U.S. National Debt – Where does it come from?

Where does our national debt come from?

One of the fundamental things to understand when considering the debate about reducing our national debt is how we accumulated so much in the first place.

To explain the impact various policies have had over the past decade, shifting us from projected surpluses to actual deficits and, as a result, running up the national debt.

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As you can see, we’ve also included a quote from President Obama’s speech on July 26, 2011 that sums up the basic issues:

For the last decade, we’ve spent more money than we take in. In the year 2000, the government had a budget surplus. But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug program were simply added to our nation’s credit card.

As a result, the deficit was on track to top $1 trillion the year I took office. To make matters worse, the recession meant that there was less money coming in, and it required us to spend even more -– on tax cuts for middle-class families to spur the economy; on unemployment insurance; on aid to states so we could prevent more teachers and firefighters and police officers from being laid off. These emergency steps also added to the deficit.

Because neither party is blameless for the decisions that led to this problem, both parties have a responsibility to solve it….. source: The White House

 

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Fiscal Facts: The Great Debt Shift
The U.S. will likely owe $10.4 trillion this year, its largest debt relative to the economy since 1950.  However, the Congressional Budget Office (CBO) projected in 2001 that the federal government would erase its debt in 2006 and be $2.3 trillion in the black by 2011 – a $12.7 trillion difference from today’s reality.

This fact sheet highlights the extent to which major legislation enacted over the last decade and other factors have contributed to the Great Debt Shift – the difference between CBO’s 2001 projections and actual debt today.

 

The Great Debt Shift: Methodology

  • This addendum describes the methodology the Pew Fiscal Analysis Initiative used

Projected versus Actual Debt
The first step in the analysis was to choose a baseline debt projection to compare to the actual debt numbers. CBO’s January 2001 Budget and Economic Outlook marked the first CBO baseline to include projections for fiscal year 2011,1 therefore Pew used CBO’s projection of publicly-held

federal debt from this document as the benchmark for its analysis.2 Actual debt through fiscal year 2010 comes from CBO’s January 2011 Budget and Economic Outlook, while the latest projection for debt in fiscal year 2011 comes from CBO’s March 2011 current law baseline.

For fiscal year 2011 debt, Pew uses the latest fiscal year 2011 GDP projections from CBO included in the January 2011 Outlook. In The Great Debt Shift, Pew expresses all debt as a percent of actual gross domestic product (GDP) to account for inflation, population growth and other economic factors affecting the United States’ capacity for issuing debt.

Broad Drivers of the Change in Debt Projections
To fully account for the shift between CBO’s January 2001 debt projections and actual debt, Pew used over thirty CBO reports released between March 2001 and March 2011 and recorded the size and cause of every change to CBO’s baseline projections in one of two broad categories: 1) legislative, and 2) technical & economic. Based on this CBO data, Pew further broke down the legislative category into spending increases (made up of legislative changes in defense and non-defense spending, as well as the proportion of net interest attributable to these spending growth categories) and tax cuts (legislative revenue changes plus the proportion of net interest attributable to revenue decreases).3

Other means of financing (OMF) is the final remaining component, but is not directly reported by CBO. Pew calculated OMF by taking the annual difference between the deficit and the change in publicly-held debt. The change in OMF depicted in The Great Debt Shift is the difference between actual OMF (including the latest projected OMF for fiscal year 2011) and the OMF projected by CBO in January 2001.

Starting with CBO’s original January 2001 projection of ten-year deficits and OMF, and then subtracting all technical & economic and legislative and OMF adjustments, the result is the actual annual deficit plus OMF. Summing up these adjustments cumulatively expresses them as debt rather than deficit drivers.

Specific Legislation and Policies
Pew used costs estimates from CBO to account for the costs of six specific policies through fiscal year 2011: the 2001 and 2003 tax cuts, the overseas operations in Iraq and Afghanistan, the Medicare Part D prescription drug benefit, the Troubled Asset Relief Program (TARP), the 2009 stimulus and the December 2010 tax legislation.Since CBO rarely recalculates its cost estimates oflegislation, all estimates except for TARP and the overseasIraq and Afghanistan operations come from CBO’s original cost estimates of the legislation as enacted. For TARP, CBO has updated its estimate several times, and Pew used the latest estimate from January 2011. Pew also used CBO’s latest January 2011 cost estimate of the operations in Iraq and Afghanistan.4, 5

Each cost estimate of specific legislation was further divided into the broad non-interest legislative categories (defense, non-defense and tax cuts), and Pew subtracted these components from the broad debt drivers. For TARP, Pew followed CBO’s methodology by using their 2008 estimate as the legislative effect of the legislation and classifying the difference between that initial estimate and the reestimate CBO made in 2011 as a technical revision. Pew recategorized any legislative debt growth remaining after accounting for these six policies as other defense spending, other non-defense spending and other tax cuts. Pew aggregated all legislative net interest growth into a single separate category, and OMF was calculated in exactly the same manner for the detailed breakdown as it did for the broad drivers. Finally, the technical & economic component was allocated between revenue decreases and spending increases.

