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Introductory Notes

In keeping with the practice of the Congressional Budget Office and other federal agencies that deal with budget policy, many of the federal debt, spending, and revenue figures in this research are expressed as a portion of gross domestic product (GDP). This is because debates about the size of government and the effects of its debt are frequently centered upon how much of a nation’s economy is consumed by government. This measure also accounts for population growth, some of the effects of inflation, and the relative capacity of government to service its debt.

However, the federal government does not have the entire U.S. economy at its disposal to service federal debt. The private sector, which produces the goods and services that comprise most of the economy, utilizes some of these resources, and local and state governments also consume some of the nation’s GDP. Hence, this research sometimes expresses federal debt as a portion of annual federal revenues. This is a more direct measure of the federal government’s capacity to service its debt.

In keeping with Just Facts’ Standards of Credibility, all charts in this research show the full range of available data, and all facts are cited based upon availability and relevance, not to slant results by singling out specific years that are different from others.

Click here for a video that summarizes some of the key facts in this research.

Quantifying the National Debt

* As of October 4, 2018, the official debt of the United States government is $21.6 trillion ($21,599,377,345,082).[1] This amounts to:

  • $65,710 for every person living in the U.S.[2]
  • $171,119 for every household in the U.S.[3]
  • 106% of the U.S. gross domestic product.[4]
  • 623% of annual federal revenues.[5]
National Debt as a Portion of the U.S. Economy

[6]

* Publicly traded companies are legally required to account for “explicit” and “implicit” future obligations such as employee pensions and retirement benefits.[7] [8] [9] The federal budget, which is the “government’s primary financial planning and control tool,” is not bound by this rule.[10] [11]

* At the close of the federal government’s 2017 fiscal year (September 30, 2017), the federal government had roughly:

  • $9.2 trillion ($9,173,000,000,000) in liabilities that are not accounted for in the publicly held national debt, such as federal employee retirement benefits, accounts payable, and environmental/disposal liabilities.[12]
  • $30.8 trillion ($30,752,000,000,000) in obligations for current Social Security participants above and beyond projected revenues from their payroll and benefit taxes, certain transfers from the general fund of the U.S. Treasury, and assets of the Social Security trust fund.[13] [14]
  • $34.6 trillion ($34,600,000,000,000) in obligations for current Medicare participants above and beyond projected revenues from their payroll taxes, benefit taxes, premium payments, and assets of the Medicare trust fund.[15] [16]

* The figures above are determined in a manner that approximates how publicly traded companies are required to calculate their liabilities and obligations.[17] [18] [19] The obligations for Social Security and Medicare represent how much money must be immediately placed in interest-bearing investments to cover the projected shortfalls between dedicated revenues and expenditures for all current participants in these programs (both taxpayers and beneficiaries).[20] [21] [22]

* Combining the figures above with the national debt and subtracting the value of federal assets, the federal government had about $88.9 trillion ($88,911,000,000,000) in debts, liabilities, and unfunded obligations at the close of its 2017 fiscal year.[23]

* This $88.9 trillion shortfall is 92% of the combined net worth of all U.S. households and nonprofit organizations, including all assets in savings, real estate, corporate stocks, private businesses, and consumer durable goods such as automobiles and furniture.[24] [25]

* This shortfall equates to:

  • $272,405 for every person living in the U.S.[26]
  • $704,391 for every household in the U.S.[27]
  • 456% of the U.S. gross domestic product.[28]
  • 2,485% of annual federal revenues.[29]

* The figures above:

  • do not account for the future costs implied by any current policies except those of the Social Security and Medicare programs.[30]
  • are based on current federal law and “a wide range of complex assumptions” made by federal agencies.[31] Regarding this:
    • The Board of Social Security Trustees has stated that “significant uncertainty” surrounds the “best estimates” of future circumstances.”[32]
    • The Board of Medicare Trustees has stated that the program’s long-term costs may be “substantially higher” than projected under current law. This is because current law includes the effects of the Affordable Care Act, which will cut Medicare prices for “many” healthcare services to “less than half of their level” under prior law. Per the Trustees:
Absent an unprecedented change in health care delivery systems and payment mechanisms, the prices paid by Medicare for health services will fall increasingly short of the costs of providing these services. … Before such an outcome would occur, lawmakers would likely intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result.[33]

Causes of the National Debt

Spending and Taxes

Current Expenditures and Receipts

† To measure the entirety of government expenditures and receipts, “total” instead of “current” figures are preferable, but such data (shown in the next chart) only extends back to 1960.[34]

[35]

* Data from the chart above:

Year

Receipts
(Portion of GDP)

Expenditures
(Portion of GDP)

1930

3%

3%

1940

8%

9%

1950

16%

16%

1960

17%

17%

1970

17%

20%

1980

19%

22%

1990

18%

22%

2000

20%

19%

2010

16%

25%

2017

19%

22%


Total Expenditures and Receipts

[36]

* Data from the chart above:

Year

Receipts
(Portion of GDP)

Expenditures
(Portion of GDP)

1960

18%

19%

1970

18%

21%

1980

19%

23%

1990

18%

22%

2000

20%

19%

2010

16%

27%

2017

20%

22%


Spending Distribution

Current Expenditures by Function

† Social programs include income security, healthcare, education, housing, and recreation.

‡ National defense includes military spending and veterans’ benefits.

§ General government and debt service includes the executive & legislative branches, tax collection, financial management, and interest payments.

# Economic affairs includes transportation, general economic & labor affairs, agriculture, natural resources, energy, and space. (This excludes spending for infrastructure projects such as new highways, which is not accounted for in this graph.[37])

£ Public order and safety includes police, fire, law courts, prisons, and immigration enforcement.

[38]

* Data from the chart above:

Category

Portion of Total Federal Spending

1960

1970

1980

1990

2000

2010

2016

Social Programs

21%

32%

45%

44%

54%

61%

63%

National Defense

53%

42%

26%

25%

19%

20%

18%

General Government & Debt Service

19%

18%

21%

25%

21%

13%

14%

Economic Affairs & Infrastructure

6%

7%

7%

5%

5%

4%

4%

Public Order & Safety

0%

0%

1%

1%

1%

1%

1%


Tax Distribution

Effective Tax Rates by Income

NOTE: This data does not account for 6% of federal revenues that could not be allocated to households by income group.

[39] [40] [41]

* Data from the chart above:

Average Effective Federal Tax Burdens (2014)

Income Group

Household Income

Tax Rate

Taxes Paid

Lowest 20%

$31,500

1%

$400

Second 20%

$48,300

8%

$3,800

Middle 20%

$71,900

13%

$9,600

Fourth 20%

$106,300

17%

$18,600

Highest 20%

$282,500

27%

$75,100

* Breakdown of the highest 20%:

Income Group

Household Income

Tax Rate

Taxes Paid

81st – 90th

$152,400

21%

$32,000

91st – 95th

$207,500

23%

$48,300

96th – 99th

$342,900

27%

$91,400

Top 1 %

$1,774,800

34%

$596,200

Consequences

* As detailed in publications of the Congressional Budget Office, the Brookings Institution, and Princeton University Press, the following are some potential consequences of unchecked government debt:

  • Reduced “living standards” and “wages.”[42] [43] [44] [45] [46]
  • “Reductions in spending” on “government programs.”[47]
  • “Higher marginal tax rates.”[48]
  • “Higher inflation” that increases “the size of future budget deficits” and decreases the “the purchasing power” of citizens’ savings and income.”[49] [50]
  • Restricted “ability of policymakers to use fiscal policy to respond to unexpected challenges, such as economic downturns or international crises.”[51]
  • “Losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt.”[52]
  • Increased “probability of a fiscal crisis in which investors would lose confidence in the government’s ability to manage its budget, and the government would be forced to pay much more to borrow money.”[53] [54]

* In 2012, the Journal of Economic Perspectives published a paper about the economic consequences of government debt. Using 2,000+ data points on national debt and economic growth in 20 advanced economies (such as the United States, France, and Japan) from 1800 to 2009, the authors found that countries with national debts above 90% of GDP averaged 34% less real annual economic growth than when their debts were below 90% of GDP.[55]

* The United States exceeded a debt/GDP level of 90% in the second quarter of 2010.[56]

* Per the textbook Microeconomics for Today:

GDP per capita provides a general index of a country’s standard of living. Countries with low GDP per capita and slow growth in GDP per capita are less able to satisfy basic needs for food, shelter, clothing, education, and health.[57]

* In 2013, the Political Economy Research Institute at the University of Massachusetts, Amherst, published a working paper about the economic consequences of government debt. Using data on national debt and economic growth in 20 advanced economies from 1946 to 2009, the authors found that countries with national debts over 90% of GDP averaged:

  • 31% less real annual economic growth than countries with debts from 60% to 90% of GDP,
  • 29% less real annual economic growth than countries with debts from 30% to 60% of GDP,
  • and 48% less real annual economic growth than countries with debts from 0% to 30% of GDP.[58]

* The authors of the above-cited papers have engaged in a heated dispute about the results of their respective papers and the effects of government debt on economic growth. Facts about these issues can be found in the Just Facts Daily article, “Do Large National Debts Harm Economies?

Politics

Responsibility

* The U.S. Constitution vests Congress with the powers to tax, spend, and pay the debts of the federal government. Legislation to carry out these functions must either be:

  • passed by majorities in both houses of Congress and approved by the President; or
  • passed by majorities in both houses of Congress, vetoed by the President, and then passed by two-thirds of both houses of Congress; or
  • passed by majorities in both houses of Congress and left unaddressed by the President for ten days.[59]

* Other factors impacting the national debt include but are not limited to legislation passed by previous congresses and presidents,[60] economic cycles, terrorist attacks, natural disasters, demographics, and the actions of U.S. citizens and foreign governments.[61]


Current Policies

* In 2013, the Congressional Budget Office (CBO) projected the publicly held debt that the U.S. government would accumulate under current federal policies and their economic effects.[62] [63] Combining these projections with historical data and actual outcomes since then yields the following results:

Debt Under Current Policies

[64]

Revenues and Spending Under Current Policies

[65]

* Per CBO, postponing action to stabilize the debt will:

  • “substantially increase the size of the policy adjustments needed to put the budget on a sustainable course.”
  • punish younger generations of Americans, because most of the burden would fall on them.
  • reward older generations of Americans, because “they would partly or entirely avoid the policy changes needed to stabilize the debt.”[66] [67]

World War II Comparisons

* The following Ph.D. economists and political scientists have claimed that the level of national debt during World War II means that the modern national debt is not a serious threat:

  • Paul Davidson, editor of the Journal of Post Keynesian Economics and author of The Keynes Solution: The Path to Global Economic Prosperity:[68]
Rather than bankrupting the nation, this large growth in the national debt [during World War II] promoted a prosperous economy. By 1946, the average American household was living much better economically than in the prewar days. Moreover, the children of that Depression–World War II generation were not burdened by having to pay off what then was considered a huge national debt. Instead, for the next quarter century, the economy continued on a path of unprecedented economic growth and prosperity….[69]
  • Douglas J. Amy, professor of politics at Mount Holyoke College:[70]
Conservatives are also wrong when they argue that deficit spending and a large national debt will inevitably undermine economic growth. To see why, we need to simply look back at times when we have run up large deficits and increased the national debt. The best example is World War II when the national debt soared to 120% of GDP—nearly twice the size of today’s debt. This spending not only got us out of the Great Depression but set the stage for a prolonged period of sustained economic growth in the 50s and 60s.[71]
  • Paul Krugman, Nobel Prize-winning economist and Princeton University professor:[72]
Right now, federal debt is about 50% of GDP. So even if we do run these deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II.
 
