Point of Interest: How the U.S. Burns $14,166 a Second

The American Interest asked in its winter issue (subscription required), "Has there ever been a power as great as the United States that has been a debtor as opposed to a creditor nation?" We are, indeed, a nation of borrowers, and that might not be inherently bad. I have to admit, though, when I look at the interest piling up by the minute on U.S. debt, I get a little queasy.

Across the 30 days of November, we spent nearly $27 billion just on interest payments. Put another way, the United States spent $900 million a day -- a figure higher than the GDP of Leichtenstein -- on interest alone.

For fiscal year 2005, we had to cough up $352 billion in interest -- more than the combined budgets of the departments of education, energy, homeland security, interior, justice, labor, state, transportation and veterans affairs. Assuming there were roughly 109 million households in the United States in 2005, that comes to more than $3,200 each. (Think about what your household could have done with an extra $3,200 this year. Vacation abroad? University tuition? Medical expenses? Pay off interest on credit card debt, perhaps?)

Ensuring we'll be paying more and more interest in the years ahead are the two big deficits (for a quick explanation of "national debt" vs. "budget deficit," scroll about halfway down this page, or go here.) At the moment, the United States is running both a $600 billion current account deficit (we import a lot more than we export) and a $400 billion budget deficit.

What are the likely consequences of this double deficit? Is the record trade deficit simply a reflection of America's economic strength, as the Cato Institute's Daniel T. Griswold argues? A CBO report also concluded back in 2000 that the current account deficit was, on balance, helpful to the United States. That said, Alan Greenspan has warned that there are circumstances under which our deficits could prove "painful."

Are we in a dire situation, facing impending economic collapse? Fortunately, that looks unlikely. But we should tread carefully.

Just for fun, here are the annual deficit and public debt numbers going back to 1962. Look at those glorious years (1997-2001) where not only had the deficit been erased, but the debt was actually going down. (The only other place on the chart where the debt drops is a .01 percent decrease from 1968 to 1969.) Never thought I'd feel nostalgic for the late 1990s, but there it is.

Presumably, we'll always be carrying some vast amount of debt, but it might be nice for our children and grandchildren if that amount were a little less vast. With so much debt already piled up -- roughly $8 trillion -- can we ever bring it down to a manageable level? Will interest payments one day eclipse other expenditures, causing ever larger shortfalls? What should we keep in mind as we attempt to reduce our debt?

By Emily Messner |  December 15, 2005; 12:14 AM ET  | Category:  Facts
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It has been many years since I read Gibbon's 'Decline and Fall of the Roman Empire'. One conclusion was that foreign wars, mounting public debt and money sqwabbling in Rome were major factors in Rome's demise. I ask myself: does the US have sufficient treasure and blood to play world missionary democrat (small d) and care for domestic disasters? Gibbon suggests an answer to my question.

Posted by: Arthur Fern | December 15, 2005 10:58 AM

Here is the deficit (-) or surpluse for the past 16 years:
1988: -155.2 Billion
1989: -152.6 Billion
1990: -221.1 Billion
1991: -269.3 Billion (Record breaking deficit)
1992: -290.3 Billion (Record breaking deficit)
1993: -255.1 Billion
1994: -203.2 Billion
1995: -164 Billion
1996: -107.5 Billion
1997: -21.9 Billion
1998: 69.2 Billion (Largest surpluse since 1962, had only happened once before in 1969 when we had a 3.2 billion dollar surplus)
1999: 125.5 Billion (Record breaking surplus)
2000: 236.2 Billion (Record breaking surplus. Tax cuts enter the national debate because politicians have short memories. Apparently 37 out of 38 years of unmitigated deficit spending means it's unfair for American tax payers to give the government 236.2 billion extra than they receive in benefits)
2001: 128.2 Billion (Largest recorded drop in government revenue in history as well as the largest drop in Deficit (-) or Surplus in history)
2002: -157.8 Billion (SHATTERS the historic 2000-2001 historic deficit plunge. 2000-2001 saw 108[record] billion drop, 2001-2002 dropped 285.8. Also shatters previous record of largest drop in government revenue by an additional 100 billion)
2003: -377.6 Billion (New record for largest deficit, new record for largest drop in total government revenue. 2001 was a record breaking year as was 2002 but none compared with 2003. It couldn't possibly get worse?)
2004: -412.1 Billion (New record for largest deficit)

Let's see how those numbers sunny up if electorates had done the moral thing. The following numbers are the Deficit minus the year's interest payments (rounded down to the nearest billion) on the national debt:

