History of National Debt by hcj


									History of National Debt
• http://www.publicdebt.treas.gov/history/history.htm
• http://www.uwsa.com/us-national-debt.html
• http://www.treasurydirect.gov/govt/reports/pd/histdebt/hist
Debt in the 19 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.
• The National Debt in 1816 was $127 million
• Andrew Jackson reduced the National Debt to zero (or virtually
  zero) in 1835
• 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 20 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
•   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
•   2001: $5.8 trillion
•   2002: $6.2 trillion
•   2003: $6.8 trillion
•   2004: $7.4 trillion
•   2005: $7.9 trillion
•   2006: $8.5 trillion
•   2007: $9.0 trillion
•   2008: $10.0 trillion
•   2009: $11.9 trillion
•   2010: $13.6 trillion
•   TODAY: $14.7 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
Taxes of the Federal Government
•   http://www.ustreas.gov/education/fact-

• The income tax was instituted in
• The social security tax was
  instituted in 1935
Recent tax history
•   Effective tax rates from 1979 to 2007
    • http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456
•   Marginal tax rates from 1913 to 2011
    • http://www.taxfoundation.org/publications/show/151.html

• In recent years taxes in the
    United States have declined.
The U.S. is a relatively
low tax nation
Consequently… debt is
also used to finance the
§   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%.
   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
   Paying interest on internal debt redistributes
    income, but does not cause a net reduction in
    income of the average citizen.
§   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.
   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 2011).
   The Debt-to-GDP ratio in 1946 was 1.21 (or 121%)
   What happened to this debt? From 1946 to 2011, 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?
§   From 1946 to 2011, nominal GDP has
    increased from about $220 billion to nearly
    $15 trillion.
§   That means our debt from World War II is
    simply insignificant compared to the size of our
    national economy.
§   Remember what we said before…
   Real GDP per-capita has increased
    in every decade in U.S. history.
   Growth was faster in the 20 th
    century (relative to the 19 th century).
   Average annual growth in the 20 th
    century was about 2% per year.
   For the past 100 years….
    ◦ Real Gross Domestic Product has
      increased (on average) 38.4% in each
    ◦ Real GDP per capita has increased (on
      average) 22.5% in each decade
Debt as
Percentage of GDP





       1800   1840   1880   1920   1960   2000

 The U.S. debt does not
  appear so large when
compared to the debts of
  some other countries

    how much U.S. Debt does china have?
•   Debt held by China:
    • US debt holdings: $1.173 trillion
    •   http://www.treasury.gov/resource-center/data-chart-
    • In other words, China owns about 8% of the U.S. national debt.
• Japan holds about 6.3% of our debt. The United
  Kingdom is third on the list, with 2.4% 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.
 Where did our current debt come from?
• The driving factors behind our
 current debt include
  • the recent recession (tax revenues
    declined, while expenditures like
    unemployment compensation
  • Tax cuts under President Bush
  • Wars in Iraq and Afghanistan
  • Stimulus package
• Without these factors, national
 debt would not be growing much
 over the next 10 years.
    Future Debt issues
• What will debt look like in the future?
•   http://cbo.gov/ftpdocs/122xx/doc12212/2011_06_22_summary.pdf

• According to the Congressional Budget Office, it
  depends on the policies we enact. If we maintain
  current law (i.e. allow Bush tax cuts to expire,
  implement the Affordable Care Act, etc…) the
  CBO projects a debt to GDP ratio that is fairly
  similar to the current ratio in 25 years.
• If we continue with tax cuts, this ratio may be will
  over 200% in 25 years.
Tax cuts vs. Increases in spending
•   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
•   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
•   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.
•   In sum, government debt can have adverse consequences. But
    it is not the case that it will destroy the nation.
•   So DON’T PANIC!!!
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?

To top