    • 1 Federal fiscal years run from October 1 of the previous calendar year through September 30 of the eponymous calendar year.
    • 2 Because the CBO projected, in January 2001, that persistent surpluses would accumulate as savings and would offset nonredeemable federal debt, Pew used CBO’s projection of “net indebtedness.”
    • 3 To split legislative net interest between spending increases and tax cuts, Pew used the ratio of cumulative legislative spending increases to cumulative tax cuts through each year.
    • 4 Since no estimates of outlays for the operations in Iraq and Afghanistan exist, Pew used CBO’s estimate of budget authority. However, CBO and OMB estimates of outlay rates for the overseas operations are high (greater than 90 percent in the first year), so total budget authority through 2011 is a close approximation of total spending through 2011.
    • 5 CBO also has reestimated the costs of the 2009 stimulus, but the new estimates do not include sufficient detail for Pew to categorize the revisions between categories.

Sources: The Great Debt Shift, Pew Charitable Trusts Organization

 

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How the Deficit Got This Big

With President Obama and Republican leaders calling for cutting the budget by trillions over the next 10 years, it is worth asking how we got here — from healthy surpluses at the end of the Clinton era, and the promise of future surpluses, to nine straight years of deficits, including the $1.3 trillion shortfall in 2010. The answer is largely the Bush-era tax cuts, war spending in Iraq and Afghanistan, and recessions.

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The first graph

shows the difference between budget projections and budget reality. In 2001, President George W. Bush inherited a surplus, with projections by the Congressional Budget Office for ever-increasing surpluses, assuming continuation of the good economy and President Bill Clinton’s policies. But every year starting in 2002, the budget fell into deficit. In January 2009, just before President Obama took office, the budget office projected a $1.2 trillion deficit for 2009 and deficits in subsequent years, based on continuing Mr. Bush’s policies and the effects of recession. Mr. Obama’s policies in 2009 and 2010, including the stimulus package, added to the deficits in those years but are largely temporary.

 

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The second graph

shows that under Mr. Bush, tax cuts and war spending were the biggest policy drivers of the swing from projected surpluses to deficits from 2002 to 2009. Budget estimates that didn’t foresee the recessions in 2001 and in 2008 and 2009 also contributed to deficits. Mr. Obama’s policies, taken out to 2017, add to deficits, but not by nearly as much.

A few lessons can be drawn from the numbers. First, the Bush tax cuts have had a huge damaging effect. If all of them expired as scheduled at the end of 2012, future deficits would be cut by about half, to sustainable levels. Second, a healthy budget requires a healthy economy; recessions wreak havoc by reducing tax revenue. Government has to spur demand and create jobs in a deep downturn, even though doing so worsens the deficit in the short run. Third, spending cuts alone will not close the gap. The chronic revenue shortfalls from serial tax cuts are simply too deep to fill with spending cuts alone. Taxes have to go up.

In future decades, when rising health costs with an aging population hit the budget in full force, deficits are projected to be far deeper than they are now. Effective health care reform, and a willingness to pay more taxes, will be the biggest factors in controlling those deficits.

A version of this editorial appeared in print on July 24, 2011, on page SR11 of the New York edition with the headline: How the Deficit Got This Big source: NYTimes.com

 

15 Trillion Dollars

What does 15 Trillion Dollars look like, An illustration of United States of America’s debt problems; with national debt and unfunded liablities put into perspective. below Showing One Million to 114.5 Trillion,

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Ten Charts Essential to Understanding the Federal Debt

Since April 2010, the Pew Fiscal Analysis Initiative has published several reports explaining the medium-and long-term fiscal challenges facing the federal government. With stagnating economic conditions and the passage of new legislation, especially the Budget Control Act of 2011, the outlook for the deficit and debt has changed considerably over the past six months.

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