1988: 58.8 Billion
1989: 87.4 Billion
1990: 42.9 Billion
1991: 16.7 Billion
1992: 1.7 Billion (Notice how a record breaking deficit turns into a surplus)
1993: 36.9
1994: 92.8 Billion
1995: 168 Billion
1996: 235.5 Billion
1997: 331.1 Billion
1998: 432.2 Billion
1999: 478.5 Billion
2000: 597.2 Billion
2001: 487.2 Billion
2002: 174.2 Billion
2003: -59.6 Billion
2004: -91.1 Billion

What these numbers tell me? Anyone who doesn't make balancing the budget and doing something about the National Debt and our horrendous interest payments on it an essential national issue is a thief. If we didn't have to pay horrendous amounts each year just funding the interest on our national debt we could invest that money towards drastically improving the base quality of life of all Americans. This country would not be politically divided because there wouldn't be enough hands to grab all the money we would have. The selfishness of this electorate and its failure to balance the budget should be treated criminally.

Posted by: Will | December 15, 2005 11:34 AM


Thanks for excellent insight. Americans are oblivious to the most important issue out there........DEBT. Until there is a major crisis, nothing will happen. The future will not be recognizable by this current generation. Much higher taxes, inflation and smaller government.

Posted by: Bill Bolen | December 15, 2005 11:37 AM

Most important to the debt is the parties to whom we owe it, namely Japan and China.

What the communists could not do with missiles, they'll now easily win the cold cash war.

Posted by: Bernie | December 15, 2005 11:55 AM

First, this is a great piece. And, it is profoundly disappointing that the media aren't doing more pieces like this. It makes me suspicious that too many Americans want to be involved in partisanship, because it is easier than handling the difficult issues like this one. And, this is the number 1 issue facing the country.

We can't keep making government bigger (which is what contracting out does - check the numbers on how much we spend now if you don't think the increasin contracting out doesn't make government bigger) but we have to find some way to create a budget that reflects our tax structure and our national priorities for expenses.

The bottom line- we can't keep spending more and taxing less.

Posted by: Bill Wetmore | December 15, 2005 11:58 AM

An honest politician? There is no such animal. Elections are not won, they are bought. And then they are paid for with our tax money. I would like for someone to explain to me why a flat rate tax would not work! If you make $100.00 year, you pay $10.00 in tax. If you make $100,000,000.00 a year, you pay$10,000,000.00 in tax. I can't speak for all, but i'm tired of seeing 38% of my wages being spent by purchacers of elections that don't care a plug nickel about anything but themselves.

Posted by: joe | December 15, 2005 12:14 PM

joe-

About 96% of tax revenues are generated from the richest 50% of the country. No one inside that 50% currently pays 10% taxes, and many of them pay considerably more.

The top 5% of wage earners right now pay 53% of the income tax revenue in this country, and they all pay over 35% income taxes. If you lowered their taxes to 10% you would decrease federal income taxes generated by this group by over 300%. That means that the top 5% would go from covering 53% of income tax revenues to covering around 18% of the income tax burden.

The current lowest tax bracket for the poorest Americans is already at 10% so we cannot expect this revenue to come from elsewhere.

If you lowered the 5%'s tax burden from 53% to 18% it would decrease total income tax revenues by over a third.

Sine this is a discussion about how to DECREASE the budget deficit and national debt, I would love for you to explain where that lost revenue can be replenished from?

Just to clarify, allow me to put a 33% loss in Federal Income Taxes into perspective for you. In 2004 the government generated 809 Billion dollars in Federal Income taxes. Let's take your suggestion and cut that number by 1/3rd. That would decrease government income tax revenue from 809 billion dollars to 539 billion dollars. The deficit that year was -421 billion dollars. If we instituted your flat tax, that deficit would jump to -691 billion dollars.

How, exactly, does a flat tax cure the deficit?

Posted by: Will | December 15, 2005 12:57 PM

It's about time that this subject started making an appearance. Here is a little something I copied from the Official government web site on our debt [see below]. This is the web sites address,
http://www.publicdebt.treas.gov/opd/opdpenny.htm
You can look at this countries debt all the way back to 1776.
Personally I think Congress should be forced to call one of the credit management companies and get some counciling, maybe go into a 12 step program at buyers/shoppers/spenders annonymous.

What I want to know is when Congress, or anyone in government, is going to start talking about and then acting on paying off this debt.

The Debt To the Penny

Current Amount

12/13/2005 $8,136,066,508,140.10


Current
Month

12/12/2005 $8,131,974,072,322.63
12/09/2005 $8,131,290,646,119.43
12/08/2005 $8,131,033,535,598.31
12/07/2005 $8,121,651,809,807.04
12/06/2005 $8,122,710,788,511.92
12/05/2005 $8,119,496,424,139.25
12/02/2005 $8,118,319,301,298.54
12/01/2005 $8,107,952,560,719.68

Posted by: Mookie | December 15, 2005 01:04 PM

This issue will spark intergenerational war.

