Who Holds the U.S. Debt?

ME.  Professor, the next big hurdle for Congress in January and February 2013, will be raising the national debt ceiling.  Perhaps some perspective is in order.  In December 2012, U.S. debt held by the public was reported at $11.579 trillion.  Inter-governmental debt held by government agencies was reported at $4.791 trillion. When added together, this makes a combined total public debt of $16.370 trillion.  That is $52,536 of debt for every man, woman and child in the country.

 BF.  Unless you are planning to set up a payment plan involving every man, woman and child, your argument misses the point. The 2012 third-quarter estimate for the U.S. Gross Domestic Product (GDP) was $15.811 trillion. GDP is the broadest measure of the value of goods and services produced in the domestic economy.  So that means that our national debt is 103.5% of our annual GDP economy.

 ME.  Some analysts use $11.579 trillion in debt held by the public as the logical comparison with GDP.  Using that measure, U.S. Debt represents only 73.2% of annual GDP.  Those who use these numbers don’t count the inter-governmental debt, which includes non-marketable Treasury securities held in accounts of the federal government trust funds that are owed to program beneficiaries such as the Social Security Trust Fund.  This represents the cumulative trust fund surpluses, including interest earnings that have been invested in Treasury securities.  Congress has been borrowing those funds to help cover the annual deficits.

BF. You are right, it only takes 8^th grade math to point out that one can make debt look smaller when a smaller debt number is used.  Congress has been playing the inter-governmental debt game for decades.  It is important to point out that our national debt represented upwards of 113 percent of GDP in 1945 at the end of World War II.  So in relation to our national economy, our national debt has been higher.  It declined over the 1950s, 60s and 70s, but now the global big picture has changed.  The U.S. experienced annual trillion dollar deficits the past four years while fighting two wars and averting what could have been a global financial meltdown and depression.

 ME.  Some are concerned about the U.S. debt held by China.  Some prognosticators suggest that when another nation owns a large share of our debt, they would have too much influence over our national affairs--similar to a banker who holds a mortgage on a homeowner.  Well that myth deserves debunking.  As of July 2012, $5.3 trillion of our U.S. debt was foreign investors—that represents 32.3 percent of our combined total public debt or about 48 percent of the U.S. debt held by the public   So a little less than a third or half of our national debt is held by foreign investors, depending on which U.S. debt number is used for the denominator.  China and Japan are the two largest foreign investors holding U.S. Debt, but they hold $1.1 trillion each. 

BF.  Holding less than 10 percent of U.S. debt does not represent control over the U.S. economy.  It is true, however, that China’s economy is growing faster than others and that it exports more to the U.S. than it imports.  Because of this, China tends to accumulate U.S. debt.  Also the U.S. dollar is still a major currency used in international trade, so China would also hold U.S. debt for that reason. The other large debt holder, Japan, became our major global trading partner over several decades.  With 1.34 billion people, China similarly represents a golden opportunity to become a major global trading partner for U.S. agriculture and the U.S. as a whole.  Of course allegations of undervaluing its currency will need to be addressed to avoid ongoing friction with the major global trading nations of the world.

 ME.  Well that brings us back to solving the U.S. debt problem at hand by reducing the annual deficits that have grown to over a trillion dollars annually.  So, if we go over the fiscal cliff, the U.S. automatically cuts spending by $105 billion per year and raises taxes by $399 billion plus some partial year tax increases in 2013.  CBO estimates the total deficit reduction to be $560 billion or about half of last year’s total annual federal deficit.  The fiscal cliff essentially amounts to $4 in tax increases for every $1 of spending cuts and the spending cuts are equally divided between the defense budget and other selective discretionary programs.  

 BF. Ok, but CBO’s fiscal cliff baseline also estimates that if nothing is done, the drag on the economy from tax increases and spending cuts result in unemployment rising again to over 9 percent while the economy falls back into a recession.  GDP would decline by 0.5 percent in 2013.  However, Congress and the President can kick the can down the road and postpone the decisions and impacts. CBO estimates that under that option, unemployment continues to decline and the economy continues to grow.  We avoid short term impacts, and the main consequences are longer term in that our annual deficits continue to add to the national debt at over a trillion dollars per year and national debt continues to grow which adds to our annual interest costs.  In five years, annual federal interest costs climb from less than $300 billion to over $600 billion. The problem becomes harder to solve in the future.

 ME. Well the dysfunction in Washington reminds me of basic guiding principles learned long ago in a Flinchbaugh classroom far away.  A pure market system allocates to each according to ability. So those without ability to provide for themselves go without, including the very young, the old and feeble, the disabled, and the unemployed. A communistic system allocates equally to each according to need but growth is impeded because those with ability to produce more are held back since there is no incentive to perform above the minimum contribution.   A market-oriented social democracy allocates to according to ability above minimum needs. Here the lines of compromise defining minimum needs are redrawn by elections.  One might think that the winner’s proposals would ordinarily rule the day given the recent election outcomes in which we saw the losing coalition of interests outspend the winner by a wide margin. But I’m not so sure.

 BF. Best line I’ve seen about Washington’s dysfunction is Congress ought to go home and turn it over to former Republican Senator Alan Simpson and Erskin Bowles, former President Clinton’s Chief of Staff. Not only would the job get done, but we’d be entertained in the process.  

* Dr. Mark A. Edelman is a professor of Economics at Iowa State University and Dr. Barry L. Flinchbaugh is an emeritus professor of Agricultural Economics at Kansas State University. 

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