions, including individual investors, banks, insurance companies and retirement funds in the U.S.

About a quarter of the debt is held by various U.S. government trust funds that are required to invest their money in Treasury securities. That’s a form of internal governmental accounting that gets included in calculations of the federal debt limit but doesn’t count as debt held by the public since it amounts to one part of the government lending money to another part.

Just about one-third of the debt is owned by people and institutions  in other countries, of which the largest single holder is China, which has, at last count, about $1.3 trillion in U.S. treasury securities, or about 7.8% of the U.S. outstanding debt.

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3. The U.S. has had a national debt for almost its entire history.

The federal government has been without a debt for only one year in U.S. history, during parts of 1835 and 1836. As a percentage of the GDP, the debt peaked at the end of World War II. Notably, the dollar value of the debt increased through the 1950s and 1960s, but because of rapid economic growth, the debt fell dramatically relative to the size of the economy.

As the rapid growth after World War II indicates, a large debt doesn’t necessarily strangle an economy. That doesn’t mean that large debts are good for a country, just that the relationship between the debt and economic growth is a lot more complicated than political rhetoric would indicate.

4. Debt crises have marked American politics from the beginning.

One of the biggest political fights of the George Washington administration involved the national debt. Alexander Hamilton successfully pushed a plan under which the new federal government would assume the debts that the states had incurred during the Revolution. Thomas Jefferson and James Madison fought the idea. In the end, the two sides reached a compromise under which Congress approved the debt plan and Hamilton backed the idea of placing the new nation’s capital on the banks of the Potomac River, rather than in Philadelphia.

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