Posted by: jemison | December 15, 2005 03:42 PM

Thanks Will. I now understand better. The debt has two parts, there is the part held by the government itself, then there is the part held by the public (or public institutions or foreign public, institutions, or governments).

So when Emily speaks of 352 billion in interest for 2005, is this the interest on the debt in pulic hands, government hands, or both? Probably both since it is about right for 8 trillion. But is it true that the government actually cut checks for that amount? I doubt it. I imagine they cut checks for the amount due on the publicly held debt and just issued more debt securities to itself to cover the amount due on the intragovernmental debt (most probably go into Gore's "lock box". It gets to be kind of a shell game.

For example. Emily longs for the days of surplus in the late 90's. But was it?
Also from Mookie's link above:
09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/28/2001 $5,807,463,412,200.06
09/29/2000 $5,674,178,209,886.86
09/30/1999 $5,656,270,901,615.43
09/30/1998 $5,526,193,008,897.62
09/30/1997 $5,413,146,011,397.34
This is the combined debt. If you examine it carefully yow will see that there has been not a single year in which the debt has been reduced from the prior year so, despite the illusion of surplus, the debt obligation we pass on to our children has continued to go up every single year. I think the biggest reason for this is because the paper the government cuts to fund its interest payments to itself (so to speak) are not considered as a part of the "deficit".

Ohhhhh, how we kid ourselves.

Posted by: Cayambe | December 15, 2005 04:10 PM

Cayambe-

Actually, for whatever reason the 350 billion in interest we pay generates money somehow. There is a "Net Interest" quotient that is paid for and is factored into the deficit. I am not an economist so I would love for someone to explain how that works. According to the Congressional Budget Office: "Net interest (function 900 of the budget) comprises the government's interest payments on federal debt offset by its interest income." I don't know what interest income is.

Regardless, the Net Interest IS factored into the deficit, and in 2004 it was 160 billion dollars. Again, this is no small amount and would SIGNIFICANTLY decrease the deficit.

I would love for an economist to explain it to me, but I'm fairly certain the debt payments are factored into total outlays which is how the Congressional Budget Office determines annual deficits.

Posted by: Will | December 15, 2005 05:51 PM

Will,
In your calculation of what the deficit would have been had we no interest to pay, what was your source for annual interest?

I'm not an economist either or an accountant for that matter...but I do have a fair amount of experience with company financial statements and the rules governing them. The government doesn't seem to have equivalent financial statements.

My problem with the budget and deficits as presented is understanding the exact nature of the term "outlay". Is this a measure of actual cash spent? Is the actual deficit a measure of all cash revenue coming into the government minus all cash expenses paid by the government? Since I know I don't quite get it, I simply examined the year to year changes in what is the called the Gross Federal Debt (GFD) as follows.
YEAR GFD DELTA
1977 706,398 -62,837
1978 776,602 -70,204
1979 829,467 -52,865
1980 909,041 -79,574
1981 994,828 -85,787
1982 1,137,315 -142,487
1983 1,371,660 -234,345
1984 1,564,586 -192,926
1985 1,817,423 -252,837
1986 2,120,501 -303,078
1987 2,345,956 -225,455
1988 2,601,104 -255,148
1989 2,867,800 -266,696
1990 3,206,290 -338,490
1991 3,598,178 -391,888
1992 4,001,787 -403,609
1993 4,351,044 -349,257
1994 4,643,307 -292,263
1995 4,920,586 -277,279
1996 5,181,465 -260,879
1997 5,369,206 -187,741
1998 5,478,189 -108,983
1999 5,605,523 -127,334
2000 5,628,700 -23,177
2001 5,769,881 -141,181
2002 6,198,401 -428,520
2003 6,760,014 -561,613
2004 7,354,673 -594,659
2005 est8,031,387 -676,714
2006 est8,707,627 -676,240
2007 est9,350,102 -642,475

Now why the unified budget deficit numbers don't track with these is something I just don't know. One possibility I can imagine is that we may have purchased foreign securities at some interest rate and then sold equivalent treasuries at a lower rate or something like that. This would mean those particular treasuries would be eventually retired by assets (foreign bonds) in the government's hands instead of from general tax revenues from our grandchildren. The GFD also includes the Federal Reserve System "debt" that changes from year to year and I'm not sure how those changes might be reflected as outlays and receipts. So this is just speculation on my part.

There is some more detailed information over at the Treasury website. They put out a Public Debt report each month that seems aimed at brokers and dealers in treasury securities. In the Excel format one of the worksheets lists the beginning balance, change, and ending balance by account. Of course that doesn't actually tell you where the funds necessary to make the change flowed from or to. The SS Old-Age account is the largest of the 165 accounts and shows about 1.6 trillion outstanding.

