by Dr Jonathan Cooley

National Debt is money the US government owes to individuals, corporations, government entities and foreign investors.

It’s like our family debt, isn’t it? Like affording a home or a car? We have debts that are due monthly and we can only afford as much as our income allows given all our other expenses. So isn’t the government the same?

I keep hearing this (again) from Congresspeople…

“No” is the short answer.

In 2012, a Noble Prize winner in economics, Dr. Paul Krugman finished an Op-Ed piece called Nobody Understands Debt¹ (New York Times, January 1, 2012). Not much has changed in the overall scheme with today’s “Debt Crisis” fostered by certain Republicans who don’t want to extend the Debt ceiling or wish to use it as leverage for their other goals. And here we are again in 2023, so this discussion is relevant.

Dr. Krugman states,

“…through most of 2011, as in 2010, almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.”

He continues,

“This misplaced focus said a lot about our political culture, in particular about how disconnected Congress is from the suffering of ordinary Americans. But it also revealed something else: when people in D.C. talk about deficits and debt, by and large they have no idea what they’re talking about… while debt can be a problem, the way our politicians and pundits think about debt is all wrong, and exaggerates the problem’s size… They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.”

This is, however, a really bad analogy in at least two ways.

More importantly to me, Krugman notes,

“First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. …¹“

To begin, here is a chart that helps put US sources (income) and uses (how we spend money) in perspective.

Chart 1: US Sources (income) and Uses (expenditures) ²

Source: https://www.fiscal.treasury.gov/files/reports-statements/mts/mts1222.pdf

First, we will discuss the National Deficit. Then we will add the National Debt to the conversation.

National Deficit: The National Deficit is the difference between our national income from taxes and other sources and what our government spends. Although it fluctuates, the Congressional Budget Office (CBO) indicates it has generally been rising from a surplus of $236 billion under President Clinton to a projected debt of $1.0 trillion in 2023.

For example, the US National Deficit in 2010 was 10.7% of GDP while Norway had a SURPLUS of 9.9%. Here is a chart of the US history since 1900. ¹⁴ Listening to some current economic historians (e.g., Niall Ferguson, Empires on the Edge of Chaos ²), National Debt as a percent of GDP (US Gross Domestic Product) and National Debt as a percent of average personal income may be more critical than National Deficit. If we look to history and modern India, China, Greece and Italy where dramatic debt has been experienced there may be more lessons to be learned, but these are beyond the scope of this article.

US National Debt as a percent of GDP grew rapidly rose above 45% of GDP as a result of World War I and above 70 % in the depths of the Great Depression. Debt has breached 100% of GDP twice since 1900: during World War II and in the aftermath of the Crash of 2008 ³.  Krugman points out, debt from World War II was never repaid; it just became increasingly irrelevant as the US economy and tax base grew.

Chart 2: US National Deficit as a % of GDP, 1900 to 2015

Do you find this chart surprising?  I did.

I didn’t try to match it to economic policy or Democratic/Republican control of the presidency or congress – but that might also be interesting and enlightening.

Below is a brief history since the 2016 President Trump administration.

US National Debt Deficit since 2016

• 2016: $585 billion deficit – Trump elected to office
• 2017: $666 billion deficit (13.8% INCREASE)
• 2018: $779 billion deficit (17% INCREASE)
• 2019: $984 billion deficit (26.3% INCREASE)

• Total INCREASE of 68.2%

• 2020: $3.1 trillion deficit – Byden elected to office
• 2021: $2.2 trillion deficit (projected -29% DECREASE)
• 2022: $1.1 trillion deficit (projected -50% DECREASE)
• 2023: $1.0 trillion deficit (projected -0.9% DECREASE

• Total = Time will tell

Here are some references for this information:

• Congressional Budget Office. “The Budget and Economic Outlook: 2021 to 2031.” February 2021.
• Congressional Budget Office. “Monthly BudgetReview: January 2021.” January 2021.

The National Debt

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 The US National Debt – not to be confused with the US National Deficit discussed earlier – is the total amount of money borrowed from different sources and upon which the US is paying interest.

So how is the United States doing now?

Taxes increase as companies pay based on taxable profits and citizens pay based on taxable income. Krugman indicated that all governments need to do is ensure that debt grows more slowly than their tax base. So how is our tax base and how does it compare to other countries such as China?

Population and the Tax Base: First, let’s consider taxable citizens and population growth. We had a large growth in population after WWII (the “baby boom”) which provided an ever-increasing taxable population. It has since basically leveled off. Note the massive growth since 1950 (yellow line) compared to Canada, Germany , Italy and the UK .

