If you have a mortgage, student loans or a balance on your credit cards, you owe a debt. And if you do have debt, you’re in some good company – the U.S. federal government has tons of it.
As of June 4, 2018, the total outstanding debt owed by the federal government was $21,090,788,185,039.90, or $21.1 trillion. Yes that’s an astronomical number, but it’s not necessarily a bad thing; in fact, United States government debt is considered the safest in the world, according to Lawrence White, an economist at the NYU Stern School of Business.
“It is mostly an abstract concept, unlike, say, a personal student loan or auto loan or mortgage, where you have a personal obligation to repay the debt,” said White. “If you don’t repay, there are legal consequences that are going to be unpleasant. For an individual, the national debt has none of those particular characteristics. It is an obligation of the US, not an obligation of an individual.”
That doesn’t mean the national debt doesn’t affect you. If the US were to default on its debt, the interest rate on its debts would increase, which would be disastrous.
“That would mean our taxes would increase or other government spending would have to decrease,” said White. “It would throw financial markets into chaos.”
The federal government borrows money in the form of Treasuries (notes, bills and bonds; more on that later). Treasuries are a government’s debt obligation, and because they are backed by the credit and taxing power of a national government, they’re considered low-risk. Perhaps the biggest recent example of the use of borrowed money was the TARP program used to bail out the bank and auto industries in the wake of the 2008 financial crisis.
Who owns the national debt?
One of the biggest holders of national debt is the government itself. Federal agencies, like the Social Security Administration, the Office of Personnel Management Retirement, and Medicare own $5.7 trillion worth of the debt as of March 2018. This is called intragovernmental holdings. When an agency, like the Social Security Trust Fund, brings in more in tax revenue than it needs to spend, it buys US Treasuries.
Treasuries are the notes that hold value: there are Treasury notes, bills and bonds. The name refers to the time period a lender will hold on to it. Treasury notes are short-term, usually a few months; Treasury bills are medium-term, a few years; and Treasury bonds are long-term, more than a decade.
The remaining $15.4 trillion is held by the public – individuals and companies. This includes foreign governments. China is the largest foreign holder of American debt, holding around $1.19 trillion as of March 2018. Japan held $1.04 trillion as of March. It’s worth noting the US government also lends money to foreign governments.
Has the national debt ever been paid off?
In 1999 and 2000, the federal government briefly ran budget surpluses. (A budget surplus occurs when the government is bringing in more money than it spends – something every household should be doing, ideally.) During that period, we were paying down some of the debt we owed rather than adding more. Under George W. Bush’s administration, we returned to running a budget deficit and have been since.
The national debt has been paid off only once in American history. In 1835, President Andrew Jackson paid it off in full. It only lasted a year.
Is it a good idea for the federal government to be in debt?
Just like personal debt, sometimes it makes sense for federal governments to borrow funds.
“During recessionary periods, [the government] is seeing a shortfall of revenues, and unemployment is high,” said White. “There needs to be larger aggregate spending, and that spending happens through borrowing.”
“On the other hand, when the economy is booming, we shouldn’t be seeing a lot of government borrowing. That’s not a good time because that can just add to inflationary pressures.”
White said that’s one of the biggest dangers the tax cuts of December of 2017 pose to the nation.
“The national deficits are going to get larger because of the tax cut,” said White. “Tax cuts are occurring when the economy is at basically full employment. That’s not a time when we should be running deficits; we should be running national surpluses.”