Again, the debt outlook is bad. But we’re not looking at something inconceivable, impossible to deal with; we’re looking at debt levels that a number of advanced countries, the U.S. included, have had in the past, and dealt with.[73]

* In the 40 years that followed the end of World War II (1946–1985):

  • federal spending as a portion of GDP averaged 42% lower than the last year of the war.[74]
  • publicly held debt as a portion of GDP decreased by 72 percentage points.[75]

* In 2010, around the time when the statements above were written, the Congressional Budget Office projected that under current policy and a sustained economic recovery over the next 40 years:

  • federal spending as a portion of GDP will average over 78% higher than in the four decades that followed World War II.[76]
  • publicly held debt as a portion of GDP will rise by 277 percentage points.[77]

Alternative Policies

* As alternatives to CBO’s current policy projections detailed above, CBO has also run projections for scenarios such as these:

1) Current law:[78]

  • Due to bracket creep, federal revenues will incrementally increase from 18% of GDP in 2014 to 24% in 2084.[79] [80] At this point, federal revenues will be 35% higher than the average from 1974–2013.[81]
  • Federal spending on all government functions will incrementally increase from 20% of GDP in 2014 to 26% in 2040.[82] At this point, spending will be 27% higher than the average from 1974–2013.[83]
  • Payments for Medicare services will undergo reductions that will likely cause “severe problems with beneficiary access to care.”[84] [85]

2) Republican Congressman Paul Ryan’s 2014 budget resolution, called the “The Path to Prosperity”:[86]

  • Starting in 2024, Medicare beneficiaries will have a choice to enroll in private plans paid for by Medicare or remain in the traditional Medicare program.[87] Also starting in 2024, the eligibility age for Medicare benefits will incrementally rise to correspond with Social Security’s retirement age.[88] Compared to the projections under the current policy scenario, Medicare spending will be 0.5% lower in 2016, 2% lower in 2020, and 4% lower in 2024.[89]
  • Federal Medicaid spending will be converted to an “allotment that each state could tailor to meet its needs, indexed for inflation and population growth.”[90] The expansion of Medicaid manadated by the Affordable Care Act (a.k.a. Obamacare) will be repealed.[91] Compared to the projections under the current policy scenario, Medicaid spending will be 9% lower in 2016, 19% lower in 2020, and 24% lower in 2024.[92]
  • All federal spending related to Obamacare’s exchange subsidies will be repealed.[93]
  • Spending on all government functions except for interest payments on the national debt will incrementally decline from 19% of GDP in 2015 to 16% in 2025.[94] (The average from 1974–2013 is 18%).[95]
  • Revenues will increase from 18% of GDP in 2015 to 19% in 2032 and stay constant thereafter.[96] (The average from 1974–2013 is 17%.[97])

* Combining historical data on the national debt with CBO’s 2014 projections for current policy, current law, and the Ryan plan yields the following results:

Debt Under Different Policies

[98] [99]


Public Opinion

* Other than interest on the national debt, most of the long-term growth in federal spending (as a percent of GDP) under CBO’s current policy and current law scenarios stems from Social Security, Medicare, Medicaid, the Children’s Health Insurance Program, and Affordable Care Act (a.k.a. Obamacare) subsidies.[100]

* A poll conducted by Pew Research Center and USA Today in February 2013 found that:

  • 70% of Americans say it is “essential for the president and Congress to pass major legislation to reduce the federal budget deficit.”
  • 73% of Americans say that to reduce the budget deficit, the president and Congress should focus only or mostly on spending cuts.
  • 41% think the government should increase spending in Social Security, 46% think the government should continue the same spending, and 10% believe the government should reduce spending in Social Security.
  • 36% think the government should increase spending in Medicare, 46% think the government should continue the same spending, and 15% think the government should reduce spending in Medicare.[101] [102]

* A poll conducted by NBC News and the Wall Street Journal in February 2011 found that:

  • 80% of Americans are concerned “a great deal” or “quite a bit” about federal budget deficits and the national debt.
  • if the deficit cannot be eliminated by cutting wasteful spending, 35% of Americans prefer to cut important programs while 33% prefer to raise taxes.
  • 22% think cuts in Social Security spending will be needed to “significantly reduce the federal budget deficit,” 49% do not, and 29% have no opinion or are not sure.
  • 18% think cuts in Medicare spending will be needed to “significantly reduce the federal budget deficit,” 54% do not, and 28% have no opinion or are not sure.[103] [104]

* A poll conducted in November 2010 by the Associated Press and CNBC found that:

  • 85% of Americans are worried that the national debt “will harm future generations.”
  • 56% think “the shortfalls will spark a major economic crisis in the coming decade.”
  • when asked to choose between two options to balance the budget, 59% prefer to cut unspecified government services, while 30% prefer to raise unspecified taxes.[105]

* A poll conducted in July 2005 by the Associated Press and Ipsos found that:

  • 70% of Americans were worried about the size of the federal deficit.
  • 35% were willing to cut government spending.
  • 18% were willing to raise taxes.
  • 1% were willing to cut government spending and raise taxes.[106]

Congresses

* During the first session of the 113th Congress (January–December 2013), U.S. Representatives and Senators introduced 168 bills that would have reduced spending and 828 bills that would have raised spending.[107]

* The table below quantifies the costs and savings of these bills by political party. This data is provided by the National Taxpayers Union Foundation:

Costs/Savings of Bills Sponsored or Cosponsored

in 2013 by Typical Congressman (in Billions)

Increases

Decreases

Net Agenda

House Democrats

$407

$10

$397

Senate Democrats

$22

$3

$18

House Republicans

$9

$91

–$83

Senate Republicans

$6

$165

–$159

[108] [109]

* Click here to look up any member of Congress and see the annual costs or savings from the legislation he or she has sponsored or cosponsored.

* The table below quantifies the net agendas of the political parties in previous Congresses:

Costs/Savings of Bills Sponsored or Cosponsored in the First

Sessions of Congress by Typical Congressman (in Billions)

2011

2009

2007

2005

2003

2001

1999

House Democrats

$497

$500

$547

$547

$402

$262

$34

Senate Democrats

$24

$134

$59

$52

$174

$88

$15

House Republicans

–$130

–$45

$7

$12

$31

$20

–$5

Senate Republicans

–$239

$51

$7

$11

$26

$19

–$324

NOTE: Data not adjusted for inflation.

[110]


Presidents

* In February 2001, Republican President George W. Bush stated:

Many of you have talked about the need to pay down our national debt. I listened, and I agree. We owe it to our children and grandchildren to act now, and I hope you will join me to pay down $2 trillion in debt during the next 10 years. At the end of those 10 years, we will have paid down all the debt that is available to retire. That is more debt, repaid more quickly than has ever been repaid by any nation at any time in history.[111]

* From the time that Congress enacted Bush’s first major economic proposal (June 7, 2001[112]) until the time that he left office (January 20, 2009), the national debt rose from 54% of GDP to 74%, or an average of 2.7 percentage points per year.[113]

* During eight years in office, President Bush vetoed 12 bills, four of which were overridden by Congress and thus enacted without his approval.[114] These bills were projected by the Congressional Budget Office to increase the deficit by $26 billion during 2008–2022.[115]


* In February 2009, Democratic President Barack Obama stated:

I refuse to leave our children with a debt that they cannot repay—and that means taking responsibility right now, in this administration, for getting our spending under control.[116]

* From the time that Congress enacted Obama’s first major economic proposal (February 17, 2009[117]) until the time he left office (January 20, 2017), the national debt rose from 75% of GDP to 105%, or an average of 3.7 percentage points per year.[118]

* During eight years in office, President Obama vetoed 12 bills, one of which was overridden by Congress and thus enacted without his approval.[119] This bill was projected by the Congressional Budget Office to “have no significant effect on the federal budget.”[120]

Government Accounting

Trust Funds and the Two Main Categories of Debt

* Some federal programs (such as Social Security) have “trust funds” that are legally separated from the rest of the federal government.[121]

* When these programs spend less than the federal government allocates to them, their surpluses are loaned to the federal government. This creates a legal obligation for the federal government to pay money and interest to these programs, thus adding to the national debt.[122] [123] [124] [125] [126]

* The federal government divides the national debt into two main categories:[127] [128]

  1. Intergovernmental debt, which is money that the federal government owes to federal special funds and trust funds like the Social Security Trust Fund.
  2. Publicly held debt, which is money that the federal government owes to non-federal entities such as individuals, corporations, local governments, and foreign governments.[129] Money owed to the Federal Reserve is also classified under this category, even though the Federal Reserve is a federal entity.[130] [131]

* NOTE: Just Facts has found numerous instances in which politicians and journalists have used terms that technically refer to the total national debt, when in fact, they are only referring to a portion of it. In order to clear up confusion about this, below are common terms for the national debt categorized by their correct meanings:

  • Total national debt: gross debt, federal debt, public debt[132]
  • Intergovernmental debt: debt held by government accounts, government-held debt, intragovernmental holdings[133] [134] [135]
  • Publicly held debt: debt held by the public[136] [137]

* On March 31, 2018, the $21.1 trillion national debt was comprised of:

  • $5.7 trillion in intergovernmental debt
  • $15.4 trillion in publicly held debt[138]

* The federal law that governs the repayment of the national debt draws no distinction between publicly held debt and intergovernmental debt. Both must be repaid with interest.[139]

* The White House Office,[140] [141] Congressional Budget Office,[142] and other federal agencies[143] sometimes exclude intergovernmental debt in their reckonings of the national debt, because this portion of the debt “represents internal transactions of the government and thus has no effect on credit markets.”

* Federal programs to which this money is owed, such as Social Security and Medicare, include intergovernmental debt and the interest that it generates in their assets and financial projections.[144] [145] [146]

* In the 2000 presidential race, the Gore-Liebermann campaign released a 192-page economic plan that contains over 150 uses of the word “debt.” In none of these instances does the plan mention or account for any of the intergovernmental debt.[147] The same plan includes the intergovernmental debt in the assets of the Social Security and Medicare programs.[148]


“Deficits” and “Surpluses”

* During the federal government’s 2010 fiscal year (October 1, 2009 to September 30, 2010[149]), the national debt rose from $12.0 trillion to $13.6 trillion, thus increasing by $1.6 trillion.[150]

* The White House,[151] USA Today,[152] Reuters,[153] and other government and media entities reported that the 2010 federal “deficit” was $1.3 trillion.

* The difference between the national debt increase of $1.6 trillion and the reported deficit of $1.3 trillion is attributable to the following accounting practices:

  • When calculating the reported deficit, the federal government merges the finances of all federal programs into what is called the “unified budget.” Hence, the deficit does not account for the intergovernmental debt that arises when programs such as Social Security loan their surpluses to the federal government.[154]
  • When the federal government lays out money for programs such as TARP and student loans, the outgo is not fully counted in the deficit. The deficit reflects only what the government expects to lose or gain on these loans.[155] [156]

* PolitiFact, a Pulitzer Prize-winning project of the Tampa Bay Times to “help you find the truth in politics,”[157] reported in 2009 that there were “several years of budget surpluses” during Bill Clinton’s presidency. This same article cited the rise in “national debt” during George W. Bush’s presidency.[158]

* Using the same criterion PolitiFact applied to Bush’s presidency (the nominal change in national debt), the national debt rose every year of Clinton’s presidency:

Year

National Debt on Inauguration Date†

(Billions)

1993

$4,188

1994

$4,501

1995

$4,797

1996

$4,988

1997

$5,310

1998

$5,496

1999

$5,624

2000

$5,706

2001

$5,728

† NOTE: PolitiFact used the inauguration date for its debt baseline.

The national debt also rose every fiscal year of Clinton’s presidency.

[159] [160]

Interest

* In 2017, the interest on the national debt was $456 billion ($455,643,262,199).[161] This amounts to:

  • 12% of annual federal revenues.[162]
  • 1.1 times annual federal corporate income tax revenues.[163]
  • 4.0 times federal spending on education.[164]
  • 4.8 times annual federal excise tax revenues.[165]
  • 6.5 times federal spending on SNAP (food stamps).[166]

* From 1962 to 2017, interest payments on the national debt as a portion of federal revenues ranged from 9% to 27% per year, with both the median and average being 17%:

Interest Paid on the National Debt

[167]

* The primary factors that affect interest costs are the amount of debt owed and the interest rates charged on that debt.[168] [169] [170]

* In 2014, the Congressional Budget Office (CBO) reported:

Net interest payments are currently fairly small relative to the size of the economy because interest rates are exceptionally low, but CBO anticipates that those payments will increase considerably as interest rates return to more typical levels.[171]

* From 1962 to 2017, the average annual interest rate paid on the national debt ranged from 2.2% to 10.3%, with the median being 5.3% and the average 5.6%. In 2017, the rate was 2.3%:

Average Interest Rate Paid on the National Debt

[172]

* In 2017, the federal government paid an average interest rate of 2.1% on debt held by the public and 2.9% on intergovernmental debt.[173]


Interest Rate Drivers

* Per the Congressional Research Service, the Federal Reserve, the Congressional Budget Office, and the White House Office of Management and Budget, the following factors affect interest rates on the debt held by the public:

  • Longer-term debts “generally command higher interest rates compared to shorter-term” debts.[174] [175] [176]
  • High and unstable inflation causes high interest rates, while low and stable inflation causes lower interest rates.[177] [178]
  • Periods of weak economic growth generally lead to lower interest rates.[179] [180] [181]
  • When the government needs to borrow larger amounts of money, it tends to offer higher interest rates in order to attract more investors.[182] [183] [184] [185]
  • The U.S. government’s reputation for being a safe investment helps keep interest rates low. If the federal government “were unable to make timely interest payments” or pay off its obligations, “interest costs would increase,” because investors would demand more compensation for the higher risk of not being paid.[186] [187] [188]
  • Higher demand for safe investments, such as U.S. government debt, lowers interest rates on that debt.[189] [190] [191]
  • “Quantitative easing”—a recent Federal Reserve policy of buying very large amounts of federal debt—reduces the amount of debt that needs to be sold to the public, which therefore reduces interest rates.[192] [193]
  • The Federal Reserve sets the “federal funds rate”—the price banks charge each other for overnight loans of their money in the Federal Reserve’s banking system. Interest rates on short-term debt across the market tends to follow the trends of the federal funds rate.[194] [195]

