How Much Can We Borrow?

Debt and Interest
If financial institutions are taken in absolute values, the United States’s debt has nearly overtaken the nation’s annual GDP. In fact, the cumulative total of the federal government’s outstanding debt, at $14.294 trillion, is equal to the GDP of just about the next three largest economies, combined. On a smaller scale, the government owes $46,389 per American based on current population estimates, while the median U.S. household made $50,221 in 2010. If we recognize that not all Americans are equally economically active and look only at the debt per taxpayer, government debt per American rises to $129,495.
Does this mean America is at the brink of collapse? Has the economic powerhouse exceeded its boundaries? Not necessarily. Historically, the U.S. has owed significant amounts of money. According to the Federal Bureau of Public Debt, the first reported public debt of the U.S. was listed at $75,463,476.52 in January, 1791, due to costs incurred during the Revolutionary War. In current dollars, that value is in the ballpark of two billion dollars using the Consumer Price Index, although estimates vary widely. At only one point in our nation’s history, in January of 1835 under President Andrew Jackson, has the country owed zero public debt. During the Civil War the debt rose above a billion for the first time, and it saw rapid increases throughout the twentieth century. In the decade between 1980 and 1990, public debt increased more than 300%, and it’s only continued to grow in the twenty-first century.
But this year the nation has been swept with concerns that the nation is losing its grasp on a ballooning debt at great costs to the government and the taxpayers who fund it. By the end of the summer of fiscal year 2011, the US had paid more than $412 billion dollars in interest payments on debt outstanding. Expenditures seem likely to exceed last year’s figures, when the U.S. paid nearly $414 billion in interest payments for the entire year. The national debate came to a head this summer, when the debt reached the legal maximum imposed by Congress, known as the debt ceiling. The million (trillion) dollar question, then, is how much more can we borrow?
What is the debt?
America’s national debt is composed of two separate pools. Approximately one-third of the debt is owed by the government to itself through intra-governmental holdings, a curious circumstance created when one part of the government that is running a surplus lends to another in need of cash. Payroll taxes paid into the Social Security Administration exceeding benefit payments, for example, are credited to other agencies within the government, to be paid back eventually—likely when the Baby Boomer generation retires.
But the vast majority of the nation’s borrowed funds are public debt, owed to individuals, businesses, and foreign governments that have invested in the U.S. through Treasury notes, bills or bonds. Foreign nations are our biggest category of debt holders. At the end of April, China alone held $1.1525 trillion of U.S. debt, and all foreign nations combined held over $4.4 trillion, about half of the total public debt. The remainder is split between a wide variety of businesses and individuals around the country and the world.
The value of the federal debt is fast approaching America’s GDP, rising since 2010, when the debt was approximately 98% of the GDP of calendar year 2010. But public debt is only about two-thirds of GDP, and the remainder is owed internally. On this metric the U.S. compares fairly well with other countries: Japan, the third largest economy in the world, had a public debt 225.8% of its GDP in 2010, while Russia ranked among the bottom on the list of debtors, with borrowing at 9.5% of the national GDP. The government debt in other developed countries ranged enormously, from Canada at 86% to Germany at 19% of GDP. With such little consistency between economic health and public debt, there seems to be little guidance in finding a safe level of borrowing. On an analogous level, an audit of the average financially stable American family will find mortgages, credit card debts, college loans, and car payments that far exceed a single year’s income.
The Debt Ceiling
The debt ceiling is a monetary limit on how much Congress can borrow that has existed since 1917. It was originally intended to provide the government with flexibility in funding, borrowing, and spending; previously, Congress had to individually approve each sale of U.S. debt. Traditionally, the ceiling has been fairly fluid. Congress raised it ten times in the last decade, and a total of 74 times since 1962.
