The National Debt: Who Bears Its Burden?

Publication Date: February 2008

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

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Abstract:

The United States has been free of a national debt for only 2 years, 1834 and 1835. We began our existence as a country in 1790 with a debt of $75 million. It rose to $3.8 trillion in 1997. It rose to a high of 108.6% of gross domestic product (GDP) at the end of World War II; declined to a post-World War II low of 23.8% of GDP in 1974; and, then, rose to another high of 49.5% of GDP in 1993. The major cause of debt accumulation has been war. The United States has financed the extraordinary expenditures associated with war by borrowing rather than by raising taxes or printing money. This pattern was broken by the large budget deficits of the 1980s and 1990s which caused the national debt to rise substantially as a fraction of GDP during peacetime.

While economists have long recognized that a national debt imposes an inescapable burden on a nation, they have debated whether the burden is borne by the generation who contracts the debt or is shifted forward to future generations. There has also been some controversy over the nature of the burden.

The current consensus among economists is that the burden of the national debt is largely shifted forward to future generations. However, the burden imposed by the national debt does not arise from debt per se, but from budget deficits that gives rise to a national debt. If an economy is fully employed and the government increases its expenditures, for example, the resultant increase in aggregate demand will cause interest rates to rise and this will reduce or "crowd out" interest-sensitive spending by the private sector. This type of spending is likely to be for capital purposes (e.g., business spending for plant and equipment and household spending for housing and durable goods including automobiles). As a result, the private capital stock inherited by future generations is likely to be smaller and their real income or output will likely be lower. It is the reduction in future output that constitutes the burden of the national debt and it is a burden borne largely by future generations. It is a burden that cannot be decreased by borrowing abroad even though foreign borrowing could leave unchanged the size of the private capital stock.

Crucial to the consensus view (and other views) is the assumption that the economy is fully employed. And the burden discussed must be regarded as a gross burden in the sense that certain intangible gains must be set against it such as freedom from tyranny and domination by a foreign power that might have occurred had the United States lost such a contest as World War II.

From FY1998-FY2001, the federal government ran budget surpluses. These surpluses were used to reduce the national debt. If Congress continues to use them for debt reduction, the gain to the United States will be a larger capital stock for the future as debt reduction "crowds in" the interest sensitive spending of the private sector. As a result, the size of the private sector capital stock in the future should be larger and this should increase the level of income enjoyed by future generations. This is the legacy of reducing the national debt and it is a legacy that comes from budget surpluses. This report will be updated periodically.