MARY REICHARD, HOST: It’s Wednesday the 28th of August, 2019. Glad to have you along for today’s edition of The World and Everything in It. Good morning, I’m Mary Reichard.
NICK EICHER, HOST: And I’m Nick Eicher. First up: Washington Wednesday.
Last month we reported on a huge spending deal Congress and the White House reached. Among other things, it will increase the federal debt by some $320 billion over the next two years alone.
Over the next decade, the deal could end up adding another $2 trillion to the national debt that already tops $22 trillion.
REICHARD: The spending spree prompted some questions for listener Amber Wredberg. She wrote in and asked: “Is there someone who could explain the national debt in layman’s terms?
“For example, to whom are we in debt? Are we really expected to ever pay it back, and if so, by when? Are there any nations that actually have a surplus? Are any countries in debt to us?”
EICHER: Very good questions, so we’re going to dive into them today on Washington Wednesday.
Here to help us do that is
Maya MacGuineas. She’s president of the Committee for a Responsible Federal Budget. It’s a non-partisan organization based in Washington, D.C., that focuses on fiscal policy.
Maya, good morning to you.
MACGUINEAS: Good morning.
EICHER: I heard a talk you gave, in which you started by lamenting the name of your organization containing the words in succession, “Responsible,” then “Federal,” then “Budget.” Like that’s a punchline, because when we think of federal budgets, “responsible” is just sort of the last word that comes to mind. You’ve heard them all, right?
MACGUINEAS: I have. It makes me very sad that we aren’t able to deliver a responsible federal budget and therefore every time I get introduced with my name and title, people sort of have witty remarks. How are you doing? Are you almost there yet? It’s always kind of a depressing start. But we are still fighting for a responsible federal budget and greatly believe that that’s what this country needs.
EICHER: You’re fighting a good fight, and I think our listener kind of feels the same way about it, judging by her questions. So let’s begin with her first one, which is how would you describe the national debt in the simplest possible terms?
MACGUINEAS: Yeah, there are great questions, and I’m actually going to start the conversation clarifying that the national deficit is how much the federal government borrows every year to fill in the gaps between how much we spend and how much we take in in revenues. So it’s an annual difference. So we take in enough tax dollars to pay for part of our government spending and we borrow the rest. That’s the deficit.
You can kind of think of the national debt as the cumulation of all those deficits. So we borrow—in most years—the vast majority of years we borrow. Occasionally, we actually take in more in revenue and those years we run a budget surplus and we buy back a little bit of the debt. But that hasn’t happened in quite awhile.
And so after all these years, all of the deficits added together—give or take—is where our national debt is.
But what you really want to do is have a sense of how big the national debt is relative to our economy.
EICHER: And so, again, for a simple explanation, the amount that you overspend your paycheck, that’s your deficit and that running tally of deficits adds to an overall pile of debt, and that’s the difference between deficits and debts.
So, let me ask you this about United States government debt: To whom are we indebted?
MACGUINEAS: Yeah, so we borrow from a lot of different sources. About 60 percent of our borrowing is from here in the U.S.—either from individuals or financial institutions or the central bank.
The Federal Reserve system has also purchased a lot of our debt, and they did that, in fact, for some reasons to try to help the economy when we were in a big recession.
And then about 40 percent of our debt is owed overseas to a variety of different countries. The largest lender is Japan. The second largest lender is China. And central banks from other countries also buy our debt.
And we are very lucky, because countries around the world see the United States as one of the more stable economies and political environments. So we get to borrow relatively cheaply and a lot of countries want to lend to us.
EICHER: And, along these same lines, is there an expectation that the U.S. government is supposed to pay this money back? When we issue debt, people buy the debt, and there have to be different schedules for maturity, but in general terms, what about payback?
MACGUINEAS: Yeah, absolutely we have to pay back that debt. But it doesn’t actually mean that we have to pay down the $22 trillion in total national debt that we have.
So if I buy a 30-year bond, then it gets paid—I could hold it for 30 years and be paid back at the end of the time or could sell it during that. But most often, when we have to pay the debt back, we just do so by rolling it over and actually issuing more debt.
