CAVEAT: I am not an economist. I am not an accountant. I am not a lawyer. I do read stuff and try to figure it out.
I've been watching with interest the "discussions" about the U.S. debt ceiling and the back and forth in the media about what alternatives both sides have. I realized that while I have a general idea about the U.S. debt and other financial matters, I don't really understand it in any depth. So I set myself the task of learning about things like the debt, tax revenue, budget deficits, etc. I was inspired by a couple of columns by Paul Krugman in the NY Times a few days ago.(1, 2)
For me to start I thought I'd need to understand and define four different things:
1. The Gross Domestic Product (GDP)
2. The U.S. public debt
3. The annual U.S. government budget deficit, and
4. U.S. annual revenues.
Lets look at them from the bottom up. For the U.S. government (and any government, really) "revenue" is the total amount of money that the government collects from various sources during a fiscal year.
A fiscal year is an accounting fiction that defines how much time you're going to count for revenues and expenditures. In the U.S. your personal fiscal year and mine runs from January 1 through December 31. For the U.S. government the fiscal year runs from October 1 through September 30 of the following calendar year. That's why all the government shutdown nonsense happens in the fall.
Each year the U.S. government collects revenue during its fiscal year. The vast majority of this government income is taxes that you, me, and all the businesses in the country pay to the federal government. Most of the other revenue is things like rents, and special fees, but they really just fall in the noise of total revenue. In fiscal year 2022, the U.S. government collected $4.9 TRILLION in revenue. Remember that this is for ONE FISCAL YEAR.(3)
Next, the budget deficit. A budget deficit occurs when the U.S. government spends more than it takes in in revenues. In fiscal 2022 the U.S. government spent $6.27 TRILLION, which is more than the $4.9 trillion taken in as revenue, resulting in a deficit of $1.38 trillion dollars. Where does that $1.38 trillion dollars come from? Well, the government borrows it by selling U.S. Treasury bonds.
A bond is a loan that the purchaser makes to the seller of the bond. In turn, the seller agrees to pay the purchaser interest on the value of the bond (usually at a fixed rate, and paid periodically through the year) and also agrees to eventually buy back the bond for the original face value.
When the U.S. Treasury issues bonds and sells them, the amount of the bonds sold is added to the U.S. public debt. (But see the "Deficits and debt" section of reference 11, because accountants are tricky.)
The U.S. public debt is the total amount of money that the U.S. government owes to everyone. Nearly all of the government debt is in the form of Treasury instruments (bonds of various sorts). At the end of 2022, the U.S. public debt was $30.824 TRILLION dollars. That seems like a lot, but we'll get to that. Note that the public debt is "the total amount of outstanding borrowing by the U.S. Federal Government accumulated over the nation’s history."(3) Notice three words here "total," "outstanding,", and "history." The public debt is the total amount of money that the U.S. government has borrowed over the last 247 years that it has not already paid back.
Here's the interesting thing. THE UNITED STATES HAS ALWAYS HAD A PUBLIC DEBT. The Continental Congress borrowed money to pay for the American Revolution. Abraham Lincoln borrowed money to pay for the Civil War. The U.S. borrowed money to pay for World Wars I and II. The government borrowed money (to pay for the CARES act) to offset the economic effects of the COVID pandemic. Etc, etc, etc. We've ALWAYS HAD A DEBT.
Sometimes the public debt goes up. During Ronald Reagan's presidency it more than doubled from $998 billion to $2.6 trillion. Sometimes it goes down. The last time the U.S public debt went down was when Bill Clinton had a budget surplus in 1999 and 2000. In "normal" years, the debt goes up by a little bit. For example, in 1996 the public debt was $5.225 trillion, in 1997 it was $5.413 trillon, a difference of $188 billion dollars. In abnormal years, it can go up by a lot. In 2019, the public debt was $22.719 trillion, but then COVID, and in 2020 the debt jumped to $27.748 trillion, an increase of $5.029 trillion dollars. During the recession of 2008-2010 (or so) the debt also went up quite a bit (about $4.5 trillion dollars) because the government was lowering taxes and increasing spending.(4)
Which brings us to the GDP, the Gross Domestic Product. According to the U.S. Bureau of Economic Analysis, the GDP "measures the value of the final goods and services produced in the United States (without double counting the intermediate goods and services used up to produce them). Changes in GDP are the most popular indicator of the nation's overall economic health." The definition of the GDP is a bit loose, because GDP is different depending on whether one includes inflation in the calculation, and whether it's "nominal" or "real", etc. I think the simple answer is that the GDP is the total value of goods and services produced by a country in a year, adjusted for inflation. It's a measure of the size of the economy of a country.
