PUBLIC DEBT

Public debt, sometimes called national debt, is the cumulative amount a national government has borrowed to finance its outlays. Usually a result of deficit spending, public debt is distinct from a budget deficit in that it is cumulative, whereas deficit refers to a particular budget year's shortfall. Large public debts are common to many governments throughout the world, but none is larger than that of the United States.

The U.S. government finances its debts by borrowing in international credit markets and floating bonds through the U.S. Department of the Treasury and the Federal Reserve System. Federal borrowing is administered by the Treasury Department.

HISTORY AND BACKGROUND

The politics of public debt in the United States date back to the birth of the nation. In 1790, Alexander Hamilton (1755-1804) called the repayment of the national debt (then at $75 million) stemming from the Revolutionary War a "sacred obligation." War, in fact, traditionally has been the cause of surges in public debt. The public debt jumped from $65 million in 1860 to $3 billion in 1865 because of the Civil War, and to $24 billion after World War I. During the World War II years of 1940-45, the public debt increased sixfold from $43 billion to $259 billion.

The debt remained in the upper $200 billion range through the early 1960s, when it broke $300 billion, but it then accelerated briskly under the Johnson administration, in part due to the Vietnam War. By the first year of the Nixon administration it had reached $365 billion, and by the time President Nixon resigned the debt had risen to $484 billion. That figure doubled during the next six years, so that by President Reagan's first year in office the public debt hovered just below $1 trillion. Under the Reagan presidency, deficit spending rocketed to unprecedented peacetime levels, amassing a 188 percent increase in the national debt for the years in which the Reagan administration participated in the budget process. During the first Bush administration budget year (1990), the debt figure surpassed the $3 trillion mark for the first time. And by the end of fiscal 1994, the first Clinton budget year, the tally had surged to $4.6 trillion.

THE POLITICS OF PUBLIC DEBT

The public debt is one component of a far larger political question: the role, scope, and prerogatives of the federal government. The problem of the public debt becomes intertwined with questions about global and domestic priorities, the administration of the income tax system, and the function of the Federal Reserve. Federal spending can promote global prosperity, stimulate the domestic economy, develop the national infrastructure, provide access to education, and protect disadvantaged populations, among other things. Escalating interest payments on debt, however, ultimately crowd out vital expenditure and investment, sap energy from the business sector, and stifle economic productivity and growth. In addition, as Alexander Hamilton recognized, there are moral objections to passing on debt to future generations.

THE CONTEMPORARY PUBLIC DEBT

The U.S. government's fiscal 1998 was the first deficit-free year in nearly three decades, meaning that all government expenses for the budget year were funded through taxes and other receipts rather than debt. (The last balanced budget was in 1969.) This historic achievement was the product of a series of legislation and policy initiatives that reduced federal expenditures to a number of programs and trimmed the government's operating costs.

While great strides were made to erase the annual deficit, the public debt continued to swell entering the late 1990s, albeit at a slower pace. At the end of fiscal 1998, for example, the debt stood at approximately $5.54 trillion, representing a 3.2 percent increase from year-earlier levels. Significantly, interest payments on this debt totaled $364 billion that year alone. Annual interest payments from 1990 to 1998 grew by an average of $12 billion per year, although year-to-year amounts fluctuated widely.

Not only has the U.S. public debt risen in absolute terns, it has also grown disproportionately in relation to the broader economy. To illustrate, in 1980 the debt measured at just under one-third of the gross domestic product (GDP); in 1990 it weighed in at nearly 56 percent; and by 1997 it represented two-thirds. This was not the highest proportion on record, as the national debt actually exceeded GDP in the years immediately following World War II, but it represented a level last tested during the 1950s.