4/15/2015

FederalDebt,byRobertEisner:TheConciseEncyclopediaofEconomics|LibraryofEconomicsandLiberty
FullSite
Articles

EconLog

EconTalk

Books

Encyclopedia

RobertEisner
Guides

FederalDebt

Search

SearchCEE

byRobertEisner
AbouttheAuthor

SearchtheCEE

Home|CEE|1stedition|FederalDebt

Browsethe1steditionCEE

[Editor'snote:thisarticlewaswritteninearly1993.
Sincethen,thedebthasgrownandanumberofother
keydatadiscussedinthisarticlehavechanged.]
Everyonetalksaboutthefederaldebt,butfew,
literally,knowwhattheyaretalkingabout.Thatisall
themoretrueforthefederaldeficit,whichyearafter
yearaddstothetotaldebtoutstanding.

bytitle
byauthor
bycategory
Biographies
Browsethe2ndeditionCEE
bytitle

PRINT
EMAIL
CITE
COPYRIGHT

RelatedMaterialon
Econlib:
FederalDeficit

byauthor
bycategory
Biographies
AbouttheCEE
FrequentlyAskedQuestions
FAQsaboutSearchingCEE

EconlibResources
AboutEconlib
ContactEconlib
QuoteoftheDay
Birthdays&Commemorations
FrequentlyAskedQuestions
GetEconlibNewsletter

Perhapsthefirstthingtoknowaboutthefederaldebt,some
$4trillionattheendof1992,isthat$1trillionofitisheldby
governmentagenciesorgovernmenttrustfundssuchas
thoseforSocialSecurity.Excludingthatamountleavesthe
morerelevantfigureof"grossfederaldebtheldbythe
public"at$3trillion.
Eventhatnumberissomewhatmisleadingontwocounts.
First,becausetheFederalReservebanksaretechnically
privatecorporations,thedebt"heldbythepublic"includes
theFederalReserveholdings,whichcometoalmostaquarter
ofatrilliondollars,althoughtheinterestpaidonFederal
ReserveholdingslargelygoesrightbacktotheTreasury.
Second,"gross"debtdoesnotsubtractwhatthepublicowes
tothefederalgovernmentoritscreditagencies.Thenetdebt
thedebtowedbythegovernmenttothepublicexclusiveof
theFederalReserve,minusthedebtowedbythepublicto
thegovernmentissome20percentless.Therefore,the
actualnetdebtwasontheorderof$2.4trillionin1992,or
onlyalittlemorethanhalfthegrossdebt.
ThedebtofU.S.businesses(excludingfinancialinstitutions)
andhouseholdsis$7trillion,farlargerthanthefederaldebt.
Butbusinessdebt,itisargued,generallyfinancesincome
earningplantandequipment.Andindividualsborrowlargely
topurchasehomes,whichprovideimplicitincomebysaving
rentthatwouldotherwisebepaid.Debtthatfinancesincome
earningassetsishardlythesameasdeadweightdebtthat
mustbeservicedoutofunrelatedincome.
Thefederalgovernment,though,alsohasrealassets:
interstatehighways,publicbuildings,andfederalland,water,
andminerals.Alltheseassetscontributetothenational
incomeandhenceindirectlyifnotdirectlytothe"earnings"
ortaxreceiptsofthegovernmentitself.Privatebusinesses
computetheirnetworthbysubtractingliabilitiesfromassets.
Thesameshouldbedoneforthegovernment.Mostunofficial
estimatessuggestthatassetsdirectlyownedbythefederal
governmentprettymuchmatchtheentirefederaldebt.
MostofthefederaldebtisowedtoAmericans.Infact,the
shareofprivatelyheldpublicdebtownedbyforeignersfell
from21.2percentin1980to17.6percentin1992.The
foreignshareofthetotalgrosspublicdebtin1992was12.1
percent.Andvirtuallyallofthatdebtwasindollars,which
meansthatitcanbepaidofforboughtbackbythesimple
deviceofprintingmoneyor,inmoresophisticatedfashion,
openmarketoperationsoftheFederalReserve.