* In the wake of the Great Recession that began in December of 2007:[196]

  • in 2007 and 2008, the Federal Reserve reduced the federal funds target rate from 5.25% to about 0%. The Board of Governors of the Federal Reserve explained that its goal was to “support the economy during the financial crisis that began in 2007 and during the ensuing recession.”[197]
  • in 2009, the Federal Reserve began buying “very large amounts of longer-term government securities to apply downward pressure on longer-term interest rates.”[198] [199]
  • in 2014, the Federal Reserve, announced its “normalization” plan for “returning both short-term interest rates” and the Federal Reserve’s ownership of the national debt “to more normal levels.”[200] [201]
  • in December 2015, the Federal Reserve raised the federal funds target rate for the first time since 2008. From December 2015 to June 2018:
    • the Federal Reserve raised the federal funds target rate from about 0% to 1.75–2.0%.[202] [203] [204]
    • the average interest rate on 3-month federal debt rose from 0.21% to 1.94%, and the interest rate on 10-year federal debt rose from 2.15% to 2.94%.[205] [206]
    • the average interest rate on federal debt held by the public rose from 2.01% to 2.29%.[207] [208]

* When deciding the term length (maturity) of the debt it issues, the Treasury tries to balance the benefit of lower costs from short-term interest rates with the benefit of having predictable payments on long-term debt.[209] At the end of 2016, the average maturity of outstanding debt was 70 months—approximately 8 months longer than the historical average of 60 months.[210] [211]


* Interest rates on intergovernmental debt are affected by the same drivers as debt held by the public.[212] [213]

* The interest rates on most intergovernmental debt are based on the average interest rate of long-term debt held by the public. This applies regardless of whether the debt is short-term or long-term.[214] [215] [216] [217] [218] [219]

* Since long-term debts generally have higher interest rates than short-term debts, interest rates on intergovernmental debt tend to be higher than average interest rates on debt held by the public.[220] In 2017, the federal government paid an average interest rate of 2.1% on debt held by the public and 2.9% on intergovernmental debt.[221]

* The Social Security trust fund—which makes up roughly half of all intergovernmental debt—starts all new investments as short-term debt scheduled to mature on the upcoming June 30.[222] On June 30, the matured debt and its interest are rolled into new debts of different maturities ranging from 1 to 15 years.[223] [224]

* Regardless of the length (maturity) of a debt, trust funds can demand repayment including interest at any time, if they need money to cover their expenses.[225] [226]

Ownership

* On September 30, 2017, the national debt was $20.2 trillion, and the owners of this debt were:

Owner

Amount (Billions)

Portion of Total

Foreign & International Entities

$6,302

31%

China

$1,182

6%

Japan

$1,096

5%

Ireland

$311

2%

Brazil

$273

1%

Cayman Islands

$247

1%

United Kingdom

$237

1%

Switzerland

$253

1%

Luxembourg

$214

1%

Hong Kong

$194

1%

Taiwan

$184

1%

Other Nations

$2,110

10%

Domestic Non-Federal Entities

$5,885

29%

Mutual Funds

$1,651

8%

State & Local Governments

$697

3%

Banks & Savings Institutions

$605

3%

Private Pension Funds

$531

3%

Insurance Companies

$343

2%

State & Local Government Pension Funds

$216

1%

U.S. Savings Bond Holders

$162

1%

Other Investors

$1,680

8%

Federal Government Funds

$5,571

28%

Social Security

$2,890

14%

Civil Service Retirement and Disability

$894

4%

Military Retirement

$661

3%

Medicare

$268

1%

Department of Defense Retiree Healthcare

$226

1%

Postal Service Retiree Healthcare

$49

0%

Other Funds

$583

3%

Federal Reserve

$2,465

12%

Total

$20,224

100%

[227]

* On September 30, 2017, the $20.2 trillion national debt was comprised of:

Amount (Trillions)

Type

Portion of Total

$14.7

Publicly Held Debt

72%

$5.6

Intragovernmental Debt

28%

[228]


Publicly Held Debt

* On September 30, 2017, the publicly held national debt was $14.7 trillion, and the owners of this debt were:

Owner

Amount (Billions)

Portion of Publicly Held

Foreign & International Entities

$6,302

43%

China

$1,182

8%

Japan

$1,096

7%

Ireland

$311

2%

Brazil

$273

2%

Cayman Islands

$247

2%

United Kingdom

$237

2%

Switzerland

$253

2%

Luxembourg

$214

1%

Hong Kong

$194

1%

Taiwan

$184

1%

Other Nations

$2,110

14%

Domestic Non-Federal Entities

$5,885

40%

Mutual Funds

$1,651

11%

State & Local Governments

$697

5%

Banks & Savings Institutions

$605

4%

Private Pension Funds

$531

4%

Insurance Companies

$343

2%

State & Local Government Pension Funds

$216

1%

U.S. Savings Bond Holders

$162

1%

Other Investors

$1,680

11%

Federal Reserve[229]

$2,465

17%

Total

$14,673

100%

[230]


Foreign-Owned Debt

* Per the White House Office of Management and Budget (2017):

During most of American history, the Federal debt was held almost entirely by individuals and institutions within the United States. In the late 1960s, foreign holdings were just over $10 billion, less than 5 percent of the total Federal debt held by the public. Foreign holdings began to grow significantly starting in the 1970s and now represent almost half of outstanding [publicly held] debt.[231]

* On September 30, 2017, foreign and international entities owned $6.3 trillion of the U.S. national debt, and the owners of this debt were:

Owner

Amount (Billions)

Portion of Foreign

China

$1,182

19%

Japan

$1,096

17%

Ireland

$311

5%

Brazil

$273

4%

Cayman Islands

$247

4%

United Kingdom

$237

4%

Switzerland

$253

4%

Luxembourg

$214

3%

Hong Kong

$194

3%

Taiwan

$184

3%

Other Nations

$2,110

33%

Total

$6,302

100%

[232]

* Foreign purchases of U.S. government debt increase the demand for this debt, thus putting downward pressure on U.S. interest rates. Conversely, foreign sales of U.S. government debt place upward pressure on U.S. interest rates.[233] [234]

* Per a 2008 Congressional Research Service report, a “potentially serious short-term problem would emerge if China decided to suddenly” sell its holding of U.S. government debt. Possible effects could include:

  • “a more general financial reaction (or panic), in which all foreigners responded by reducing their holdings of U.S. assets”;
  • “a sudden and large depreciation in the value of the dollar”;
  • “a sudden and large increase in U.S. interest rates”;
  • a stock market fall; and/or
  • “a recession.”[235]

* The same report states:

The likelihood that China would suddenly reduce its holdings of U.S. securities is questionable because it is unlikely that doing so would be in China’s economic interests. First, a large sell-off of China’s U.S. holdings could diminish the value of these securities in international markets….
Second, such a move would diminish U.S. demand for Chinese imports…. A sharp reduction of U.S. imports from China could have a significant impact on China’s economy….[236]

* During a visit to China in February 2009, Secretary of State Hillary Clinton said:

By continuing to support American Treasury instruments [i.e., buy U.S. government debt] the Chinese are recognizing our interconnection.
We have to incur more debt. It would not be in China’s interest if we were unable to get our economy moving again.
The U.S. needs the investment in Treasury bonds to shore up its economy to continue to buy Chinese products.[237]

* In August 2007 during a currency dispute between the U.S. and China, two leading officials of Chinese Communist Party bodies suggested that China use the threat of selling U.S. debt as a “bargaining chip.”[238]

* In February 2009 during a dispute over U.S. arms sales to Taiwan, a Chinese general made the following statements in the state-run magazine Outlook Weekly:

Our retaliation should not be restricted to merely military matters, and we should adopt a strategic package of counterpunches covering politics, military affairs, diplomacy and economics to treat both the symptoms and root cause of this disease.
For example, we could sanction them using economic means, such as dumping some U.S. government bonds.[239]

* One month later while appearing before China’s parliament, the head of China’s State Administration of Foreign Exchange said:

the U.S. Treasury market is important to us. … This is purely market-driven investment behavior. I would hope not to see this matter politicized.[240]

Intragovernmental Debt

* On September 30, 2017, the intragovernmental national debt was $5.6 trillion, and this debt was owned by the following federal trust funds and special funds:

Owner

Amount (Billions)

Portion of Intragovernmental

Social Security

$2,890

52%

Civil Service Retirement and Disability

$894

16%

Military Retirement

$661

12%

Medicare

$268

5%

Department of Defense Retiree Healthcare

$226

4%

Postal Service Retiree Healthcare

$49

1%

Other Funds

$583

10%

Total

$5,571

100%

[241]

Media

Budget Cuts

* In April 2011, journalists reported on a $38 billion federal budget cut agreement with the following headlines and phraseology:

  • “Congress Sends Budget Cut Bill to Obama … cutting a record $38 billion from domestic spending”
    – Associated Press[242]
  • “Budget Deal to Cut $38 Billion Averts Shutdown … Republicans were able to force significant spending concessions from Democrats….”
    New York Times[243]
  • “New Cuts Detailed in Agreement for $38 Billion in Reductions … [D]eep budget cuts in programs for the poor, law enforcement, the environment and civic projects”
    Los Angeles Times[244]

* None of these articles reported that this $38 billion in cuts was primarily from a portion of the budget called “discretionary non-emergency appropriations.”[245] Relative to the entire federal budget, this cut left a projected spending increase of $135 billion from 2010 to 2011. This equates to an inflation-adjusted increase of $49 billion or 0.1 percentage points of GDP:[246]

Federal Outlays

[247]

* None of the articles quoted above contained a budget-wide frame of reference for the cuts. A spending reduction of $38 billion equates to 1.0% of the estimated 2011 budget or 2.7% of the projected deficit:

Budget Cut

[248]


The “Do Nothing” Plan

* In April 2011, Ezra Klein of the Washington Post posted a chart of spending and revenue projections based upon CBO’s “current law” scenario and wrote that it:

shows what happens if we do … nothing. The answer, as you can see, is that the budget comes roughly into balance.[249]

* Klein’s chart and commentary omitted the interest and outcome of the national debt under this plan.[250] In the “do nothing” scenario, outlays were projected to exceed revenues every year through 2084, and the publicly held debt was projected to increase from 62% of GDP in 2010, to 74% in 2030, 90% in 2050, and 113% in 2084.[251]

* In the same commentary, Klein wrote that the “current law” scenario is “a pretty good plan” that contains:

a balanced mix of revenues, through returning tax rates to Clinton-era levels and implementing the taxes in the Affordable Care Act, and program cuts … in Medicare….[252]

* Under CBO’s current law scenario at that time:

  • Certain elements of the tax code were not indexed for inflation or wage growth. Consequently, taxpayers would be shifted into higher tax brackets over time.
  • By 2020, federal revenues would “reach higher levels relative to the size of the economy than ever recorded in the nation’s history.”
  • Federal revenues would then continue climbing through 2084, rising 69% higher than the average of the previous 40 years and 47% higher than ever recorded in the history of the United States.[253] [254]
  • Federal spending without interest on the national debt would rise by 2084 to 68% higher than the average of the past 40 years.[255]

Bush Tax Cuts

* In February 2010, Fareed Zakaria of CNN stated:

Now, please understand that the Bush tax cuts are the single largest part of the black hole that is the federal budget deficit.[256]

* In 2010, the Bush tax cuts lowered federal revenues by about $283 billion.[257] [258] This was equivalent to 8% of the federal budget or 22% of the deficit.[259]

* Per the Congressional Budget Office (CBO), “Most parameters of the tax code are not indexed for real income growth, and some are not indexed for inflation.” Thus, if tax cuts are not periodically implemented, average federal tax rates “increase in the long run.”[260]

* In 2000, the year before the first Bush tax cuts were passed,[261] the federal government collected revenues equal to 20.4% of the nation’s gross domestic product (GDP), the highest level in the history of the United States.[262] Over the previous 30 years, federal revenues averaged 18.3% of GDP.[263]

* After the Bush tax cuts were fully implemented, federal revenues were 17.8% of GDP in 2005, 18.5% in 2006, and 18.6% in 2007.[264] Average federal revenues for the 30 years preceding the Bush tax cuts were 18.4%.[265]

* The Great Recession began in December 2007,[266] and federal revenues declined to 17.7% of GDP in 2008.[267]

* In February 2009, Congress passed and President Obama signed a law that implemented various tax cuts.[268] Federal revenues declined to 15.7% of GDP in 2009 and 16.4% in 2010.[269]

* Between 2007 and 2010, federal spending rose from 21.0% of GDP to 26.5%.[270] Average federal spending for the 30 years preceding this period was 21.8%.[271]