Chart 3 US Population Growth (US is Yellow line)

When compared to China the chart looks like this (US is still the Yellow line, China is the Red line) ⁴;

Chart 4: China Population Growth (US is Yellow line; China is the Red line)

Look familiar?  China’s population growth was similar, just more massive. Even with a different personal tax structure than the US, China recognized a growth in income.

Recent reports now indicate US and Chinese birth rates are falling and have dropped to the lowest level since national data have been available and the number of working adults who pay taxes is also falling as a percent of total population.

As of 2023 in the US, birth rates have been declining for several years. According to the Centers for Disease Control and Prevention (CDC), the general fertility rate in the US was 55.8 births per 1,000 women aged 15-44 in 2020, a record low. Births also fell by 4% in 2020, reaching the lowest level since 1979. Source: https://www.cdc.gov/nchs/pressroom/nchs_press_releases/2021/20210721.htm

In China, the birth rate has also been declining, with record low births in 2020. According to China’s National Bureau of Statistics, births dropped 18.1% in 2020, down from 2019. The Chinese government is now encouraging couples to have more children, but these efforts have not yet resulted in an increase in the birth rate. Source: http://www.stats.gov.cn/english/PressRelease/202101/t20210118_1814695.html

The US  also had larger proportions of people in older age groups – 65 or older and 80 or older than much of the rest of the world in 2000. ^{6, 7} And older age groups typically do not contribute to the tax base and governments may actually spend money on them for programs such as Social Security or Medicare. Although this article focuses on the US and China as examples, we know this trend is also true in Japan, Italy, Germany,  and South Korea. China’s dropping birth rates portend of similar dynamics.

Looking at these trends graphically is much easier for me. Here are population pyramids for the US, China and India; India’s population exceeded China’s in 2023.

Chart 5: Population Pyramids for the US, China and India

Why is this important? If a large part of China’s economy is based on inexpensive labor and that labor force is shrinking, the country’s tax base is shrinking, and costs for any elderly care would increase. India may now be positioned to provide a competitive workforce attracting the large multi-nationals currently outsourcing to China. How will China react? A contemporaneous article about Dr. Krugman’s article posits that employment is a key governmental concern. Yes! That is the point here. But the US employment rate is now under 4% and may be for some time to come without a major recession. Here is a link to a counter opinion Forbes article by Steve Keen back in 2015 at https://www.forbes.com/sites/stevekeen/2015/02/10/nobody-understands-debt-including-paul-krugman/?sh=33e5f1811ac3 . But again…a topic for another writing.

Globalization: Next, let’s consider globalization. When we combine these drops in a tax paying population with globalizing US multi-nationals where we do not collect foreign profit taxation to recapture US tax income, there is a threat to the tax base that made World War II and Great Depression debt levels appear irrelevant.

To Dr. Krugman’s second main point,

“Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; US debt is, to a large extent, money we owe to ourselves.”

As he notes, this was true of World War II debt as the US public purchased massive quantities of Treasury Bonds (known as “War Bonds” and “Savings Bonds”). He argues that this debt was significantly bigger, as a percentage of GDP than debt today.

We have only a view backward to the past, each with our own interpretation of the facts.

At the beginning of the 20th century, government debt was equally divided between federal and state debt and local debt, totaling less than 20% of GDP. After World War I, the total debt surged to 45% of GDP. By the mid-1920s debt had declined to below 35% of GDP.

Then came the Great Depression, boosting total public debt to 70  % of GDP. World War II boosted federal debt to almost 122%of GDP in 1946 with state and local debt adding another 7% for a total of 129%. For the next 35 years, the government brought the debt below 50 % of GDP, but President Reagan increased the federal debt by over 50% of GDP, and total debt towards 70% to win the Cold War.

President Bush increased the debt to fight a war on terror and bail out the banks in the crisis of 2008, jumping to 74% of GDP. Debt jumped again during the Obama presidency (2009-2017), increasing 87%, to fund the great Stimulus Package authorized under the Bush administration following the 2008 US financial crisis and recession, as well as increased spending on healthcare, education, and other social programs.. As of December 31, 2011, it stood at 99.7% of GDP..^{8 and 9}

During the Trump presidency (2016-2020), National Debt again increased 68% to $28.2 trillion. This increase was largely driven by the Tax Cuts and Jobs Act of 2017, increased military spending, and COVID-19 relief and additional stimulus spending.

