On Debt And Deficit: Part I

Our national debt is now near $17 trillion. The annual deficit rose to $1.7 trillion three years ago, but is now falling. The latest CBO estimate for this fiscal year is $606 billion.

Is this good news or bad? Is it OK to run a deficit? A debt? How much is too much? And what, if anything, should we do about it?

Part I: Background

 The national debt began to rise in a big way only during WWII. By the end of the war, it stood at $258 billion. By the time Reagan entered office, the debt had just reached $1 trillion, and by the time he left in 1988 it had grown 2 1/2 times during his tenure to $2.6 trillion. It continued to grow under the first Bush and also --albeit more slowly--under Clinton, then doubled again under the second Bush to $10 trillion and has grown another 70% so far under Obama to nearly $17 trillion. 

The national budget has been balanced just six times in the last 56 years -- four times under Clinton, and twice under Johnson. The last GOP president with a balanced budget was Eisenhower, in 1957. 

In theory, servicing this debt means paying the interest due and also the principal portion of whatever debt has come to maturity. In practice, the interest has been paid, and so has the principal -- but all of the latter, and some of the former, only by issuing more new debt to cover the cost. 

The interest cost of our national debt is a function not only of the debt, but of interest rates, and secondarily the length of maturity of the debt issued by the Treasury. The Treasury tries to extend maturities when interest rates are low so as to lock them in, and shorten them during times of high interest rates, but it is always a guessing game. The point is that the interest cost on the debt is not a direct function of the amount of debt outstanding, and often lags changes in general interest rates. 

Thus the cost of interest -- which must be borne by each year's budget -- is quite variable, although over the long haul, it has certainly trended up. Interest costs actually fell from FY 2011 to 2012, from $454 billion to $360 billion and may yet fall farther in FY 2013, thanks to very low interest rates. The 2012 figure implies an average interest rate paid of just 2.1%, a historically low figure. In 1995 the average interest rate was 6.7%. 

At $360 billion, interest on debt is the fourth most-costly item in the entire budget, behind Defense, Medicare and Medicaid. And if the average interest rate paid today was equal to that of 1995, interest cost would be the single most costly line item, at well over $1 trillion by itself.

Next Post: Part II -- Why we Ignore the Debt.