http://www.econlib.org/library/Enc1/FederalDebt.html

1/5

4/15/2015

FederalDebt,byRobertEisner:TheConciseEncyclopediaofEconomics|LibraryofEconomicsandLiberty
Whetherthatshouldbedoneraisesseriousissuesof
economicpolicy.Butifitwishes,thefederalgovernmentcan
alwayscreatewhatmoneyitneedstoserviceitsdebt.Inthis
fundamentalsense,then,federaldebtisdifferentfrom
privatedebtor,forthatmatter,thedebtofstateandlocal
governments,whichdonothavethepowertocreatemoney.
Thusthefederalgovernmenthasnoreasonevertodefaulton
itsdebtordeclarebankruptcy.
Thefederaldebtheldbythepublicdiffersinanother
fundamentalsensefromprivatedebt.Foreveryprivate
creditorthereisadebtorwhoknowsheisadebtor.Therefore
privatedebtis,fromthestandpointofaggregatewealthor
thenetworthoftheprivatesector,awashtheliabilityof
oneindividualorbusinessistheassetofanother.Thenet
debtofthefederalgovernmentheldbythepublic,however,
isanassetoftheprivatesector,ofstateandlocal
governments,oroftherestoftheworld.Butfewpeoplethink
ofthemselvesasthedebtorwhenthefederalgovernment
goesintofurtherdebtbysellingabond.Thismeansthatthe
biggerthefederaldebt,thewealthiercitizenswhoownthe
bondsfeeland,hence,themoretheyarelikelytospend.
Thusthefundamentalimportance,forgoodorforbad,ofthe
federaldebtislikelytobeitseffectonprivatespending.
Iftheeconomyisinarecessionbecauseofalackof
effectivedemandforwhatcanbeproduced,abiggerfederal
debtmaybeuseful.Thegreaterwealthitcausesintheform
ofTreasurynotes,bills,orbondsgivespeoplelessreasonto
saveand,therefore,inducesthemtoconsumemore.
Businesses,whichmayalsofeelwealthierwiththeirholdings
ofTreasurysecurities,maybeexpectedtoproducemoreto
meettheconsumerdemandandalsotoinvestmoreinthe
capacitytomeetthatdemand.
If,however,theeconomyisalreadyatfullemployment,with
fewunusedresources,consumers'attemptstospendmoreas
aconsequenceoftheirgreaterfinancialwealthcanonly
generatehigherprices.Andthere'stherub!Toohigha
federaldebt,oradeficitthatincreasesthedebtand,
consequently,causesaggregatedemandtorisefasterthan
productioncanbeincreasedtomeetthatdemand,bringson
inflation.Then,possiblyevenworse,actionsbytheFederal
Reservetocombattheinflationwillraiseinterestrates,thus
chokingoffinvestmentinnewhousing,newfactories,and
newmachinery.
Theseargumentsaboutthefederaldebt,itspowerforgood
orbad,requiretwomajorqualifications.First,thedebtmust
bemeasuredinacorrectandrelevantfashion.Thismeans,
mostimportantly,thatitmustbeadjustedforinflation.A
personwhohas$101,000inTreasurysecuritiesisnotricher
thanhewasayearagowhenheheld$100,000ifinflation
hasreducedthevalueofthedollarby3percent.Hehas,in
fact,losttheequivalentof$3,000intherealvalueofhis
securitiesfromwhatmaybecalledaninflationtax.Heis,on
balance,$2,000poorerthanhewasayearago.Thus,heis
likelytobuyfewergoods,notmore.
Justaswithindividuals,sowiththefederalgovernment.The
federaldebtmustbemeasuredinrealterms,andthereal
deficitmustbeseenasthechangeintherealvalueofthe
debt.Bythismeasuretheapparentlyhugefederaldebt
actuallydeclinedovermostofthepasthalfcentury.Even
now,afteradecadeofrelativelylargedeficits,thepercapita
federaldebtisstillmuchlessthanin1945,whenthecountry