During the current presidency of Joe Biden (2021-present), the National Debt has continued to increase, although it’s important to note that he has only been in office for a relatively short time as of this article. As of September 2021, the National Debt was approximately $28.7 trillion, an increase of 1.8% since Biden took office in January 2021. While projections suggest a decrease in the National Debt, the Biden administration has also passed significant spending increases on infrastructure, healthcare, education, and other social programs that could contribute to further National Debt increases in the future.

Here are some references for this information:

• https://www.thebalancemoney.com/us-debt-by-president-by-dollar-and-percent-3306296
• Congressional Budget Office. “The Budget and Economic Outlook: 2021 to 2031.” February 2021.
• Committee for a Responsible Federal Budget. “Analysis of the President’s FY2022 Budget.” June 2021.

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It seems a core of Dr. Krugman’s article says,

“… debt didn’t make postwar America [U.S.] poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.”

But isn’t this time different? Not as much as you think.

It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of US claims on foreigners.”

How does this relate country by country such as the US and China?  Which countries can we watch to see the effects of high debt as a percent of GDP? In an interesting article from 2007 ¹⁰, Japan owned the most U.S national debt at $644 Billion followed by China at $350 Billion. A few short years later, China topped the chart at $1,134 Billion with Japan a close second at $979 Billion. 11 Today, Japan again holds the most US Debt.

Which US agencies own the most Treasuries? Social Security, by a long shot. Here’s the breakdown from February 2021:

• 32% Social Security trusts, including the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds: $2.90 trillion
• 3.6% Office of Personnel Management Retirement: $955.1 billion
• 3.6% Military Retirement Fund: $1.01 trillion. This has become a big issue in funding our nation’s defense and is only expected to grow.
• 2.5% Cash on hand to fund federal government operations: $723 billion²
• 1.1% Medicare, which includes the Federal Supplementary Medical Insurance Trust Fund: $304.4 billion

The Treasury breaks down who holds how much of the National Debt in the monthly Treasury Bulletin. Here are highlights from the March 2021 report (September 2020 data unless indicated otherwise):

Here’s a summary table I put together and found interesting (2012 and 2022).

Who Holds US National Debt?

¹² Source: https://fiscal.treasury.gov/reports-statements/treasury-bulletin/current.html

In Summary, who owns US National Debt ? (Note: Does not total 100% due to rounding)

• 28% Foreign: $7.07 trillion (in September 2020, Japan owned $1.28 trillion and China owned $1.06 trillion of US debt, which is more than a third of foreign holdings)³
• 42% Federal Reserve and Government: $10.81 trillion (December 2020)
• 14% Mutual Funds: $3.5 trillion
• 4% State and Local Governments, including their pension funds: $1.09 trillion
• 3% Private Pension Funds: $784 billion
• 1% Insurance companies: $253 billion
• 1% US Savings Bonds: $147 billion (December 2020)
• 9% Other Holders, including individuals, government-sponsored enterprises, brokers and dealers, banks, bank personal trusts and estates, corporate and non-corporate businesses, and other investors: $2.28 trillion^4”

Source: https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124

Historical US Debt https://treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm

So – to my untrained and evening news consumption surprise – US interests do still hold about 65% of the National Debt with China and Japan only holding 6% each.

Dr. Krugman asserts that foreigners tend to put their investments into safe, low-yield assets, which represent US government debt instruments. Although this seems reasonable (even given our drop in credit rating), his article further asserts,

America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.”

On balance, Dr. Krugman states,

“Now, the fact …. doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an over indebted family might suggest… that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100  % of GDP for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan.”

Which “debt” is Dr. Krugmen now referring to? National Debt? Total Debt? National Deficit?

The statement refers to the National Debt of the UK. It includes both internal debt (owed to UK residents and institutions) and external debt (owed to foreign creditors).

According to data from the Office for National Statistics, the UK’s national debt as a percentage of GDP has exceeded 100% in recent years, reaching a peak of 107.6% in the first quarter of 2021.^{19, 20, 21}

Conclusion

Finally, Dr. Krugman writes,

“So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded ill-informed obsession with debt is standing in the way.”

What does the future hold? Who knows? But it’s important for the public and policy makers to have these facts in perspective.

History teaches us that economic experts have often been wrong. Dr. Krugman recognizes this as well. Forbes publish a counter opinion by Steve Keen back in 2015 at https://www.forbes.com/sites/stevekeen/2015/02/10/nobody-understands-debt-including-paul-krugman/?sh=33e5f1811ac3 . But again…a topic for another writing.

A lesson I learned many years ago from Eli Goldratt¹⁷ {The Goal, 1984} and Darrell Huff (How to Lie with Statistics, 1954) ¹⁸ and others, is paraphrased as…

Don’t waste time exploring a smart person’s logic. Logic is often perfect.

