It’s a midterm election year in the United States. Which means, you can expect constant bickering on most any topic with the potential to divide US citizens. But a near-constant go-to topic right now is debt. Many US Politicians want you to believe they have the solution(s) to America’s “debt problem,” and the other side will only intensify the problem.
But here’s a question almost no one asks: Does America truly have a debt problem? And what exactly is that problem?
Often, debt discussions only cover part of the picture. For example, there’s a clock in New York City counting up the size of US federal debt, but there’s no clock hanging next to the debt clock counting up US total national assets ~$205 trillion. In accounting, there’s a dual ledger. But in punditry, not so much.
So let’s cover a few key questions about America’s debt and debt service to get a clearer picture.
What is the actual size of the US’s debt? And who actually owns most of it?
The government reports total outstanding debt daily to the penny. The current total is about $29.4 trillion. Of that, “intragovernmental holdings” total approximately $6.41 trillion, or about 22% held by various government trust funds, revolving funds, and special funds, the largest being the Federal Old-Age and Survivors Insurance Trust Fund, better known as Social Security (~$2.8 trillion). Yes, the US government owns more than a fifth of its own debt. Said differently, 22% of outstanding US federal debt is owed to another arm of the US government. And that 22% is huge when compared to about 10% of all US debt is held by its three largest debtors (Japan #1, China #2, and the UK #3).
Government-owned debt effectively balances—what’s a liability to one group is an asset for another. Thus, a better measure of US debt would net out the government’s stake—net public debt. That figure is today about $22.9 trillion.
Now, some argue that it ignores entitlement payments the government is slated to make in future years. But those payments aren’t actually debt. They’re entitlements which can and historically have changed. Debt is a very specific thing: It’s a contract between a borrower and a creditor. It is not someone’s estimate of what we might spend based on a host of assumptions about future policy and economic conditions.
Is the US’s debt load historically high?
Once the debt has been accounted for properly (net debt), how can we tell if it’s high? By putting it in scale relative to the size of the US economy. As of 07/01/2021, US federal net debt was about 99% of GDP. That’s higher than the historical average but still well below previous peak levels. And the period following that past elevated debt wasn’t known for being a period of great economic distress. Rather, the late 1940s and 1950s were overall economically vibrant (Gross US Federal Debt as Percent of GDP).
Many don’t realize that from 1750 to 1850, Great Britain-the era’s global economic powerhouse-had a debt-to-GDP ratio over 100%, peaking above 250%! This period included Britain’s Industrial Revolution-the UK was the center of transformative technological advances globally. Folks often say our debt is “too high,” but there doesn’t seem to be historical evidence of a definitive level at which developed nations implode or face economic ruin.
What about servicing our debt payments?
The critical issue when considering debt shouldn’t be the absolute amount but the relative affordability. Thanks to interest rates being low, interest payments on federal debt are currently about 1.6% of GDP (as of 7/01/2021). In fact, from roughly 1979 through 2001, US debt levels relative to GDP were lower, but interest payments were higher than now. During much of the 1980s and 1990s-debt interest payments were almost double today’s levels. Which makes it difficult to argue today’s debt service costs are inherently problematic or likely to impoverish future generations.
In summary, though current US debt levels may seem massive in absolute terms, they don’t signal an inherently problematic level when viewed in scale and in context. Ultimately, Americans have feared their national debt nearly as long as there’s been national debt. That fear of debt-and the heated political rhetoric around it-likely never evaporates. But rationally understanding the US debt situation can help avoid making rash decisions based on incomplete or incorrect assumptions.