Another important number is GDP growth year over year. In a healthy economy, the GDP grows a bit every year. "A bit" can be anywhere from 1.0% through 9 or 10%. In the U.S. historically our GDP has grown between about 2% and 6% per year. There is an international standard for how to compute GDP.
OK, so why is the GDP important? It seems to be important because the national banks and international banks (like the International Monetary Fund and the World Bank) use the ratio of a country's national public debt to it's GDP as a metric to see whether a country can continue to pay back it's public debt.(6) International bankers start to get worried when a country's debt/GDP ratio gets too much over 100%.
Currently the U.S. debt/GDP ratio is about 1.2, which is a decrease of it's high in 2020 of 1.34.(7) We can compare the U.S. debt/GDP ratio to other countries like the UK - 1.86, France - 1.16, Greece - 2.37 (bad), Brazil 0.86, and Canada 0.67.(8)
The U.S. public debt has been going up slowly but surely since the 1980s. So, is that bad? Well, no. Because in that same time period, the GDP has also been going up. The U.S. economy runs deficits, but it's still growing, and - because of low interest rates - the fraction of the U.S. budget needed to "service the debt" has actually been going down in recent years.(9)
So the bottom line here is that at 1.20 debt/GDP ratio, the U.S. is not in any way in danger of defaulting on it's national debt.
Unless it just stops paying it. Which is where the debt ceiling kerfuffle comes in.
I won't try to explain all this (see reference 10) except to say the U.S. has an absolutely crazy way of creating budgets and getting the money to pay for expenditures. This crazy way has Congress voting spending bills (expenditures) which the executive branch is REQUIRED to execute. If the country buys something, it has to pay for it. But then, if the spending bills indicate that the government will run a deficit (spending > revenue) and if we've hit the maximum amount of money the country is allowed to borrow (the debt ceiling), Congress has to vote AGAIN to authorize the Treasury department to borrow money to pay bills the government has ALREADY PROMISED TO PAY.
If Congress doesn't do the second thing, the U.S. defaults on it's bills and the world economy goes to hell. The U.S. is one of exactly TWO countries that has this type of budgetary system (the other is Denmark, where they raise their debt ceiling every year with no fuss).
Except...... there's at least three things.
The first is section 4 of the 14th amendment to the U.S. Constitution which says: "The validity of the public debt of the United States, authorized by law, ..., shall not be questioned." which seems to say that the executive branch, which executes the laws that Congress passes, MUST pay the bills, no matter what, even if they have to borrow money to do it. (which means the 1917 debt ceiling law is likely unconstitutional because it stops the executive branch from borrowing)
The second is the Presidential oath, which says "I do solemnly swear (or affirm) that I will faithfully execute the Office of President of the United States, and will to the best of my ability, preserve, protect and defend the Constitution of the United States." which seems to say that the President is obligated to "faithfully execute the office," meaning the President (and the entire executive branch) is supposed to carry out the laws that Congress passes. This sets up a situation where the President has to decide which of two conflicting laws to obey.
Finally, there are other recent laws that require the executive to pay interest on the federal debt, make Social Security payments, and pay defense contractors that seem to be in direct conflict with the 1917 debt ceiling law, and again, sets up the President to have to decide which laws to obey.(12)
So, if the already passed spending bills say "spend this amount on that" and the debt ceiling law says "don't borrow more than this" they seem to be in conflict.(10) One of them should go, and it seems a sure bet it should be the debt ceiling.
REFERENCES
1. https://www.nytimes.com/2023/05/19/opinion/government-debt-pay-off.html
2. https://www.nytimes.com/2023/05/16/opinion/biden-debt-ceiling-republicans.html
3. https://fiscaldata.treasury.gov/americas-finance-guide/
4. https://www.thebalancemoney.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287
5. https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/gross-domestic-product-GDP
and https://www.bea.gov/data/gdp/gross-domestic-product
and https://en.wikipedia.org/wiki/Gross_domestic_product
6. https://www.investopedia.com/terms/d/debtgdpratio.asp
7. https://fred.stlouisfed.org/series/GFDEGDQ188S
8. https://fred.stlouisfed.org/graph/?m=QzLa
9. https://fredblog.stlouisfed.org/2021/11/higher-public-debt-but-a-lower-cost-to-service-it/
10. https://www.cbpp.org/research/federal-budget/introduction-to-the-federal-budget-process
11. https://en.wikipedia.org/wiki/United_States_federal_budget
12. https://www.commondreams.org/opinion/biden-mccarthy-debt-limit-economic-terrorism