Question the assumptions and sources upon which the logic is based.

When I ask the Brits how their roads, schools and medical systems are doing today, I get a dark picture – admittedly anecdotal.

Please don’t get me wrong. I like Dr. Paul Krugman and dissenting voices as well. This discussion is neither about economists nor any wrongheaded, ill-informed obsessions. This discussion, the arguments, and the theory dynamics are critical to finding America’s voice with Congress and Voters setting policies that work.

Those people “in the know” propose an argument and a position, but need to provide the reader and listener the courtesy of the source of their assumptions. Then I could use factcheck.com less and, in my opinion, would add credence and discipline to the discussion.

In the statistics used, I have attempted to provide the sources so readers can now pursue their own spin from the sources and statistics, and then it’s up to you and our government representatives, op-eds, and public discourse to suss it out.

Yes, I know there is a limited amount of space for an OpEd. I have gone overboard with references to make a point…references may take space but are important.

Definitions:

This can all be confusing, so here are some definitions:

GDP: Gross Domestic Product is a measure of the total value of goods and services produced within a country’s borders over a specific period of time, usually a year. It is often used to gauge the size and health of an economy. GDP is calculated by adding up the value of all final goods and services produced within a country’s borders, including those produced by foreign-owned firms, but excluding the value of intermediate goods and services (i.e., goods and services used in the production of other goods and services).

National Debt: The sum of all previously incurred annual federal deficits. Since the deficits are financed by government borrowing, national debt is equal to all government debt outstanding. Deficits increased significantly in recent years, particularly in 2020 due to the COVID-19 pandemic, tax reductions, and stimulus spending.

Public Debt: Often used for National Debt. The cumulative total of all government borrowings less repayments that are denominated in a country’s home currency. Public debt should not be confused with external debt.

Government Debt: Also often used for National Debt or Public Debt

External Debt: a measure of a nation’s foreign liabilities, capital plus interest that the government and institutions within a nation’s borders must eventually pay. This number not only includes government debt, but also debt owed by corporations and individuals to entities outside their home country. 

*Other Sources:

1 “Nobody Understands Debt” New York Times, January 1, 2012

2 http://fora.tv/2010/07/28/Niall_Ferguson_Empires_on_the_Edge_of_Chaos Ferguson, Niall. & Centre for Independent Studies (Australia).  (2010).  Empires on the edge of chaos : the nasty fiscal arithmetic of imperial decline.  St Leonards, N.S.W :  Centre for Independent Studies

3 https://www.fiscal.treasury.gov/files/reports-statements/mts/mts1222.pdf

 http://www.usgovernmentspending.com/us_national_debt_chart.html

4 Center for International Comparisons, University of Pennsylvania

5 US Birth Rate Hits All-Time Low, usgovinfo.about.com/cs/censusstatistic/a/aabirthrate.html

6 usgovinfor.about.com

7 http://nationalatlas.gov/articles/people/a_international.html

8 http://www.usgovernmentspending.com/us_national_debt_chart.html

9 http://www.skymachines.com/US-National-Debt-Per-Capita-Percent-of-GDP-and-by-

Presidental-Term.html

10 http://www.msnbc.msn.com/id/17424874/ns/business-answer_desk/t/just-who-owns-

us-national-debt/#.TwSoT9T2ZYg

11 2011: http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

12  Paul Toscano, CNBC,  
US Treasury, US Federal Reserve & US Office of Debt Management, Updated 18 Jan 2011

13  http://www.usgovernmentspending.com/debt_deficit_brief.php

14 http://www.gfmag.com/tools/global-database/economic-data/10394-public-debt-by-

country.html

15 https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html

16 http://www.gfmag.com/tools/global-database/economic-data/10394-public-debt-by-country.html#axzz1jDsUpJxT

17 Eliyahu Moshe Goldratt (March 31, 1947 – June 11, 2011) an Israeli physicist,  originator of the Optimized Production Technology, the Theory of Constraints (TOC), the Thinking Processes, Drum-Buffer-Rope, Critical Chain Project Management(CCPM), The Goal, and other TOC derived tools.

18 Darrell Huff and Irving Geis, How to Lie with Statistics,  (Norton 1993, originally issued 1954)

19 Office for National Statistics: https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/articles/ukgovernmentdebtanddeficitforeurostatmaastrichtdefinitionalignments/financialyearending2021

20 BBC: https://www.bbc.com/news/business-56962198

21 The Guardian: https://www.theguardian.com/commentisfree/2020/dec/21/britains-national-debt-history-economy