So we’re not going to have to bring our debt back down to zero. In fact, you actually never want to bring the debt back down to zero. The national debt, as long as it’s at manageable levels, is one of the most important pieces of our financial system. Because those treasury bills and bonds and notes that we can buy they offer us a very good saving vehicle and you want to have them. They serve a huge purpose.
What you just don’t want to have is a debt that is growing too quickly and, by all accounts in the United States, ours now is.
One of the ways that you can tell whether your debt is healthy or not—I mentioned debt relative to the overall economy. How big it is compared to the entire economic pie. Ours is the highest it’s ever been, relative to the economy—other than right after World War II. And how you can tell that it’s not healthy is that our debt is actually growing faster than our economy.
So, to go back to your likening it to a household, if your borrowing is growing faster than your income is growing, you may have a problem. The same is going on for the country right now, that our borrowing is growing much, much faster than our economy is.
EICHER: And then let’s do her last two questions: What nations in the world have surpluses—if any—and is anyone indebted to the United States?
MACGUINEAS: I wish I could answer that question. I do think that there are a few possibly northern European countries that have budget surpluses. I’m trying to think of who else does.
One thing I kind of put us more in the framing of is our overall national debt is on the high side compared to other economies. But there are plenty of economies that are in worse shape than we are. Japan, actually, as I mentioned, is one of the big lenders to us. They also have the highest debt overall compared to their economy.
And many countries, we purchase their debt because all countries are sort of buying and selling their bonds to each other. It’s how you diversify. But overall, we are a net borrower when decades ago we were a net lender.
EICHER: Maya, your organization was not at all impressed with the spending deal that I referenced a few minutes ago. You issued a press release, the headline of which was: “Budget deal may be the worst in history.” So, not very impressive.
MACGUINEAS: [Haha] In case there’s any question, yeah!
EICHER: Now, I don’t think I need to tell you that’s a really high bar, or low bar, depending on your perspective. Why do you say this deal was so particularly bad?
MACGUINEAS: Yeah, this is a really, really—I hope—a low point because I hope things don’t get any lower.
But a very discouraging bipartisan moment where we borrowed $320 billion over two years coming on $2 trillion over a decade. That’s numbers that you pointed out. But particularly in a time like right now when your economy’s still strong, what you shouldn’t do is put it on the credit card. Which is akin to saying I want to spend this money now and I would like my children to pay for it.
So that’s why I think it’s troubling because it has very many damaging effects on our economy. It slows our economic growth, it slows wages, it slows job creation, it leads to lower standard of living.
It also means that when we hit the next emergency or recession, we will have too much debt. It will be much harder to respond to.
And I think it’s dangerous short-term strategy that’s really an abdication of responsibility. So, yeah, we were pretty discouraged that without a single economic reason, we decided to borrow such a huge amount of money.
EICHER: Before I let you go, I want to make my own observation and hear what you think about it. But I looked at some revenue and expenditure numbers the Federal Reserve publishes, went back as far as it goes. But what you see is that we’ve never been able to collect—regardless of the various tax rates—more than 20 percent of GDP. It’s usually been much less than that. Our expenditures always seem to be north of 20 percent. And those are the deficits. We have a $20 trillion economy and 20 percent of that is $4 trillion. I’m old enough to remember the scandal of the first-ever $1 trillion budget. If all we spent was $4 trillion, we’d probably have our deficit problem cured. Why isn’t that ever enough?!
MACGUINEAS: Yeah, I think it’s a really fair question. And the answer has to do more with politics than it does budgets.
Now, it may be that people actually want to spend that much more, but I think that a big part of what happens is that we have entrenched programs, outdated, targeted towards certain geographical areas where they have very strong constituencies of support.
That said, I don’t want to leave anyone with the impression that those are the big drivers of federal budget. The big drivers are retirement and healthcare costs and interest payments on the debt are actually growing quite quickly.
We have very popular programs—Social Security, Medicare, Medicaid—and those are all becoming expensive as healthcare costs continue to soar, and those are actually the huge drivers of the federal budget.
EICHER: Maya MacGuineas is the president of the Committee for a Responsible Federal Budget. Maya, great to talk with you. Really enjoyed how simply you explain things and we’re grateful for your time.
MACGUINEAS: Oh, good. Well, thanks so much. I’m glad that you have listeners who took an interest in the topic. It can be dry, but it’s one of the single most important things we need to understand what our federal government does. So thank you for the chance.