Context

* Without mentioning the role of Congress in taxes, spending, or the national debt,[272] [273] PolitiFact reported in 2009 that the national debt increased by $5.73 trillion “under” George W. Bush, while “there were several years of budget surpluses” at “the end of the Clinton administration.”[274]

* Below are the fluctuations in national debt organized by the tenures of recent presidents and congressional majorities:

Political Power

Dates

Average Annual Change in National Debt

(Percentage Points of GDP)

Bill Clinton with Democratic House and Senate

1/20/93 – 1/4/95

0.8

Bill Clinton with Republican House and Senate

1/4/95 – 1/19/01

–1.5

George W. Bush with Republican House and Senate

1/19/01 – 6/6/01, 11/12/02 – 1/4/07

0.7

George W. Bush with Republican House and Democratic Senate

6/6/01 – 11/12/02

2.2

George W. Bush with Democratic House and Senate

1/4/07 – 1/20/09

6.3

Barack Obama with Democratic House and Senate

1/20/09 – 1/5/11

9.2

Barack Obama with Republican House and Democratic Senate

1/5/11 – 1/6/15

2.3

Barack Obama with Republican House and Senate

1/6/15 – 1/20/17

1.7

[275]

* Other factors impacting the national debt include but are not limited to: legislation passed by previous congresses and presidents,[276] economic cycles, terrorist attacks, natural disasters, demographics, and the actions of U.S. citizens and foreign governments.[277]

Footnotes

[1] Webpage: “The Debt to the Penny and Who Holds It.” Bureau of the Public Debt, United States Department of the Treasury. Accessed October 6, 2018 at <www.treasurydirect.gov>

“10/4/2018 … Total Public Debt Outstanding [=] $21,599,377,345,082”

[2] Dataset: “Monthly Population Estimates for the United States: April 1, 2010 to December 1, 2018.” U.S. Census Bureau, Population Division, December 2017. <www.census.gov>

“Resident Population … October 1, 2018 [=] 328,706,706”

CALCULATION: $21,599,377,345,082 debt / 328,706,706 people = $65,710 debt/person

[3] Dataset: “Average Number of People per Household, by Race and Hispanic Origin, Marital Status, Age, and Education of Householder: 2017.” U.S. Census Bureau, November 2017. <www.census.gov>

“Total households [=] 126,224,000”

CALCULATION: $21,599,377,345,082 debt / 126,224,000 households = $171,119 debt/household

[4] Dataset: “Table 1.1.5. Gross Domestic Product [Billions of Dollars].” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 27, 2018. <www.bea.gov>

“Seasonally adjusted at annual rates … Gross Domestic Product … 2018Q2 [=] 20,411.9”

CALCULATION: $21,599,377,345,082 debt / $20,411,900,000,000 GDP = 106%

[5] Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of Dollars].” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 27, 2018. <www.bea.gov>

“Seasonally adjusted at annual rates … Total receipts … 2018Q2 [=] 3,467.4”

CALCULATION: $21,599,377,345,082 debt / $3,467,400,000,000 receipts = 623%

[6] Calculated with data from:

a) Dataset: “Historical Debt Outstanding—Annual, 1790–1849.” United States Department of the Treasury, Bureau of the Public Debt. Updated May 5, 2013. <www.treasurydirect.gov>

b) Dataset: “Historical Debt Outstanding—Annual, 1850–1899.” United States Department of the Treasury, Bureau of the Public Debt. Updated May 5, 2013. <www.treasurydirect.gov>

c) Dataset: “Historical Debt Outstanding—Annual, 1900–1949.” United States Department of the Treasury, Bureau of the Public Debt. Updated May 5, 2013. <www.treasurydirect.gov>

d) Dataset: “Historical Debt Outstanding—Annual, 1950–1999.” United States Department of the Treasury, Bureau of the Public Debt. Updated May 5, 2013. <www.treasurydirect.gov>

e) Webpage: “The Debt to the Penny and Who Holds It.” Bureau of the Public Debt, United States Department of the Treasury. Accessed February 8, 2018 at <www.treasurydirect.gov>

f) Dataset: “Historical Data on the Federal Debt.” Congressional Budget Office, August 5, 2010. <www.cbo.gov>

g) Dataset: “Table 1.1.5. Gross Domestic Product [Billions of Dollars].” U.S. Bureau of Economic Analysis, Last revised February 28, 2018. <www.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[7] Report: “Enron: Selected Securities, Accounting, and Pension Laws Possibly Implicated in its Collapse.” By Michael V. Seitzinger, Marie B. Morris, and Mark Jickling. Congressional Research Service, Library of Congress, January 16, 2002. <www.justfacts.com>

Page 2:

Among the disclosures of publicly traded companies are accounting statements. Since financial information is of little use to investors unless all firms use comparable accounting methods, the securities laws give the Securities and Exchange Commission broad authority to establish standards for financial reporting. The SEC has delegated the task of writing accounting standards to private sector bodies, and since 1973 the Financial Accounting Standards Board has been charged with formulating accounting and financial reporting standards.

[8] Summary of Statement No. 106: “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” Financial Accounting Standards Board, December 1990. <www.fasb.org>

This Statement establishes accounting standards for employers’ accounting for postretirement benefits other than pensions…. It will significantly change the prevalent current practice of accounting for postretirement benefits on a pay-as-you-go (cash) basis by requiring accrual, during the years that the employee renders the necessary service, of the expected cost of providing those benefits to an employee and the employee’s beneficiaries and covered dependents. …

… The Board believes that measurement of the obligation and accrual of the cost based on best estimates are superior to implying, by a failure to accrue, that no obligation exists prior to the payment of benefits. The Board believes that failure to recognize an obligation prior to its payment impairs the usefulness and integrity of the employer’s financial statements. …

The provisions of this Statement are similar, in many respects, to those in FASB Statements No. 87, Employers’ Accounting for Pensions, and No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. …

This Statement relies on a basic premise of generally accepted accounting principles that accrual accounting provides more relevant and useful information than does cash basis accounting. …

[L]ike accounting for other deferred compensation agreements, accounting for postretirement benefits should reflect the explicit or implicit contract between the employer and its employees.

[9] Book: Finance for Managers. By Richard Luecke and Samuel L. Hayes. Harvard Business School Press, 2002. Page 39:

In contrast to cash-basis accounting, accrual accounting records transactions as they are made, whether or not the cash has actually changed hands. Most companies of any size use accrual accounting. This system provides a better matching between revenues and their associated cost, which helps companies understand the true causes and effect of business activities. Accordingly, revenues are recognized during the period in which the sales activities occur, whereas expenses are recognized in the same period as their associated revenues.

[10] See the three footnotes above for details regarding the manner in which publicly traded companies are required to calculate their debt and obligations using accrual-based accounting. The following note explains that the federal budget, in contrast, is calculated on a cash basis. More details are spelled out here.

[11] “2008 Financial Report of the United States Government.” U.S. Department of the Treasury, 2008. <www.fiscal.treasury.gov>

Page 21 (of PDF): “The President’s Budget (Budget), the Government’s primary financial planning and control tool, describes how the Government spent and plans to spend the money it collects.”

Page 30 (of PDF): “President’s Budget … Prepared primarily on a ‘cash basis’

[12] “Fiscal Year 2017 Financial Report of the United States Government.” U.S. Department of the Treasury, February 16, 2018. <www.fiscal.treasury.gov>

Page 55:

United States Government Balance Sheets as of September 30, 2017, and 2016

Liabilities

2017 (billions $)

Accounts payable

70.8

Federal employee and veteran benefits payable

7,700.1

Environmental and disposal liabilities

464.5

Benefits due and payable

218.8

Insurance and guarantee program liabilities

202.5

Loan guarantee liabilities

42.9

Other liabilities

473.2

Total of above (excludes publicly held federal debt)

9,173

[13] The following points provide important context for understanding the data and calculation in the next footnote:

  • The past participants wash out of the calculation below, because their benefits have already been paid.
  • The general fund of the U.S. Treasury is “used to carry out the general purposes of Government rather than being restricted by law to a specific program….” [“Internal Revenue Manual.” Internal Revenue Service. Accessed January 11, 2011 at <www.irs.gov>. Part 1, Chapter 34, Section 1 (<www.irs.gov>)]
  • Social Security’s “closed group unfunded obligation” represents “the financial burden or liability being passed on to future generations.” [Textbook: Fiscal Challenges: An Interdisciplinary Approach to Budget Policy. Edited by Elizabeth Garrett, Elizabeth A. Graddy, and Howell E. Jackson. Cambridge University Press, 2009. Chapter 6: “Counting the Ways: The Structure of Federal Spending.” By Howell E. Jackson. Page 207: “The measure featured here is the ‘closed-group liability’ for each program. This measure reflects the financial burden or liability being passed on to future generations.”]
  • Prior to 2012, the Social Security Trustees Report provided an explicit “closed group unfunded obligation” for the Social Security program. Since this figure is not provided in later reports, Just Facts has calculated it using the methodology provided in the 2011 Report. [“2011 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.” United States Social Security Administration, May 13, 2011. <www.ssa.gov>. Page 66: “The present value of future cost reduced by future non-interest income over the next 100 years for all current participants1 equals $21.4 trillion. Subtracting the current value of the trust fund gives a closed group unfunded obligation of $18.8 trillion, which represents the shortfall of lifetime contributions for all past and current participants relative to the cost of benefits for them. … 1 Individuals who attain age 15 or older in 2011.”]

[14] Calculated with data from the “2017 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.” United States Social Security Administration, July 13, 2017. <www.ssa.gov>

Page 7: “Table II.B1.—Summary of 2016 Trust Fund Financial Operations [In billions]. … OASDI … Asset reserves at the end of 2016 … $2,847.7”

Page 202:

Table VI.F2.—Present Values of OASDI [Social Security] Cost Less Non-interest Income and Unfunded Obligations for Program Participants, Based on Intermediate Assumptions [Present values as of January 1, 2017; dollar amounts in trillions] …

[P]resent value of future cost for current participants [=] 65.3 …

[P]resent value of future dedicated tax income for current participants [=] 31.7 …

[P]resent value of future general fund reimbursements over the infinite horizon a [=] c

a Distribution of general fund reimbursements among past, current, and future participants cannot be determined.

c Less than $50 billion

CALCULATION: $65.3 present value of future cost for current participants – $31.7 present value of future dedicated tax income for current participants – <$0.05 present value of future general fund reimbursements over the infinite horizon – $2.848 current value of the trust fund = $30.752 closed group unfunded obligation

[15] The following points provide important context for understanding the data and calculation in the next footnote:

  • Federal general revenues are “used to carry out the general purposes of Government rather than being restricted by law to a specific program….” [“Internal Revenue Manual.” Internal Revenue Service. Accessed January 11, 2011 at <www.irs.gov>. Part 1, Chapter 34, Section 1 (<www.irs.gov>)]
  • Medicare Part A (a.k.a. HI or Hospital Insurance) covers hospital inpatient services, skilled nursing facility care (not custodial care), and hospice care. This part of Medicare is funded by dedicated revenues (not general revenues), and the law does not allow for the transfer of general revenues to cover projected shortfalls. [“2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” Centers for Medicare and Medicaid Services, May 31, 2013. <www.cms.gov>. Page 202: “There is no provision under current law to cover the shortfall [of Medicare Part A]. In particular, transfers from the general fund of the Treasury could not be made for the purpose of avoiding asset exhaustion without new legislation.”]
  • Medicare Parts B and D (a.k.a. SMI or Supplementary Medical Insurance) cover physician, hospital outpatient, prescription drug, and other healthcare services. The law specifies that these parts of Medicare are automatically funded with general revenues to cover any shortfalls between dedicated revenues and expenses. [“2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” Centers for Medicare and Medicaid Services, May 31, 2013. <www.cms.gov>. Page 44: “[B]oth the Part B and Part D accounts of the SMI trust fund will remain in financial balance for all future years because beneficiary premiums and general revenue transfers will be set at a level to meet expected costs each year.”]
  • “Medicare also has a Part C, which serves as an alternative to traditional Part A and Part B coverage. Under this option, beneficiaries can choose to enroll in and receive care from private ‘Medicare Advantage’ and certain other health insurance plans. Medicare Advantage and Program of All-Inclusive Care for the Elderly (PACE) plans receive prospective, capitated payments for such beneficiaries from the HI [Part A] and SMI Part B trust fund accounts; the other plans are paid on the basis of their costs.” [“2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” Centers for Medicare and Medicaid Services, May 31, 2013. <www.cms.gov>. Page 1.]
  • Medicare’s “closed-group population … includes all persons currently participating in the program as either taxpayers or beneficiaries, or both.” [“2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” Centers for Medicare and Medicaid Services, May 31, 2013. <www.cms.gov>. Page 251.]
  • Medicare’s “closed-group unfunded obligation” represents “the financial burden or liability being passed on to future generations.” [Textbook: Fiscal Challenges: An Interdisciplinary Approach to Budget Policy. Edited by Elizabeth Garrett, Elizabeth A. Graddy, and Howell E. Jackson. Cambridge University Press, 2009. Chapter 6: “Counting the Ways: The Structure of Federal Spending.” By Howell E. Jackson. Page 207: “The measure featured here is the ‘closed-group liability’ for each program. This measure reflects the financial burden or liability being passed on to future generations.”]
  • Previous Medicare participants wash out of the calculations below, because their taxes and benefits have already been paid.

