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National Debt

Problem Brief

Definition2020-05-20T09:35:43-05:00

Problem Definition

National debt has been viewed as a threat to the nation’s economic durability for decades. For this reason, the nation’s leaders had accumulated debt only during periods of crisis, such as the World Wars and the Great Depression, and immediately began to pay down the debt as soon as it was able. It wasn’t until the 1980s and early 1990s when, for the first time, debt more than doubled at a time when there was no economic or military crisis. The debt has trended upward ever since, fueled in part by spending on the wars in Afghanistan and Iraq and the stimulus program that pulled the nation out of the Great Recession, and by the tax cuts enacted at the end of President Trump’s first year in office.

Understanding the problem can be challenging because terminology surrounding the debt is frustrating and confusing. Economists who study debt don’t always use the same definition for terms, and they also don’t agree on which measure of the debt is most relevant to the debate. Below, we identify several key terms used when discussing the debt; it is useful to understand these terms and their differences when reading or listening to discussions of the debt from other sources.

Terms and Measures

Budget Deficit. When the federal government’s annual spending exceeds its revenue, it runs a budget deficit.

National Debt. The national debt is the amount of money the federal government has borrowed to cover budget overruns plus the interest it has to pay on the amount borrowed.

Gross National Debt. The federal government borrows through several mechanisms to cover the additional budget expenditures. Most commonly, it sells US Treasury bonds to third parties such as mutual funds, pensions, foreign governments, and others. It also borrows from other US government funds, like the Social Security Trust Funds. The money it borrows from itself combined with the money owed to third parties is called the gross national debt. The US Treasury Department reported a gross debt of $21.97 trillion at the end of calendar year 2018.

Net National Debt. Federal debt attributable only to third parties, or external debt, is called the net national debt. Net national debt at the end of 2018 was $16.1 trillion.

Public Debt. In the US, economists refer to net debt as the public debt, and some refer to gross debt as “total public debt”. Unfortunately, in some countries, the term “public debt” also includes debt owed by states, provinces, and municipalities, so it is important when reviewing sources that reference the public debt that you understand exactly what meaning is being used. Even some leading economists have overlooked this difference when conducting their research; this has further confused discussions around the debt.

Debt-to-GDP ratio. Most often, economists talk about the debt as a percentage that is defined as the ratio of the dollar amount of the debt to the nation’s gross domestic product (GDP). This debt can be expressed as gross debt-to-GDP, which in 2018 was 107%, or net debt-to-GDP, which was 78% in 2018.

Which Measure to Use

Net debt is typically used as a measure of financial health. External creditors and financial analysts want to know how likely it is that a debtor will be able to pay back its debt to them. Debt owed from one part of the government to another part is not part of their calculations.

At The American Leader, we will use net national debt when discussing the debt problem.

Net national debt is also used by such government sources and organizations as the Congressional Budget Office, the Committee for a Responsible Federal Budget, and the Peter G. Peterson Foundation.

Be aware: The US Congress uses gross debt to define the “debt ceiling” in an attempt to limit the amount that the federal government can borrow. The Organization for Economic Cooperation and Development (OECD) also uses gross debt, while other organizations such as FRED, the economic data website of the Federal Reserve Bank of St. Louis, report both net debt and gross debt. The US Debt Clock, a prominent public monitor of the rising debt, uses the gross debt figure, confusing an otherwise efficient and effective overview of US debt, deficits, spending, and taxation.

Related Problems: Climate Change, Infrastructure, Access to Healthcare

Researched and written by George Linzer Reviewed by Committee for a Responsible Federal Budget and William Gale

Published on November 5, 2019

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