http://www.econlib.org/library/Enc1/FederalDebt.html

2/5

4/15/2015

FederalDebt,byRobertEisner:TheConciseEncyclopediaofEconomics|LibraryofEconomicsandLiberty
anditseconomyweremuchsmaller.Inflationofonly3
percentreducesagrossdebtof$3trillionby$90billion.This
indicatesarealbudgetdeficit$90billionlessthanthatin
officialmeasures.
Agoodwayofjudgingthesizeofthefederaldebt,andhence
itslikelyeffectontheeconomy,is,asforanindividual,to
takeitasaratioofincome.Thefederaldebtreachedapeak
ratioof114percentofGDPafterWorldWarIIanddeclined
to26percentby1981,beforerisingagain.Butevenwiththe
subsequentdeficits,itwasstillonly51percentofGDPin
1992.True"balance"inthebudget,itmightbesuggested,
wouldentailnotazerodeficit,butonesuchthatthedebt
growsatthesamepercentagerateasGNP,thuskeepingthe
debttoGNPratioconstant.
Thesecondqualificationisthatmanyeconomistsquestion
whetherfederaldebtisrealwealthforthepublicasawhole.
Theyarguethatincreasesinthefederaldebtwillcause
peopletoexpectfutureincreasesintaxesinordertoservice
thatdebt.Ontheassumptionthatthepresentvalueofthe
increaseinexpectedfuturetaxesisequaltotheincreasein
thedebt,thereisnonetchangeinperceivedwealthand,
hence,noeffectofthedebtonoveralldemandforgoodsand
services.
Thisargumenthasbeenseverelycriticizedforclaimingtoo
muchforesightonthepartofindividualsandfordownplaying
seriousreservations.Indeed,DavidRicardo,thefamous
earlynineteenthcenturyeconomistwhofirstenunciatedthe
idea,washimselfskepticalofit.Hearguedthatmanypeople
wouldnotworryaboutfuturetaxesbecausetheymightnot
expecttobealivewhentaxeswerefinallyraised.Theanswer
thatpeoplewouldstillworryabouttheirchildrenand
grandchildrenisweakenedbythefactsthatsomehaveno
childrenandothersdon'twanttoleavemoneytothem
anyway.Otherfactorsthatweakenthe"Ricardian"argument
are:lowerborrowingcostsforthegovernmentthanthe
publictheuncertaintythattaxeswilleverberaisedorwho
willbearthemandthepossibilitythatdebtwhich,infact,
broughthigheremployment,output,andinvestmentmight
eventuallypayforitselfoutofhigherincomes.Inthatcase
taxrateswouldnothavetoincreaseinthefuture.
Finally,someeconomistsarguethatweshouldincludein
federaldebttheimplicitdebtfromthegovernment's
commitmenttopayfuturebenefitssuchasSocialSecurity.If
wedoso,shouldn'tweaddassetsintheformofthepresent
valueoffuturetaxesthatmightbereceived?Inprinciple,
theyarebothrelevant,butthereisastrongargumentthatin
viewoftheuncertainamountstobeprojectedfortaxesand
paymentsovermanydecades,itwouldbebettertoexclude
themfromourmeasuresofthedebt.
TABLE1

AlternativeMeasuresofFederalDebt
GrossFederalDebtHeldbyPublic1
Year

Billionsof
Dollars

Percentageof
GDP

PerCapitain
1992$

1945

235.2

110.9

15,487

1946

241.9

113.8

12,824

1947

224.3

100.6

10,244

http://www.econlib.org/library/Enc1/FederalDebt.html

3/5

4/15/2015

FederalDebt,byRobertEisner:TheConciseEncyclopediaofEconomics|LibraryofEconomicsandLiberty

