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Putting the Debt in Context

Monday, June 17, 2013

The deficit is shrinking, but federal debt is at an all-time high. More importantly, how large is the debt burden?

The shrinking deficit is making headlines; compared with prior expectations, tax revenues have been higher while spending has been lower. But how can we put the deficit and our federal debt into perspective? How large is the federal debt? And, a distinctly different question, how large is the burden of the federal debt?

The quick, seemingly contradictory answers are as follows: (1) the dollar level of the federal debt is the largest it has ever been in history; however, (2) the burden of that debt is as low as it has been in 40 years — lower than it was during the administrations of Presidents Clinton, George H.W. Bush, Reagan, Carter, and Ford.

Those two facts make sense when one considers the important difference between the “debt” and the “debt burden.”

The Debt Level

Figure 1 below is a pie chart showing the total federal debt ($16.8 trillion as of March 2013), who owns it, and how the ownership breaks down between foreign and domestic holders of U.S. Treasury securities.

Many politicians and pundits stop right there, focusing exclusively on the “fear factor” of the raw magnitude of the federal debt, nearly $17 trillion. As I’ve argued before, that’s an error of omission: it fails to place the debt level into any kind of context. It ignores the size of the economy, which can render any given debt level harmless, unbearable, or anywhere in between.

Conover Debt Burden 1


We wouldn’t stand for a baseball announcer who concealed half the score (“So, after seven full innings in this exciting game against the Nationals, the Dodgers have five runs. . . Now a word from our sponsor”). Oddly, however, we seem to passively accept when politicians and pundits who do the same thing when they report on our federal debt, especially when they falsely imply that some generation someday will need to “pay it all back” (more on that below). Ultimately, our “$17 trillion federal debt” is only half of what we need to know; the rest of the story reveals how easy or difficult it is to handle that level of debt.

The Debt Burden

The “burden” of the debt is not that it will eventually have to be paid back. To the contrary, it is unnecessary to pay back any of the debt principal whatsoever, as I noted in another article. Not only that, but paying off the debt is typically a going-out-of-business strategy. (Most of us can confidently assert that our nation’s long-term strategy is something other than “going out of business.”) 

The alternative to paying back the debt is completely legitimate, as well as financially equivalent: paying the interest forever — the financial strategy that our government has employed for nearly two hundred years. Paying interest forever (while continually rolling the principal over) is a growth strategy.

As a result, the debt “burden” is revealed by how easy or difficult it is for the government to pay the interest on its debt. Today, the debt burden is as low as it has been in decades: figure 2 shows that in the past 12 months, it took 8.4 percent of federal tax receipts to pay the interest on the federal debt.

Conover Debt Burden 2

In the past 40 years, the debt burden has been this low (8.4 percent) only twice: once in 1977, and once in mid-2005. Today’s debt burden — the “bite” that interest takes out of tax receipts — is lower than it was at the end of the previous five administrations: Clinton (11.0 percent), GHW Bush (18.3 percent), Reagan (16.7 percent), Carter (10.2 percent), and Ford (8.6 percent).

And that is the rest of the debt story — the portion we seldom if ever hear from our politicians and pundits.

Why Today’s Debt Burden Is Relatively Low

Two factors explain why today’s debt burden is unusually low: (1) near-zero interest rates on new federal debt issues, and (2) a better-than-expected increase in federal tax receipts — some of it due to one-time inflows, some due to tax rate increases, and some likely due to a small increase in economic activity. But nobody should expect the first condition to persist for long. Consequently, the second condition will someday need to improve even more in order to keep the debt burden low and tolerable. The best way to accomplish that is through economic growth, without increasing anybody’s tax rates. The top-priority debate should be about the better way to grow the economy: top-down, planned growth driven by government-appointed and elected experts — or, alternatively, bottom-up, organic growth driven by motivated private sector entrepreneurs. The Keynesian Left is advocating government-driven growth. The Reagan Right should be advocating bottom-up, entrepreneur-driven growth — because the growth message is more to the point than the reduction message.

In any case, with sufficient economic growth, the debt burden won’t be a problem; without sufficient growth, it could balloon into a significant one. It all comes back to growth.

Steve Conover retired recently from a 35-year career in corporate America. He has a BS in engineering, an MBA in finance, and a PhD in political economy. His website is

FURTHER READING: Conover also writes “How to Reduce the Debt Burden for Future Generations,” “‘Top-Down’ vs. ‘Bottom-Up,’” “A Business Perspective on the Federal Debt,” and “The New ‘Buffett Rule’ Everyone Is Ignoring.” Arnold Kling writes “Lenders and Spenders: Confronting the Political Reality of Debt.” James Pethokoukis tells “The Inconvenient Truth about the U.S. National Debt,” while Abby McCloskey says, “We Hit The Debt Limit Again. Shall We Take the Bad or Good Way Out?” John H. Makin writes, “Washington Got Deficit Reduction Done Despite Itself — Then Sabotaged It.”

Image by Dianna Ingram/Bergman Group

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