What I do know is that if the only source of funds available to eventually retire this debt is general tax revenues, i.e. if this debt has no alternative future material cash flows or assets supporting it, the deficit as it seems to be reported does not fully reflect the actual burden we are passing on to the following generations.

About the flat tax that was brought up. The only way you will ever get there is to get rid of all income shelters so all forms of income are exposed to the tax. You can start by removing the ceiling on social security earnings, taxing all dividends and all capital gains at the same flat rate, and setting an inflation indexed standard deduction to an amount that keeps the poor from becoming poorer. Then I would suppose you would move on to the corporate world and reexamine the great variety of ways Congress has provided to shelter their income from taxation. Where that takes you requires a whole lot of number crunching, and somehow, I doubt that the really really rich would like the answer.

Posted by: Cayambe | December 17, 2005 01:13 AM

Most of the deficit/debt can probably be put at the door of everyday greed, self-interest and plain stupidity on the part of, most of all, Congress and the people who buy it. But remember that a fairly influential faction of the Republican Party has been openly advocating economic sabotage against the US under the rubric "Starve the Beast."

Posted by: Pobrecito | December 17, 2005 04:28 PM

Cayambe-

I got the annual interest payments from http://www.publicdebt.treas.gov/opd/opdint.htm and subtracted that number from any particular year's deficit to get the adjusted number. As it turns out (and I mentioned it in another thread) this doesn't seem to be the correct method of determining how much our annual interest actually hurts us because of something called "Interest income". I have no idea how national debt interest generates revenue, but, for example, in 2004 I think the annual interest rate accounted for on the Congressional Budget Office's website is about 80 billion lower than the 350 billion annual interest in 2004. The rationale according to them was that their figure was the annual interest paid on the national debt minus the interest income. If there is anyone familiar with interest income I would love to hear what this is.

I was also struck why the amount of public debt owned did not track the annual deficits/surplus. It must have something to do with what percentage of the debt is owned by the public and what is owned by foreign entiteis, or perhaps it has to do with the trade deficit. I'm not entirely sure either and would love answers.

Posted by: Will | December 19, 2005 10:47 AM

Will,
Another possibility just occurred to me after reading the WP story on the budget just barely passed. There is this thing called "emergency spending" which is not budgeted. Now one would still expect to see it in "outlays" but, quien sabe, maybe these turkeys just don't count it for the sake of political appearances.

Posted by: Cayambe | December 21, 2005 12:45 PM

Cayambe-

More likely it is included in the non-discretionary budget. But honestly, that's just a guess. It's unfortunate that no one has explained our lingering questions which seem fairly important (because we are talking about hundreds and hundreds of billions of dollars and today there was a 50/50 vote on TENS of billions of dollars).

I do not think budget issues have received nearly enough attention as evidenced by the fact that even after seriously engaging the statistics directly I am left with more questions than answers.

Posted by: Will | December 21, 2005 01:34 PM

I am going to take the radical position of coming out against debt. But seriously, the US should take steps to slash spending to get back towards surplus.

Having said that, the debt is not really that big of a deal. While massive in nominal terms, it's under 3% GDP. Hey, that's enough to get us EU membership!

The REAL problem as I see is not the current discretionary spending, nor is it overly low taxation. What's really going to give us headaches is the coming crisis in Medicare/aid. That is going to make social security look like childs play. We've got a lot of programs that we can not afford to pay for unless we get serious about reform.

I'm not holding my breath.

Posted by: Colin | December 21, 2005 02:16 PM

Colin - What? Debt 3% of US GDP? My friend, the US GDP in 05 was 12.4 trillion dollars. Therefore the US debt is closer to 66%, not three. Where'd you come up with three?

Posted by: James | May 11, 2006 05:59 PM

Thanks for the discussion on interest. It is a disaster.

I don't know where Emily's $352B comes from though. According to CBPP, the 2005 FY interest was $180 billion for the public debt, plus $90 billion in interest for the money we have borrowed from the SS an Medicare trust funds. But who is quibbling about $82 billion these days.

What is most interesting about all this is that interest payments have been artificially low in the Bush years. Short-term rates have been very low, and the Bush people have refinanced much of the debt with short term instruments. We have a trillion of debt to turn over this year. And interest rates are going up. The government brought back 30-year bonds a few months ago at over 4%. You will be hearing a lot more about interest in the next year or two.

http://www.bondmarkets.com/story.asp?id=1210

It is a catastrophe.

Posted by: liberal shmiberal | May 11, 2006 09:54 PM

To clarify my previous remarks, one metaphor is that the Bush treasury has essentially financed their debt with an adjustable rate mortgage to take advantage of low introductory rates. It worked....for awhile. Net interest fell from $223 billion in 2000 to $153 billion in 2003, despite hundreds of billions of new debt. But now we are even more screwed.

Posted by: liberal shmiberal | May 11, 2006 09:59 PM

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