Putting the Debt in Context

The deficit is shrinking, but federal debt is at an all-time high. More importantly, how large is the debt burden?

The shrinking deficit is making headlines; compared with prior expectations, tax revenues have been higher while spending has been lower. But how can we put the deficit and our federal debt into perspective? How large is the federal debt? And, a distinctly different question, how large is the burden of the federal debt?

The quick, seemingly contradictory answers are as follows: (1) the dollar level of the federal debt is the largest it has ever been in history; however, (2) the burden of that debt is as low as it has been in 40 years — lower than it was during the administrations of Presidents Clinton, George H.W. Bush, Reagan, Carter, and Ford.

Those two facts make sense when one considers the important difference between the “debt” and the “debt burden.”

The Debt Level

Figure 1 below is a pie chart showing the total federal debt ($16.8 trillion as of March 2013), who owns it, and how the ownership breaks down between foreign and domestic holders of U.S. Treasury securities.

Many politicians and pundits stop right there, focusing exclusively on the “fear factor” of the raw magnitude of the federal debt, nearly $17 trillion. As I’ve argued before, that’s an error of omission: it fails to place the debt level into any kind of context. It ignores the size of the economy, which can render any given debt level harmless, unbearable, or anywhere in between.

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