1948

216.3

87.7

9,074

1949

214.3

81.6

8,879

1950

219.0

82.4

8,715

1951

214.3

68.4

8,000

1952

214.8

63.1

7,766

1953

218.4

60.0

7,643

1954

224.5

61.0

7,598

1955

226.6

58.9

7,300

1956

222.2

53.4

6,802

1957

219.3

50.0

6,364

1958

226.3

50.5

6,328

1959

234.7

48.9

6,262

1960

236.8

46.9

6,123

1961

238.4

46.1

6,006

1962

248.0

44.7

6,026

1963

254.0

43.5

6,016

1964

256.8

41.1

5,890

1965

260.8

38.9

5,752

1966

263.7

35.9

5,553

1967

266.6

33.6

5,398

1968

289.5

34.2

5,520

1969

278.1

30.0

4,992

1970

283.2

28.7

4,775

1971

303.0

28.8

4,773

1972

322.4

28.1

4,818

1973

340.9

26.8

4,752

1974

343.7

24.5

4,361

1975

394.7

26.1

4,521

1976

477.4

28.3

5,105

1977

549.1

27.8

5,318

1978

607.1

28.6

5,378

1979

639.8

28.2

5,152

1980

709.3

26.8

5,148

1981

784.8

26.5

5,144

1982

919.2

29.4

5,679

1983

1,131.0

34.1

6,665

1984

1,300.0

35.2

7,268

1985

1,499.4

37.8

8,032

1986

1,736.2

41.2

8,976

1987

1,888.1

42.4

9,372

1988

2,050.2

42.6

9,675

1989

2,189.3

42.3

9,803

1990

2,410.4

44.1

10,227

1Endoffiscalyears:June30to1976September30,1977

90.
SOURCES:OfficeofManagementandBudget,Budget
Baselines,HistoricalData,andAlternativesfortheFuture,
January1993,Table7.1,p.346EconomicReportofthe
President,January1993,TableB29,p.381Bureauof
EconomicAnalysis,NationalIncomeandProductSeries
Diskette,andSurveyofCurrentBusiness,January1993
andauthor'scalculations.

AbouttheAuthor

http://www.econlib.org/library/Enc1/FederalDebt.html

4/5

4/15/2015

FederalDebt,byRobertEisner:TheConciseEncyclopediaofEconomics|LibraryofEconomicsandLiberty
RobertEisnerwastheWilliamR.KenanProfessorofEconomicsat
NorthwesternUniversityandapastpresidentoftheAmericanEconomic
Association.Hediedin1998.
FurtherReading
Barro,RobertJ."AreGovernmentBondsNetWealth?"Journalof
PoliticalEconomy82(1974):10951117.
Barro,RobertJ."TheRicardianApproachtoBudgetDeficits."Journalof
EconomicPerspectives3(1989):3754.
Bernheim,B.D."ANeoclassicalPerspectiveonBudgetDeficits."
JournalofEconomicPerspectives3(1989):5572.
Buiter,W.H.,andJ.Tobin."DebtNeutrality:ABriefReviewofDoctrine
andEvidence."InSocialSecurityVersusPrivateSaving,editedby
GeorgeM.vonFurstenberg.1979.
Eisner,Robert.HowRealIstheFederalDeficit?1986.
Eisner,Robert."BudgetDeficits:RhetoricandReality."Journalof
EconomicPerspectives3(1989):7393.
Eisner,Robert,andP.J.Pieper."ANewViewoftheFederalDebtand
BudgetDeficits."AmericanEconomicReview74(1984):1129.
Returntotop

Copyright2002
LibertyFund,Inc.
AllRightsReserved

http://www.econlib.org/library/Enc1/FederalDebt.html

ThecuneiforminscriptionintheLibertyFundlogoisthe
earliestknownwrittenappearanceoftheword"freedom"
(amagi),or"liberty."Itistakenfromaclaydocumentwritten
about2300B.C.intheSumeriancitystateofLagash.

Contact
SiteMap
PrivacyandLegal
http://www.econlib.org

5/5