Understanding U.S. Debt

As the deadline for adjusting or eliminating the debt ceiling approaches, the political conversation intensifies, economists weigh in, and the media senses another headline opportunity. But what is the U.S. debt ceiling and what does the August 2 deadline refer to? Before looking at the debt ceiling, let's look at the debt itself. The total or gross federal debt refers to the "outstanding debt issued by the Treasury and other federal government agencies" as explained by the General Accountability Office. This includes debt held in other U.S. government agency accounts like Medicare and that held by outside investors. For a good overview about the National Debt, check out the CQ Researcher issue (access requires DACC user ID and password when off campus).

As is explained in this helpful General Accountability Office web page, the debt limit is not, as people may think, a restriction on government spending, but rather on the Department of Treasury's ability to borrow to meet its current obligations. For this reason, holding the debt limit does nothing about deficit except, potentially make it worse if the U.S.'s credit rating is lowered so that it has to borrow at a higher rate. The GAO prepared a detailed report explaining how the sort of gamesmenship going on in Washington hurts the ability of the Treasury Department to manage the public debt, further increasing problems with the U.S. debt rating. The Economist offers this analysis about why this political brinksmanship may, in fact, result in default, not inevitable compromise, as many assume. And Politifact examines what default might mean.

The foreign press has been highly critical of U.S. politicians during the crisis. The Atlantic samples international opinion on a particular issue weekly. Here's their sampling of foreign reaction to political posturing over the debt.

How did we get here? You can watch the PBS Frontline episode Ten Trillion and Counting online to get some background about how the U.S. got into its current financial position. This documentary focuses on the economic impact of the Bush years: the tax cuts, the wars, the legislation--like the Medicare Pt. D - prescription drug benefit. (A teacher's guide for the film is available here.)  Supporting material on the site provides commentary by economic writers holding different political perspectives as well as Bush White House insiders, while in-depth interviews provide the opinions of key federal officials. The Pew Research Trust did an analysis outlining the principal forces that changed fiscal predictions that in 2001 foresaw a budget surplus by 2011 into a mounting budget deficit. It clearly demonstrates that the biggest drivers of the increase in the debt are first, the Bush tax cuts, and second, various legislative action, such as war funding, Medicare Pt. D, measures to fund the recovery and underwrite the banking crisis, and other defense and non-defense legislative spending.

Another misleading element in a lot of the public debate about the debt crisis is the implication that in some sort of nostalgic "good old days" the government operated in the black. Actually, as the GAO demonstrates, the U.S. has operated at a deficit for most of its history. An interesting breakdown of deficit data has been done by Dr. Stephen Bloch, at Adelphi University. He crunches the historical numbers in various ways and shows how the Great Depression, despite many claims about "Big Government" that might suggest rampant, runaway spending was actually relatively deficit free, and offers comments about electoral patterns related to federal deficits in the 20th century. Another interesting historical fact, the U.S. has previously been in default, twice, as you'll read in this New York Times piece, demonstrating that claims of the event as unprecedented are unfounded, although circumstances are significantly different.

One long-term solution frequently put forward to concerns over the deficit is that the federal government should adopt legislation requiring it to balance its budget annually, rules that the states have in place in various forms. However, the Institute for Truth in Accounting published its 50-State Study documenting the ways in which allegedly "balanced" state budgets are anything but balanced, whether their citizens or even their politicians realize it. Numerous accounting practices permit states to bury long-term obligations, fail to identify newly acquired obligations (such as the need to lease services for assets that have been sold), or simply delay or shift funds from payment cycle to payment cycle. The full report includes state-by-state breakdowns of accounting practices, all of which indicated that "significant liabilities" for each state "were not included." Of interest is the fact that it is Illinois's dubious accounting practices, which conceal significantly larger than realized debt obligations ($70 billion) that inspired the 50-state study (see p. 6).

An ongoing element of the debt debate has to do with the Bush tax breaks. Should they be retained or is their elimination necessary for the country's fiscal health? To get at some answers to these questions, an excellent place to look is the Tax Policy Center of the Brookings Institution. Their Tax Policy Briefing Book presents a lot of information about taxes in a concise fashion. The "Background" section of the Briefing Book includes several sections outlining the impact of the Bush era cuts. These include specific sections related to the national debt, a comparison to Reagan era tax cuts, whether or not the majority benefit from the cuts assuming the cuts result in (or coincide with) economic growth, and what spending cuts and revenue generation would be necessary to make them permanent. Also included in the briefing book is information comparing U.S. tax rates to those of other countries,

Still feel like this whole budget/taxes thing is too hard to comprehend? You're not alone. This is why the Eyebeam Dataviz Challenge asked people to come up with games to help people understand these concepts. Now you can check out the winners! See exactly how much of your federal tax dollar goes to fund something you hate (or love) or explore the budget in other innovative, fun ways.