[16] Calculated with data from the “2017 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” United States Department of Health and Human Services, Centers for Medicare and Medicaid Services, July 13, 2017. <www.cms.gov>

Page 214:

The first line of table V.G2 [which displays unfunded Part A obligations] shows the present value of future expenditures less future taxes for current participants, including both beneficiaries and covered workers [i.e., taxpayers]. Subtracting the current value of the HI [Hospital Insurance or Part A] trust fund (the accumulated value of past HI taxes less outlays) results in a “closed group” unfunded obligation of $10.4 trillion.

Page 217: “Table V.G4.—Unfunded Part B Obligations for Current and Future Program Participants through the Infinite Horizon [Present values as of January 1, 2017; dollar amounts in trillions] … Equals unfunded obligations for past and current participants … General revenue contributions [=] 18.6”

Page 219: “Table V.G6.—Unfunded Part D Obligations for Current and Future Program Participants through the Infinite Horizon [Present values as of January 1, 2017; dollar amounts in trillions] … Equals unfunded obligations for past and current participants … General revenue contributions [=] 5.6.”

CALCULATION: $10.4 trillion in closed-group unfunded obligations for Medicare Part A + $18.6 in closed-group unfunded obligations for Part B + $5.6 in closed-group unfunded obligations for Part D = $34.6 trillion total closed-group unfunded obligation

[17] See here, here, and here for details regarding the manner in which publicly traded companies are required to calculate their debt and obligations using accrual-based accounting. The following two footnotes show that the federal budget, in contrast, is calculated on a cash basis. These next two footnotes also show that accrual-based accounting is used in the “Financial Report of the United States Government,” which was originally the source for all of the shortfall figures cited above. However, in 2009, the Financial Management Service of the U.S. Treasury, which produces the Financial Report of the U.S. Government, stopped providing individual values for the “closed group” shortfalls of the Social Security and Medicare programs. Since that time, the report has only shown a “closed group” total for all social insurance programs combined. For the 2009 and 2010 reports, Just Facts requested and received the components of this total from the U.S. Treasury. For the 2011 report, the U.S. Treasury refused to provide these figures despite repeated requests from Just Facts. Thus, Just Facts now calculates these figures using data from the Social Security and Medicare Trustees Reports.

[18] “2008 Financial Report of the United States Government.” U.S. Department of the Treasury, 2008. <www.fiscal.treasury.gov>

Page 21 (of PDF):

Each year, the Administration issues two reports which detail the financial results for the Government. The President’s Budget (Budget), the Government’s primary financial planning and control tool, describes how the Government spent and plans to spend the money it collects. By comparison, the accrual-based Financial Report of the United States Government (Report) includes the cost of operations, the sources used to finance those costs, how much the Government owns and owes, and the outlook for its social insurance programs.

Page 30 (of PDF):

President’s Budget

Financial Report of the U.S. Government

Prepared primarily on a ‘cash basis’

Prepared on an ‘accrual basis’

[19] Report: “Understanding the Primary Components of the Annual Financial Report of the United States Government.” U.S. Government Accountability Office, September, 2005. <www.gao.gov>

Page 5:

Accrual accounting, which is also used by private business enterprises, is the basis for U.S. generally accepted accounting principles for federal government entities. It is intended to provide a complete picture of the federal government’s financial operations and financial position. The federal government primarily uses the cash basis of accounting for its budget, which is the federal government’s primary financial planning and control tool.

Page 6:

The accrual basis of accounting recognizes revenue when it is earned and recognizes expenses in the period incurred, without regard to when cash is received or disbursed. The federal government, which receives most of its revenue from taxes, nevertheless recognizes tax revenue when it is collected, under an accepted modified cash basis of accounting.

[20] “2008 Financial Report of the United States Government.” U.S. Department of the Treasury, 2008. <www.fiscal.treasury.gov>

Page 51 (of PDF):

The [social insurance] estimates are actuarial present values2 of the projections and are based on the economic and demographic assumptions representing the trustees’ best estimates as set forth in the relevant Social Security and Medicare trustees’ reports and in the relevant agency performance and accountability reports for the RRB and the Department of Labor (Black Lung). …

2 Present values recognize that a dollar paid or collected in the future is worth less than a dollar today, because a dollar today could be invested and earn interest. To calculate a present value, future amounts are thus reduced using an assumed interest rate, and those reduced amounts are summed.

Page 60 (of PDF):

Participants for the Social Security and Medicare programs are assumed to be the “closed group” of individuals who are at least age 15 at the start of the projection period, and are participating as either taxpayers, beneficiaries, or both, except for the 2007 Medicare programs for which current participants are assumed to be at least 18 instead of 15 years of age.

Page 105 (of PDF):

The present values of future expenditures in excess of future revenue are the current amounts of funds needed to cover projected shortfalls, excluding the starting trust fund balances, over the projection period. They are calculated by subtracting the actuarial present values of future scheduled contributions and dedicated tax income by and on behalf of current and future participants from the actuarial present value of the future scheduled benefit payments to them or on their behalf.

[21] Report: “Social Security and Medicare Trust Funds and the Federal Budget.” Office of Economic Policy, U.S. Department of Treasury, May 2009. <www.treasury.gov>

Page 16: “The resulting present value is the amount that would have to be put in the bank today at the assumed interest rate to fund the future cash flows.”

[22] “2008 Financial Report of the United States Government.” U.S. Department of the Treasury, 2008. <www.fiscal.treasury.gov>

NOTE: In addition to the “closed group” projections, the annual Financial Report of the United States Government also contains projections for the “open-group” and “infinite horizon.” Details are below.

Page 10: “ ‘Closed’ Group and ‘Open’ Group differ by the population included in each calculation. From the [Statement of Social Insurance], the ‘Closed’ Group includes: (1) participants who have attained eligibility and (2) participants who have not attained eligibility. The ‘Open’ Group adds future participants to ‘Closed’ Group.”

Page 122:

Current participants in the Social Security and Medicare programs form the “closed group” of taxpayers and/or beneficiaries who are at least age 15 at the start of the projection period. For the 2007 Medicare projections, current participants are at least 18 years of age at the beginning of the projection period. Since the projection period for the Social Security, Medicare, and Railroad Retirement social insurance programs consists of 75 years, the period covers virtually all of the current participants’ working and retirement years, a period that could be more than 75 years in a relatively small number of instances.

Page 137:

[W]hen calculating unfunded obligations, a 75-year horizon includes revenue from some future workers but only a fraction of their future benefits. In order to provide a more complete estimate of the long-run unfunded obligations of the programs, estimates can be extended to the infinite horizon. The open-group infinite horizon net obligation is the present value of all expected future program outlays less the present value of all expected future program tax and premium revenues. …

In comparison to the analogous 75-year number in Table 5, extending the calculations beyond 2082, captures the full lifetime benefits and taxes and premiums of all current and future participants. The shorter horizon understates financial needs by capturing relatively more of the revenues from current and future workers and not capturing all of the benefits that are scheduled to be paid to them.

[23]

Federal Debt, Liabilities, Obligations, and Assets at Close of the 2017 Fiscal Year

Category

(Billions $)

Publicly Held Debta b

14,724

Liabilitiesc

9,173

Social Security Future Expenditures in Excess of Future Dedicated Revenuesd b

33,600

Medicare Future Expenditures in Excess of Future Dedicated Revenuese b

34,895

Assetsf

–3,480.7

Total

88,911

NOTES:

  • (a) “Fiscal Year 2017 Financial Report of the United States Government.” U.S. Department of the Treasury, February 16, 2018. <www.fiscal.treasury.gov>

Page 55: “United States Government Balance Sheets as of September 30, 2017, and 2016. … (In billions of dollars) … Federal debt securities held by the public and accrued interest … 2017 [=] 14,724.1”

  • (b) “Publicly held debt” differs from the “national debt” in that it excludes “intergovernmental debt,” which is money that the federal government owes to various trust funds such as Social Security’s. Just Facts uses the publicly held debt in this calculation because this is the convention of the Financial Report of the United States Government, which is the source for the federal assets and liabilities cited in the table above. Facts regarding why and how the federal government keeps its books in this manner are covered in the section of this research entitled “Government Accounting.” Hence, to account for the portion of the national debt that consists of monies owed to the Social Security and Medicare Trust Funds, the shortfalls for these programs in the table above do not include the trust fund balances.
  • (c) See here.
  • (d) Calculated by adding Social Security’s unfunded closed-group obligation of $30,752 billion to Social Security’s trust fund assets of $2,848 billion (see here). The sum of these figures equals $33,600 billion.
  • (e) Calculated by adding Medicare’s unfunded closed-group obligation of $34,600 billion to Medicare’s trust fund assets of $295 billion (see here). The sum of these figures equals $34,895 billion.
  • f) “Fiscal Year 2017 Financial Report of the United States Government.” U.S. Department of the Treasury, February 16, 2018. <www.fiscal.treasury.gov>

Page 55: “United States Government Balance Sheets as of September 30, 2017, and 2016.

Assets

2016 (Billions $)

Cash and other monetary assets

271.2

Accounts and taxes receivable, net

143.3

Loans Receivable and Mortgage-Backed Securities, Net

1,348.5

Inventories and related property, net

326.7

Property, plant, and equipment, net

1,034.5

Debt and equity securities

116.2

Investments in Government-Sponsored Enterprises

92.6

Other assets

147.7

Total

3,480.7

[24] Calculated with data from the footnote above and the report: “Financial Accounts of the United States: Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts, Third Quarter 2017.” Board of Governors of the Federal Reserve System, December 7, 2017. <www.federalreserve.gov>

Page 138: “B.101 Balance Sheet of Households and Nonprofit Organizations … Billions of dollars; amounts outstanding end of period, not seasonally adjusted … [Line] 40 Net worth … 2017 Q3 [=] 96,939.2”

NOTE: Household assets detailed in this table include items such as real estate, corporate equities, mutual funds, equity in noncorporate businesses, life insurance, pension fund reserves, and consumer durable goods. Liabilities detailed in this table include items such as home mortgages and consumer credit. Nonprofit organizations are explicitly named in the title of this table because their assets are not considered household property, whereas assets of for-profit entities are considered household property.

CALCULATION: $88,911 in federal debts, liabilities, and Social Security/Medicare obligations / $96,939.2 net worth of households and nonprofit organizations = 92%

[25] Webpage: “Updated PPI Commodity Weight Allocations to Stage-of-Processing Indexes.” Bureau of Labor Statistics. Last modified February 18, 2009. <www.bls.gov>

“SOP 3130 - Consumer Durable Goods: contains nonfood products, ready for final consumption, with a life expectancy of more than three years. Examples of durable goods include furniture, passenger cars, and appliances.”

[26] Dataset: “Monthly Population Estimates for the United States: April 1, 2010 to December 1, 2018.” U.S. Census Bureau, Population Division, December 2017. <www.census.gov>

“Resident Population … October 1, 2017 [=] 326,392,644”

CALCULATION: $88,911,000,000,000 / 326,392,644 people = $272,405/person

[27] Dataset: “Average Number of People per Household, by Race and Hispanic Origin, Marital Status, Age, and Education of Householder: 2017.” U.S. Census Bureau, November 2017. <www.census.gov>

“Total households [=] 126,224,000”

CALCULATION: $88,911,000,000,000 / 126,224,000 households = $704,391/household

[28] Dataset: “Table 1.1.5. Gross Domestic Product [Billions of Dollars].” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised March 28, 2018. <www.bea.gov>

“Seasonally adjusted at annual rates … Gross Domestic Product … 2017Q3 [=] 19,500.6”

CALCULATION: $88,911,000,000,000 / $19,500,600,000,000 GDP = 456%

[29] Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures [Billions of Dollars].” U.S. Department of Commerce, Bureau of Economic Analysis. Revised March 28, 2018. <www.bea.gov>

“Seasonally adjusted at annual rates … Total receipts … 2017Q3 [=] 3,578.0”

CALCULATION: $88,911,000,000,000 / $3,578,000,000,000 receipts = 2,485%

[30] “2008 Financial Report of the United States Government.” U.S. Department of the Treasury, 2008. <www.fiscal.treasury.gov>

Page 28 (of PDF): “The SOSI [Statement of Social Insurance] provides additional perspective on the Government’s long term estimated exposures and costs. However, it should be noted that the Government’s financial statements do not reflect future costs implied by any current policy, such as national defense, the global war on terrorism, and disaster relief and recovery.”