The summer of 2011 marked a significant shift in American attitude towards the debt ceiling as Congress came within hours of allowing the U.S. to default on its financial obligations. Despite a myriad of warnings on the effects of default, many politicians stuck to their priorities of cutting spending. At the very least, the warnings read, defaulting would immediately increase interest rates on existing debt and cut government spending by approximately 45%, a decrease that would impact Social Security recipients, soldiers, civil servants, and millions of others left without wages and benefits. Treasury Secretary Tim Geithner predicted a default would “shake the basic foundation of the entire global financial system.” And at least one doomsday prediction came true even before the act, in the form of the downgrading of America’s vaunted AAA financial ranking by one of the three large ranking agencies, came despite the last minute compromise.
“It’s a remarkable thing,” says Lawrence Summers, a Harvard economist and former chair of the National Economic Council. “Countries usually have debt crises because they can’t pay their debts. This is a case of a country that won’t pay, that’s threatening to put itself in a position where it won’t pay its debt.” Summers is among a vocal group of economists and left-leaning policy makers who condemn attempts to restrict, by law, the growing debt.  Most economists agree: a Reuters poll conducted in mid-July, as the debt ceiling debate raged, found that 38 out of 54 economists surveyed said that the uncertainty and confusion caused by the political turmoil surrounding the debt ceiling had already hurt economic growth, and that a default would be far worse. Summers describes the congressional majority of the House of Representatives as using the nation’s credit as a “hostage in negotiations” and says that “no objective justifies that kind of hostage taking.”
Peter Juhas, head of Strategic Planning at AIG and a former lead advisor to the Treasury, says he believes the government should take advantage of its ability to borrow in order to spend in a time when no one else can. His description of government spending during a period of economic crisis as “providing a backstop and supporting the market” coincides with that of many other economists. While in the long term measures should be taken to decrease the federal debt, short term measures that increase it may in fact boost the economy.
But for Republicans, turning around the expanding national debt has become a legislative priority. Much of the controversy over the debt ceiling focused on rhetoric and political brinksmanship. As a whole, the GOP stressed the necessity of living within one’s means both individually and as a country. Republican presidential candidate Michele Bachman ran an ad in July emphasizing her position against raising the debt ceiling, warning that “we can’t keep spending money that we don’t have.”
The solution that Congress created generally met with disapproval on all sides. The debt ceiling may be raised by up to $2.4 trillion, although only $400 billion were immediately included. Further increase requests of up to $500 billion by President Obama will be subject to approval by Congress; a two-third vote could disallow an increase. Additional increases will only be available if matched by spending cuts. The Congressional Budget Office foresees $2.1 trillion in deficit reduction over 10 years, of which $917 billion are eliminated through cuts to discretionary spending such as programs and agencies, and the remainder coming either through the decisions of the so-called “super committee” composed of twelve people from the House and Senate. This committee must identify recommendations for additional spending cuts by November 23, at which point Congress can choose to accept or reject it. Should these suggestions fail for whatever reason (including a stalemate within the committee), so-called “triggers” will begin spending cuts across the board. The House and Senate will also be required to vote on the “Balanced Budget Amendment,” an amendment to the constitution that would prevent the country from spending more than its revenue, a popular proposal among the Tea Party and many on the right.
Opinions on how to reduce the deficit vary drastically. Discussion on the left tends to focus on an increase in revenue, primarily funded by the wealthiest in the country; among proponents of spending cuts, some focus on the large military budget of the U.S., which occupies over half of discretionary spending in the federal budget. On the right, many focus on entitlements such as Social Security, Medicare, and Medicaid as programs that need significant reform.
Although the immediate crisis has passed, it is inevitable that discussion of the federal debt and national spending will continue to feature in, if not dominate, national discussion in the years to come. Strategies for long term financial health must balance with short term priorities as economists and politicians grapple with two fundamental questions: How big can we let the deficit get? What strategies for decreasing it will do the most good?
On the bright side, we have at least a few more years to figure it out. Although the stock market has fluctuated dramatically in recent months, much of the turmoil has been caused by European economic instability. There is little alternative to investing in the U.S. and the dollar. Juhas notes that even as other currencies rise against the dollar, no growing economy has nearly the resources or the quantity of money to replace the U.S. as the primary vehicle of investment.
Design by Melissa Wong