Monthly Archives: January 2013

A Quick and Easy Debt and Deficit Primer

What is the federal deficit?

The federal deficit is the amount by which federal government spending exceeds revenues in a particular year. It is the additional amount that the government has to borrow each year.

How big is the federal deficit?

In fiscal year 2012 (which ended Sept. 30), the deficit was about $1.1 trillion.

What is the Public Debt?

The public debt is the total amount owed by the U.S. government. It is the net total of all deficits and surpluses the government has had since the country began, or the total amount that the government has borrowed.

How big is the Public Debt?

As of Jan. 3, 2013, the total public debt was just over $16.4 trillion.

What’s the difference between the Public Debt and the “Debt Held by the Public”?

Much of the public debt is held by the Federal Reserve and governmental bodies. Because this effectively is money that the government owes to itself, the amount of debt owed to others is much more important to look at. This is the “debt held by the public”.

How big is the Public Debt Held by the Public?

As of Jan. 3, 2013, the debt held by the public was about $11.6 trillion.

What’s the best way to measure the public debt?

The most useful way to measure the public debt is to look at the public debt held by the public as a percentage of Gross Domestic Product (GDP, or the total size of the economy). The debt held by the public is about 76% of GDP. The 2012 federal deficit was about 7.2% of GDP.

Who holds the public debt?

The largest chunk of debt is held by the Fed and governmental agencies. About a third is held by foreign governments and firms and investors in other countries. About 12% is held by U.S. mutual funds, private pension funds, and insurance companies. State and local governments hold about 3%.

What foreign countries hold the public debt?

The U.S. owes China about $1.1 trillion, about 21% of our total debt. We owe Japan another $1.1 trillion. Oil exporting countries (Saudi Arabia, Kuwait, Iraq, Venezuela, Indonesia, and others) hold about $260 billion. Brazil holds $250 billion. About $240 billion is held by “Caribbean Banking Center” countries (Bahamas, Bermuda, Cayman Islands, etc.).

When do we have to pay it all back?

True fact: The U.S. government never really has to pay back the public debt. As long as the debt doesn’t get “too big”, the government can keep borrowing to pay off older debt. However, the government does have to keep paying interest on all the money it owes.

How much interest are we paying?

We paid about $220 billion in interest in 2012. This was about 6% of total federal government spending.

How big is too big?

There’s no simple answer. The bigger the debt, the more interest we have to pay, the more likely it is that the government will have trouble borrowing more, and the more likely the debt will hurt the economy. Some research suggests that debt hurts growth when it gets over 90% of GDP, but opinions vary. However, if the public debt grows more slowly than the economy, the debt becomes smaller and smaller relative to GDP, and so becomes less and less important.

Are deficits bad for the country? What do economists say?

Economists differ on their views of deficits. Most economists agree that deficit spending (“fiscal stimulus”) during recessions is a good thing overall, for a number of good reasons. Few economists would argue that deficit spending during economic expansions is generally a good idea.

How much did the federal government spend in 2012? How much did it take in?

The federal government spent about $3.7 trillion in 2012, and revenues were about $2.6 trillion. Spending was about 25% of GDP, and revenues were about 17%.

Some Final Comments

Everything in economics is a trade-off. Deficit spending stimulates the economy in the short term, but has implications for the long term. When an economy has high unemployment, deficit spending can help to get people back to work, which eventually increases tax revenues. This can actually reduce future deficits. Thus, helping the economy in the short term can help in the long term as well, despite the long-term negatives of owing more money. But again, this is complicated stuff and opinions differ on the specifics.