[31] “2010 Financial Report of the United States Government.” U.S. Department of the Treasury, December 21, 2010. <www.fiscal.treasury.gov>

Page v: “Further, the long-term nature of these costs and their sensitivity to a wide range of complex assumptions can, in some cases, cause significant fluctuation in agency and Governmentwide costs from year to year. … At VA and other agencies that administer postemployment benefit programs, these fluctuations are attributable to an array of assumptions and variables including interest rates, inflation, beneficiary eligibility, life expectancy, and cost of living.”

Page 131: “Assumptions are made about many economic and demographic factors, including gross domestic product (GDP), earnings, the CPI, the unemployment rate, the fertility rate, immigration, mortality, disability incidence and terminations and, for the Medicare projections, health care cost growth.”

[32] “2014 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.” United States Social Security Administration, July 28, 2014. <www.ssa.gov>

Page 8: “The intermediate assumptions reflect the Trustees’ best estimates of future experience. Therefore, most of the figures in this overview present only the outcomes under the immediate assumptions. Any projection of the future is, of course, uncertain. For this reason, the Trustees also present results under low-cost and high-cost alternatives to provide a range of possible future experience.”

Page 18: “Uncertainty of the Projections … Significant uncertainty surrounds the intermediate assumptions.”

NOTE: For a detailed explanation of Social Security’s finances, visit Just Facts’ research on this issue at <www.justfacts.com>

[33] “2014 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” Centers for Medicare and Medicaid Services, July 28, 2014. <www.cms.gov>

Pages 276–277:

Statement of Actuarial Opinion

In past reports, the Board of Trustees has emphasized the virtual certainty that actual Part B expenditures will exceed the projections under current law due to further legislative action to avoid substantial reductions in the Medicare physician fee schedule. Current law would require a physician fee reduction of almost 21 percent on April 1, 2015—an implausible expectation.

Since lawmakers have overridden these scheduled reductions each year since 2003, the Trustees have changed the basis of their projections of Part B expenditures from current law to a projected baseline, which includes an assumption that the physician payment updates will equal the increase averaged over the last 10 years. This change results in a far more reasonable expectation of Medicare expenditures than occurs under current law. The projected baseline estimates are summarized throughout the main body of this report, while current-law estimates are included in appendix C.

The Affordable Care Act is making important changes to the Medicare program that are designed, in part, to substantially improve its financial outlook. While the ACA has been successful in reducing many Medicare expenditures to date, there is a strong possibility that certain of these changes will not be viable in the long range. Specifically, the annual price updates for most categories of non-physician health services will be adjusted downward each year by the growth in economy-wide productivity. The ability of health care providers to sustain these price reductions will be challenging, as the best available evidence indicates that most providers cannot improve their productivity to this degree for a prolonged period given the labor-intensive nature of these services.

Absent an unprecedented change in health care delivery systems and payment mechanisms, the prices paid by Medicare for health services will fall increasingly short of the costs of providing these services. By the end of the long-range projection period, Medicare prices for many services would be less than half of their level without consideration of the productivity price reductions. Before such an outcome would occur, lawmakers would likely intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result. Overriding the productivity adjustments, as lawmakers have done repeatedly in the case of physician payment rates, would lead to substantially higher costs for Medicare in the long range than those projected in this report.

NOTES:

  • Credit for bringing this fact to the attention of Just Facts belongs to Alex Adrianson of the Heritage Foundation. [Commentary: “What If Things that Have No Chance of Happening Happen? Asks Medicare’s Actuaries.” By Alex Adrianson. InsiderOnline, August 12, 2010. <www.insideronline.org>]
  • Cuts in Medicaid prices under the Affordable Care Act affect “hospital, skilled nursing facility, home health, hospice, ambulatory surgical center, diagnostic laboratory, and many other services.” [“2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” Centers for Medicare and Medicaid Services, May 31, 2013. <www.cms.gov>. Page 273.]
  • For a detailed explanation of Medicare’s finances, visit Just Facts’ research on this issue at <www.justfacts.com>

[34] For an explanation of the differences between “total” and “current” expenditures, see <www.bea.gov>

[35] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised March 28, 2018. <www.bea.gov>

Line items 1 and 23: “Current receipts” and “Current expenditures”

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised March 28, 2018. <www.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[36] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised March 28, 2018. <www.bea.gov>

Line items 39 and 42: “Total receipts” and “Total expenditures.”

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised March 28, 2018. <www.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[37] Although the below-cited table of “Government Current Expenditures by Function” includes a line item for “Highways,” the BEA’s definition of “Government Current Expenditures” does not include “Gross Investment,” which is defined as “what government spends on structures, equipment, and software, such as new highways, schools, and computers.” Such spending is included in “Total Government Expenditures,”* for which the BEA does not provide a breakdown by function.

* Webpage: “FAQ: BEA Seems to Have Several Different Measures of Government Spending. What Are They for and What Do They Measure?” U.S. Department of Commerce, Bureau of Economic Analysis. Last updated November 4, 2016. <www.bea.gov>

[38] Calculated with data from:

a) Dataset: “Table 3.16. Government Current Expenditures by Function.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised October 03, 2017. <www.bea.gov>

b) Report: “Fiscal Year 2018 Historical Tables: Budget Of The U.S. Government.” White House Office of Management and Budget, May 16, 2017. <www.whitehouse.gov>

Pages 51–60 (of PDF): “Table 3.1—Outlays by Superfunction and Function: 1940–2022.”

NOTES:

  • Per correspondence from the Bureau of Economic Analysis (March 8, 2011), spending for veterans’ benefits is “included within those functions that best reflect the nature of the specific benefits programs managed by the agency.” Per the White House Office of Management and Budget (“Table 3.2: Outlays by Function and Subfunction, 1962–2016.” Accessed March 8, 2011 at <www.whitehouse.gov>), “Veterans benefits and services” consist of “Income security for veterans,” “Veterans education, training, and rehabilitation,” “Hospital and medical care for veterans,” “Veterans housing,” and “Other veterans benefits and services.” These all fall into categories that Just Facts categorizes as “Social programs.” Thus, Just Facts subtracted the total “Veterans benefits and services” from the “Social programs” category and added this to the “National defense” category. Per the same correspondence from the Bureau of Economic Analysis, “The administrative expenses of the [Veterans’ Affairs] agency … might be included within the General Public Service function.” Because of the uncertainty implicit in this statement and the lack of such data from all sources known to Just Facts, we are unable to segregate this spending.
  • Given the recent steep rise in the national debt, Just Facts has been asked why the portion of federal spending dedicated to “General government and debt service” has generally fallen since the mid-1990s. Major causes for this include (1) the recent steep rise in overall government spending (2) the recent low interest rates (3) the interest payments shown here do not include the interest due on government-held (a.k.a., “nonmarketable”) debt, which as of October 31, 2016, has a 39% higher interest rate than publicly held debt. [Dataset: “Average Interest Rates on U.S. Treasury Securities, October 2016.” U.S. Department of the Treasury. Accessed November 22, 2016 at <www.treasurydirect.gov>]. Facts regarding how and why the federal government keeps its books in this manner are covered in the section of this research entitled “Government Accounting.”
  • An Excel file containing the data and calculations is available upon request.

[39] Calculated with the dataset: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>

“Table 3. Average Household Income 1979–2014”

NOTES:

  • An Excel file containing the data and calculations is available upon request.
  • The next two footnotes contain important context for these calculations.

[40] Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>

Page 1: “Federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.”

Page 14:

Federal taxes allocated to households in this analysis account for approximately 94 percent of all federal revenues, on average. The remaining federal revenue sources not allocated to U.S. households include states’ deposits for unemployment insurance, estate and gift taxes, net income earned by the Federal Reserve, customs duties, and miscellaneous fees and fines.

Because of the complexity of estimating state and local taxes for individual households, this report considers federal taxes only. Researchers differ about whether state and local taxes are, on net, regressive, proportional, or slightly progressive, but most agree that state and local taxes are less progressive than federal taxes.

Page 12:

Means-tested transfers are cash payments and in-kind transfers from federal, state, and local governments. The largest means-tested transfers consist of transfers provided through Medicaid and the Children’s Health Insurance Program (measured as the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); and Supplemental Security Income.

Income before transfers and taxes is market income plus social insurance benefits.

Market income consists of labor income; business income; capital income (including capital gains); income received in retirement for past services; and other nongovernmental income sources. Social insurance benefits consist of benefits provided through Social Security (Old Age, Survivors, and Disability Insurance); Medicare (measured as the average cost to the government of providing those benefits); unemployment insurance; and workers’ compensation.

[41] Economists typically use a “comprehensive measure of income” to calculate effective tax rates, because this provides a complete “measure of ability to pay” taxes.† In keeping with this, Just Facts determines effective tax rates by dividing all measurable taxes by all income. The Congressional Budget Office [CBO] previously did the same,‡ but in 2018, CBO announced that it would exclude means-tested transfers from its measures of income and effective tax rates.§

Given this change, Just Facts now uses CBO data to determine comprehensive income and effective tax rates by adding back the means-tested transfers that CBO publishes but takes out of these measures. To do this, Just Facts makes a simplifying assumption that households in various income quintiles do not significantly change when these transfers are added. This is mostly true, but as CBO notes:

Almost one-fifth of the households in the lowest quintile of income before transfers and taxes would have been in higher quintiles if means-tested transfers were included in the ranking measure (see Table 5). Because net movement into a higher income quintile entails a corresponding net movement out of those quintiles, more than one-fifth of the households in the second quintile of income before transfers and taxes would have been bumped down into the bottom before-tax income quintile. Because before-tax income excludes income in the form of means-tested transfers, almost one-fifth of the people in the lowest quintile of income before transfers and taxes were in higher before-tax income quintiles. There is no fundamental economic change represented by those changes in income groups—just a change in the income definition used to rank households. Because means-tested transfers predominantly go to households in the lower income quintiles, there is not much shuffling across income quintile thresholds toward the top of the distribution.§

NOTES:

  • † Report: “Fairness and Tax Policy.” U.S. Congress, Joint Committee on Taxation. February 27, 2015. <www.jct.gov>. Page 2: “The notion of ability to pay (i.e., the taxpayer’s capacity to bear taxes) is commonly applied to determine fairness, though there is no general agreement regarding the appropriate standard by which to assess a taxpayer’s ability to pay. … Many analysts have advocated a comprehensive measure of income as a measure of ability to pay.”
  • ‡ Report: “The Distribution of Household Income and Federal Taxes, 2013.” Congressional Budget Office, June 2016. <www.cbo.gov>. Page 31: “Before-tax income is market income plus government transfers. … Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs.”
  • § Report: “The Distribution of Household Income, 2014.” Congressional Budget Office, March 19, 2018. <www.cbo.gov>. Page 4: “The new measure of income used in this report—income before transfers and taxes—is equal to market income plus social insurance benefits. That new measure is similar to the previous measure, except that means-tested transfers are no longer included….”
  • § Working paper: “CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Household Income.” By Kevin Perese. Congressional Budget Office, December 2017. <www.cbo.gov>. Page 18.

[42] Brief: “Federal Debt and the Risk of a Fiscal Crisis.” Congressional Budget Office, July 27, 2010. <www.cbo.gov>

Page 1: “Some of those consequences would arise gradually: A growing portion of people’s savings would go to purchase government debt rather than toward investments in productive capital goods such as factories and computers; that ‘crowding out’ of investment would lead to lower output and incomes than would otherwise occur.”

[43] Paper: “Tempting Fate: The Federal Budget Outlook.” By Alan J. Auerbach and William G. Gale. Brookings Institution, June 30, 2011. <www.brookings.edu>

Page 16: “[S]ustained large deficits will reduce future national income and living standards.”

[44] Report: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010 (Revised August 2010). <www.cbo.gov>

Page xi: “Large budget deficits would reduce national saving, leading to higher interest rates, more borrowing from abroad, and less domestic investment—which in turn would lower income growth in the United States.”

[45] Report: “Estimated Macroeconomic Impacts of the American Recovery and Reinvestment Act of 2009.” Congressional Budget Office, March 2, 2009. <www.cbo.gov>

Page 2:

In contrast to its positive near-term macroeconomic effects, the legislation will reduce output slightly in the long run, CBO estimates. The principal channel for that effect, which would also arise from other proposals to provide short-term economic stimulus by increasing government spending or reducing revenues, is that the law will result in an increase in government debt. To the extent that people hold their wealth as government bonds rather than in a form that can be used to finance private investment, the increased debt will tend to reduce the stock of productive private capital. In economic parlance, the debt will “crowd out” private investment.

[46] Report: “The Budget and Economic Outlook: Fiscal Years 2013 to 2023.” U.S. Congressional Budget Office, February 2013. <www.cbo.gov>

Page 8: “Because federal borrowing generally reduces national saving, the stock of capital assets, such as equipment and structures, will be smaller and aggregate wages will be less than if the debt were lower.”

