History of National Debt
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
• 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
• The income tax was instituted in
• The social security tax was
instituted in 1935
Recent tax history
• Effective tax rates from 1979 to 2007
• Marginal tax rates from 1913 to 2011
• 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
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
§ That means our debt from World War II is
simply insignificant compared to the size of our
§ 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
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
• 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
• 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?
• 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
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
• 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
• 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?