[47] Brief: “Federal Debt and the Risk of a Fiscal Crisis.” Congressional Budget Office, July 27, 2010. <www.cbo.gov>

Page 1: “Rising interest costs might also force reductions in spending on important government programs.”

[48] Brief: “Federal Debt and the Risk of a Fiscal Crisis.” Congressional Budget Office, July 27, 2010. <www.cbo.gov>

Page 1: “[I]f the payment of interest on the extra debt was financed by imposing higher marginal tax rates, those rates would discourage work and saving and further reduce output.”

[49] Book: This Time is Different: Eight Centuries of Financial Folly. By Carmen M. Reinhart (University of Maryland) and Kenneth S. Rogoff (Harvard University). Princeton University Press, 2009.

Page xxvii: “Our aim here is to be expansive, systematic, and quantitative: our empirical analysis covers sixty-six countries over nearly eight centuries.”

Page 175: “[I]nflation has long been the weapon of choice in sovereign defaults on domestic debt and, where possible, on international debt.”

Page 77: “Inflation conditions often continue to worsen after an external default.12

Page 398: “12 Domestic defaults produce even worse inflation outcomes; see chapter 9.”

Page 175: “[G]overnments engage in massive monetary expansion, in part because they can thereby gain a seigniorage tax on real money balances (by inflating down the value of citizen’s currency and issuing more to meet demand). But they also want to reduce, or even wipe out, the real value of public debts outstanding.”

Page 400: “Seigniorage is simply the real income a government can realize by exercising its monopoly on printing currency. The revenue can be broken down into the quantity of currency needed to meet the growing transactions demand at constant prices and the remaining growth, which causes inflation, thereby lowering the purchasing power of existing currency.”

[50] Brief: “Federal Debt and the Risk of a Fiscal Crisis.” Congressional Budget Office, July 27, 2010. <www.cbo.gov>

Page 7:

[A]s governments create money to finance their activities or pay creditors during fiscal crises, they raise inflation. Higher inflation has negative consequences for the economy, especially if inflation moves above the moderate rates seen in most developed countries in recent years.[footnote omitted] Higher inflation might appear to benefit the U.S. government financially because the value of the outstanding debt (which is mostly fixed in dollar terms) would be lowered relative to the size of the economy (which would increase when measured in dollar terms). [footnote omitted] However, higher inflation would also increase the size of future budget deficits.

[51] Brief: “Federal Debt and the Risk of a Fiscal Crisis.” Congressional Budget Office, July 27, 2010. <www.cbo.gov>

Page 1: “Moreover, rising debt would increasingly restrict the ability of policymakers to use fiscal policy to respond to unexpected challenges, such as economic downturns or international crises.”

[52] Brief: “Federal Debt and the Risk of a Fiscal Crisis.” Congressional Budget Office, July 27, 2010. <www.cbo.gov>

Page 7: “A sudden increase in interest rates would also reduce the market value of outstanding government bonds, inflicting losses on investors who hold them. That decline could precipitate a broader financial crisis by causing losses for mutual funds, pension funds, insurance companies, banks, and other holders of federal debt—losses that might be large enough to cause some financial institutions to fail.”

[53] Report: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010 (Revised August 2010). <www.cbo.gov>

Page xi: “Over time, higher debt would increase the probability of a fiscal crisis in which investors would lose confidence in the government’s ability to manage its budget, and the government would be forced to pay much more to borrow money.”

Page 14: “The federal government could not issue ever-larger amounts of debt relative to the size of the economy indefinitely. If debt continued to rise rapidly relative to GDP, investors at some point would begin to doubt the government’s willingness to pay interest on that debt.”

[54] Brief: “Federal Debt and the Risk of a Fiscal Crisis.” Congressional Budget Office, July 27, 2010. <www.cbo.gov>

Pages 4–5:

A rising level of government debt would have another significant negative consequence. Combined with an unfavorable long-term budget outlook, it would increase the probability of a fiscal crisis for the United States. In such a crisis, investors become unwilling to finance all of a government’s borrowing needs unless they are compensated with very high interest rates; as a result, the interest rates on government debt rise suddenly and sharply relative to rates of return on other assets. Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States; in particular, there is no identifiable tipping point of debt relative to GDP indicating that a crisis is likely or imminent. But all else being equal, the higher the debt, the greater the risk of such a crisis. …

The history of fiscal crises in other countries does not necessarily indicate the conditions under which investors might lose confidence in the U.S. government’s ability to manage its budget or the consequences for the nation of such a loss of confidence. On the one hand, the United States may be able to issue more debt (relative to output) than the governments of other countries can, without triggering a crisis, because the United States has often been viewed as a “safe haven” by investors around the world, and the U.S. government’s securities have often been viewed as being among the safest investments in the world. On the other hand, the United States may not be able to issue as much debt as the governments of other countries can because the private saving rate has been lower in the United States than in most developed countries, and a significant share of U.S. debt has been sold to foreign investors.

[55] Paper: “Public Debt Overhangs: Advanced-Economy Episodes Since 1800.” By Carmen M. Reinhart (University of Maryland), Kenneth S. Rogoff (Harvard University), and Vincent R. Reinhart (chief U.S. economist at Morgan Stanley). Journal of Economic Perspectives, Summer 2012. Pages 69–86. <online.wsj.com>

Page 70:

In this paper, we use the long-dated cross-country data on public debt developed by Reinhart and Rogoff (2009) to examine the growth and interest rates associated with prolonged periods of exceptionally high public debt, defined as episodes where public debt to GDP exceeded 90 percent for at least five years. (The basic results here are reasonably robust to choices other than 90 percent as the critical threshold, as in Reinhart and Rogoff 2010a, b).1 Over the years 1800–2011, we find 26 such episodes across the advanced economies. While data limitations may have prevented us from including every episode of high public debt in advanced economies since 1800, we are confident that this list encompasses the preponderance of such episodes. To focus on the association between high debt and long-term growth, we only cursorily treat shorter episodes lasting under five years, of which there turn out to be only a few. The long length of typical public debt overhang episodes suggests that even if such episodes are originally caused by a traumatic event such as a war or financial crisis, they can take on a self-propelling character.

Consistent with a small but growing body of research, we find that the vast majority of high debt episodes—23 of the 26—coincide with substantially slower growth. On average across individual countries, debt/GDP levels above 90 percent are associated with an average annual growth rate 1.2 percent lower than in periods with debt below 90 percent debt; the average annual levels are 2.3 percent during the periods of exceptionally high debt versus 3.5 percent otherwise.

CALCULATION: (3.5 – 2.3) / 3.5 = 34.3%

[56] Calculated with data from:

a) Webpage: “The Debt to the Penny and Who Holds It.” Bureau of the Public Debt, United States Department of the Treasury. Accessed March 31, 2011 at <www.treasurydirect.gov>

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised March 25, 2011. <www.bea.gov>

CALCULATIONS:

Quarter

Debt (billions $)

GDP (billions $)

Debt/GDP

2009-Q4

12,311.3

14,277.3

86%

2010-Q1

12,773.1

14,446.4

88%

2010-Q2

13,203.5

14,578.7

91%

2010-Q3

13,561.6

14,745.1

92%

2010-Q4

14,025.2

14,871.4

94%

NOTE: An Excel file containing the data and calculations is available upon request.

[57] Textbook: Microeconomics for Today (6th edition). By Irvin B. Tucker. South-Western Cengage Learning, 2010.

Page 450: “GDP per capita provides a general index of a country’s standard of living. Countries with low GDP per capita and slow growth in GDP per capita are less able to satisfy basic needs for food, shelter, clothing, education, and health.”

[58] Working paper: “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff.” By Thomas Herndon, Michael Ash, and Robert Pollin. Political Economy Research Institute, April 15, 2013. Revised 4/22/13. <www.peri.umass.edu>

Page 21: “Table 3: Published and replicated average real GDP growth, by public debt/GDP category”

NOTE: This working paper was later published as a formal paper in the Cambridge Journal of Economics, March 2014. Pages 257–279. <doi.org>

[59] Constitution of the United States. Signed September 17, 1787. <justfacts.com>

Article I, Section 7:

[Clause 1] All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.

[Clause 2] Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States; If he approve he shall sign it, but if not he shall return it, with his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together with the Objections, to the other House, by which it shall likewise be reconsidered, and if approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes of both Houses shall be determined by yeas and Nays, and the Names of the Persons voting for and against the Bill shall be entered on the Journal of each House respectively. If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.

Article I, Section 8, Clause 1: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States….”

[60] Report: “A Citizen’s Guide to the Federal Budget: Fiscal Year 2000.” White House Office of Management and Budget, January 1999. <www.gpo.gov>

Pages 18–19:

• Discretionary spending, which accounts for one-third of all Federal spending, is what the President and Congress must decide to spend for the next year through the 13 annual appropriations bills. It includes money for such activities as the FBI and the Coast Guard, for housing and education, for space exploration and highway construction, and for defense and foreign aid.

• Mandatory spending, which accounts for two-thirds of all spending, is authorized by permanent laws, not by the 13 annual appropriations bills. It includes entitlements—such as Social Security, Medicare, veterans’ benefits, and Food Stamps—through which individuals receive benefits because they are eligible based on their age, income, or other criteria. It also includes interest on the national debt, which the Government pays to individuals and institutions that hold Treasury bonds and other Government securities. The President and Congress can change the law in order to change the spending on entitlements and other mandatory programs—but they don’t have to.

[61] Report: “GAO Strategic Plan, 2007–2012.” U.S. Government Accountability Office, March 2007. <www.gao.gov>

Page 15:

Table 2: Forces Shaping the United States and Its Place in the World

Changing security threats: The world has changed dramatically in overall security, from the conventional threats posed during the Cold War era to more unconventional and asymmetric threats. Providing for people’s safety and security requires attention to threats as diverse as terrorism, violent crime, natural disasters, and infectious diseases. The response to many of these threats depends not only on the action of the U.S. government but also on the cooperation of other nations and multilateral organizations, as well as on state and local governments and the private and independent sectors. Complicating such efforts are a number of failed states allowing the trade of arms, drugs, or other illegal goods; the spread of infectious diseases; and the accommodation of terrorist groups. …

Economic growth and competitiveness: Economic growth and competition are also affected by the skills and behavior of U.S. citizens, the policies of the U.S. government, and the ability of the private and public sectors to innovate and manage change. … Importantly, the saving and investment behavior of U.S. citizens affects the capital available to invest in research, development, and productivity enhancement. …

Global interdependency: Economies as well as governments and societies are becoming increasingly interdependent as more people, information, goods, and capital flow across increasingly porous borders. …

Societal change: The U.S. population is aging and becoming more diverse. As U.S. society ages and the ratio of elderly persons and children to persons of working age increases, the sustainability of social insurance systems will be further threatened. Specifically, according to the 2000 census, the median age of the U.S. population is now the highest it has ever been, and the baby boomer age group—people born from 1946 to 1964, inclusive—was a significant part of the population.

[62] Report: “The 2013 Long-Term Budget Outlook.” Congressional Budget Office, September 2013. <cbo.gov>

Page 4: “Under one set of alternative policies, referred to as the extended alternative fiscal scenario, certain policies that are now in place but that are scheduled to change under current law would continue instead, and some provisions of current law that might be difficult to sustain for a long period would be modified.”

Page 79:

The extended alternative fiscal scenario incorporates the assumptions that certain policies that have been in place for a number of years will be continued and that some provisions of law that might be difficult to sustain for a long period will be modified. …

The results with economic feedback include the economic effects of the budget policies in the long run and the effects of that economic feedback on the budget. Those results are CBO’s central estimates from ranges determined by alternative assumptions about how much deficits “crowd out” investment in capital goods such as factories and computers (because a larger portion of people’s savings is being used to purchase government securities) and how much people respond to changes in after-tax wages by adjusting the number of hours they work.

Pages 84–85:

Beyond 2023, the difference in deficits between the extended baseline and later years, reaching roughly 3 percent of GDP in 2038. The higher noninterest spending stems from several assumptions of the extended alternative fiscal scenario: that the automatic reductions in spending required by the Budget Control Act for 2014 and later will not occur (although the original caps on discretionary appropriations in that law are assumed to remain in place); that lawmakers will act to prevent Medicare’s payment rates for physicians from declining; that after 2023, lawmakers will not allow various restraints on the growth of Medicare costs and health insurance subsidies to exert their full effect; and that after 2023, federal spending for programs other than Social Security and the major health care programs will rise to the average of other noninterest spending, net of offsetting receipts, as a percentage of GDP during the past two decades, rather than fall significantly below that level, as it does in the extended baseline.

[63] “2014 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” Centers for Medicare and Medicaid Services, July 28, 2014. <www.cms.gov>

Pages 276–277:

Statement of Actuarial Opinion

In past reports, the Board of Trustees has emphasized the virtual certainty that actual Part B expenditures will exceed the projections under current law due to further legislative action to avoid substantial reductions in the Medicare physician fee schedule. Current law would require a physician fee reduction of almost 21 percent on April 1, 2015—an implausible expectation.

Since lawmakers have overridden these scheduled reductions each year since 2003, the Trustees have changed the basis of their projections of Part B expenditures from current law to a projected baseline, which includes an assumption that the physician payment updates will equal the increase averaged over the last 10 years. This change results in a far more reasonable expectation of Medicare expenditures than occurs under current law. The projected baseline estimates are summarized throughout the main body of this report, while current-law estimates are included in appendix C.

The Affordable Care Act is making important changes to the Medicare program that are designed, in part, to substantially improve its financial outlook. While the ACA has been successful in reducing many Medicare expenditures to date, there is a strong possibility that certain of these changes will not be viable in the long range. Specifically, the annual price updates for most categories of non-physician health services will be adjusted downward each year by the growth in economy-wide productivity. The ability of health care providers to sustain these price reductions will be challenging, as the best available evidence indicates that most providers cannot improve their productivity to this degree for a prolonged period given the labor-intensive nature of these services.

Absent an unprecedented change in health care delivery systems and payment mechanisms, the prices paid by Medicare for health services will fall increasingly short of the costs of providing these services. By the end of the long-range projection period, Medicare prices for many services would be less than half of their level without consideration of the productivity price reductions. Before such an outcome would occur, lawmakers would likely intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result. Overriding the productivity adjustments, as lawmakers have done repeatedly in the case of physician payment rates, would lead to substantially higher costs for Medicare in the long range than those projected in this report.

[64] Constructed with:

a) Dataset: “The 2013 Long-Term Budget Outlook.” Congressional Budget Office, September 2013. <www.cbo.gov>

Tab: “Figure 1-1. Federal Debt Held by the Public Under CBO’s Extended Baseline”

Tab: “6. Summary Data for the Extended Alternative Fiscal Scenario”

b) Dataset: “The Budget and Economic Outlook: 2018 to 2028.” Congressional Budget Office, April 2018. <www.cbo.gov>

“Summary Figure 2. Federal Debt Held by the Public”

NOTE: An Excel file containing the data is available upon request.

[65] Constructed with:

a) Dataset: “The 2013 Long-Term Budget Outlook.” Congressional Budget Office, September 2013. <www.cbo.gov>

Tab: “6. Summary Data for the Extended Alternative Fiscal Scenario”

b) Dataset: “An Update to the Budget and Economic Outlook: Fiscal Years 2014 to 2024.” Congressional Budget Office, August 2014. <www.cbo.gov>

Tab: “Figure 1-2. Total Revenues and Outlays”

c) Dataset: “The Budget and Economic Outlook: 2018 to 2028.” Congressional Budget Office, April 2018. <www.cbo.gov>

“Figure 4-2. Total Revenues and Outlays”

NOTE: An Excel file containing the data is available upon request.

[66] Report: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010 (Revised August 2010). <www.cbo.gov>

Page 16:

Waiting to close the fiscal gap would make the necessary changes larger. To illustrate the costs of delay, CBO simulated the effects of closing the fiscal gap under the alternative fiscal scenario beginning in 2011, 2015, 2020, or 2025. Those simulations indicate that postponing action would substantially increase the size of the policy adjustments needed to put the budget on a sustainable course. For example, if lawmakers wanted to close the fiscal gap through 2035 but did not begin until 2015, they would have to reduce primary spending or increase revenues over that period by 5.7 percent of GDP, rather than by 4.8 percent if they acted in 2011 (see Figure 1-3). If they waited until 2020 to close the fiscal gap through 2035, they would have to cut noninterest outlays or raise revenues over that period by 7.9 percent of GDP. Moreover, those simulations omit the effects that deficits and debt would have on economic growth and interest rates in the intervening years; incorporating such effects would make the impact of delaying policy changes even more severe.

[67] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 2014. <www.cbo.gov>

Pages 12–13:

Second, CBO has estimated the amount by which delaying policy changes to reduce deficits would increase the size of the policy adjustments needed to achieve any chosen goal for debt. If the goal was to have the debt equal 74 percent of GDP in 2039 but to wait to implement new policies until 2020, the combination of increases in revenues and reductions in noninterest spending over the 2020–2039 period would need to be 1.5 percent of GDP, rather than the 1.2 percent of GDP needed to reach that goal if policy changes took effect in 2015 (see Figure 1-2). If lawmakers waited even longer—until 2025—to take action, the policy changes over the 2025–2039 period would need to amount to 2.1 percent of GDP. If, instead of aiming to keep debt from rising relative to GDP, lawmakers wanted to return debt to its historical average percentage of GDP—but policy changes did not take effect until 2020—the policy changes would need to amount to 3.2 percent rather than 2.6 percent of GDP. Waiting an additional five years would require even larger changes, amounting to 4.3 percent of GDP.

Third, CBO has studied how waiting to resolve the long-term fiscal imbalance would affect various generations of the U.S. population. In 2010, CBO compared economic outcomes under a policy that would stabilize the debt-to- GDP ratio starting in 2015 with outcomes under a policy that would delay stabilizing the ratio until 2025.6 That analysis suggested that generations born after about 2015 would be worse off if action to stabilize the debt-to-GDP ratio was postponed to 2025. People born before 1990, however, would be better off if action was delayed—largely because they would partly or entirely avoid the policy changes needed to stabilize the debt—and generations born between 1990 and 2015 could either gain or lose from a delay, depending on the details of the policy changes.7

6 See Congressional Budget Office, Economic Impacts of Waiting to Resolve the Long-Term Budget Imbalance (December 2010), <www.cbo.gov>. That analysis was based on a projection of slower growth in debt than CBO now projects, so the estimated effects of a similar policy today would be close, but not identical, to the effects estimated in that earlier analysis.

7 Those conclusions do not incorporate the possible negative effects of a fiscal crisis or effects that might arise from the government’s reduced flexibility to respond to unexpected challenges.

[68] Webpage: “Paul Davidson.” University of Tennessee Knoxville, 2011. <haslam.utk.edu>

Editor, Journal of Post Keynesian Economics

Author: The Keynes Solution: The Path to Global Economic Prosperity

Bernard Schwartz Center for Economic Policy Analysis …

Dr. Davidson is the Editor of the Journal of Post Keynesian Economics and member of the Editorial Board of Ekonomia. He is the author, co-author, or editor of 22 books. He is the author of over 210 articles.

[69] Commentary: “Making Dollars and Sense of the U.S. Government Debt.” By Paul Davidson. Journal of Post Keynesian Economics, Summer 2010. Pages 663–667. <www.tandfonline.com>

Pages 664–665:

In the war years from 1941 to 1945, the GDP doubled while the national debt increased by more than 500 percent as Roosevelt financed much of the war expenditures by government borrowing. By the end of the war in 1945, the national debt … was equal to approximately 120 percent of GDP.

Rather than bankrupting the nation, this large growth in the national debt promoted a prosperous economy. By 1946, the average American household was living much better economically than in the prewar days. Moreover, the children of that Depression–World War II generation were not burdened by having to pay off what then was considered a huge national debt. Instead, for the next quarter century, the economy continued on a path of unprecedented economic growth and prosperity….

[70] Webpage: “Douglas J. Amy.” Mount Holyoke College, 2011. <www.mtholyoke.edu>

Professor of Politics …

Douglas Amy is a leading expert on electoral voting systems, including proportional representation, redistricting issues in the United States, and the plight of third party candidacies. …

Prior to his interest in electoral systems, Amy concentrated on environmental mediation and policy analysis.

[71] Commentary: “The Deficit Scare: Myth vs. Reality.” By Douglas J. Amy. Accessed March 22, 2011 at <www.governmentisgood.com>

Page 3:

Conservatives are also wrong when they argue that deficit spending and a large national debt will inevitably undermine economic growth. To see why, we need to simply look back at times when we have run up large deficits and increased the national debt. The best example is World War II when the national debt soared to 120% of GDP—nearly twice the size of today’s debt. This spending not only got us out of the Great Depression but set the stage for a prolonged period of sustained economic growth in the 50s and 60s. Massive investments were made in science and technology, American workers were re-trained and re-employed, private investment was encouraged, and consumer purchasing power was increased. That 25-year post-war economic boom, with the most rapid increase in living standards in our history, would not have happened without the stimulus of all this deficit spending.

[72] Webpage: “Paul Krugman.” New York Times, 2011. <www.nytimes.com>

Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed Page and continues as professor of Economics and International Affairs at Princeton University. …

On October 13, 2008, it was announced that Mr. Krugman would receive the Nobel Prize in Economics.

[73] Commentary: “How Big Is $9 Trillion?” By Paul Krugman. New York Times, August 23, 2009. <krugman.blogs.nytimes.com>

What you have to bear in mind is that the economy—and hence the federal tax base—is enormous, too. Right now GDP is around $14 trillion. If economic growth averages 2.5% a year, which has been the norm, and inflation is 2% a year, which is the target (and which the bond market seems to believe), GDP will be around $22 trillion a decade from now. So we’re talking about adding debt that’s equal to around 40% of GDP.

Right now, federal debt is about 50% of GDP. So even if we do run these deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II. It will also be substantially less than, say, debt in several European countries in the mid to late 1990s. (There are some technical issues in comparing these various numbers—gross debt versus net (mainly about Social Security) and overall government debt versus federal, but they don’t change the basic picture.)

Again, the debt outlook is bad. But we’re not looking at something inconceivable, impossible to deal with; we’re looking at debt levels that a number of advanced countries, the US included, have had in the past, and dealt with.

[74] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised February 25, 2011. <www.bea.gov>

Line item 20: “Current expenditures”

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised February 25, 2011. <www.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[75] Calculated with data from “Fiscal Year 2012 Historical Tables, Budget of the U.S. Government.” White House Office of Management and Budget, 2010. <www.gpo.gov>

Page 139: “Table 7.1—Federal Debt at the End of Year: 1940–2016 … Total Debt held by the Public as a Percentage of GDP.”

CALCULATION: 108.7 (publicly held debt as a % of GDP in 1946) – 36.4 (publicly held debt as a % of GDP in 1985) = 72.3

[76] Calculated with data from:

a) Dataset: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010. <www.cbo.gov>

Subset: “Summary Data for the Alternative Fiscal Scenario (percentages of gross domestic product)” <www.cbo.gov>

b) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised February 25, 2011. <www.bea.gov>

Line items 20: “Current expenditures”

c) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised February 25, 2011. <www.bea.gov>

NOTES:

  • The methodologies used by the above-cited government agencies to quantify federal spending differ. The CBO uses “total outlays” for projections, and the BEA uses “current expenditures” for historical data back to World War II. The CBO’s spending figure for 2010 is 24.3%, and the figure calculated using BEA data is 25.4%. Thus, Just Facts uses the term “over” to describe the relationship between historical and projected data in this context.
  • An Excel file containing the data and calculations is available upon request.

CALCULATIONS:

  • Average total outlays from 2011–2050 = 32.8% of GDP
  • Average current expenditures from 1946–1985 = 18.4%
  • (32.8 – 18.4) / 18.4 = .782

[77] Calculated with the dataset: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010. <www.cbo.gov>

Subset: “Summary Data for the Alternative Fiscal Scenario”

CALCULATION: 344 (publicly held debt as a % of GDP in 2050) – 67 (publicly held debt as a % of GDP in 2011) = 277

[78] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 2014. <www.cbo.gov>

Page 8: “CBO’s long-term projections extend beyond the usual 10-year budget window to focus on the 25-year period ending in 2039. They generally reflect current law, following the agency’s April 2014 baseline budget projections through 2024 and then extending the baseline concept into later years; hence, they constitute what is called the extended baseline.”

[79] Dataset: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Tab “1. Summary Data for the Extended Baseline.”

[80] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 2014. <www.cbo.gov>

Pages 7–8: “CBO projects, revenues would remain roughly stable relative to GDP for the next 10 years as an increase in individual income taxes was offset by a decline in receipts from corporate income taxes and remittances from the Federal Reserve (all relative to the size of the economy).”

Page 18:

Revenue projections through 2024 follow the 10-year baseline, which generally incorporates the assumption that various tax provisions will expire as scheduled even if they have routinely been extended in the past. After 2024, rules for individual income taxes, payroll taxes, excise taxes, and estate and gift taxes are assumed to evolve as scheduled under current law.13 Because of the structure of current tax law, total federal revenues from those sources are estimated to grow faster than GDP over the long run. Revenues from corporate income taxes and other sources (such as receipts from the Federal Reserve System) are assumed to remain constant as a percentage of GDP after 2024….

13 The sole exception to the current-law assumption applies to expiring excise taxes dedicated to trust funds. The Deficit Control Act requires CBO’s baseline to reflect the assumption that those taxes would be extended at their current rates. That law does not stipulate that the baseline include the extension of other expiring tax provisions, even if they have been routinely extended in the past.

Page 59: “After 2024, revenues would continue rising faster than GDP, largely for two reasons: Growth in real (inflation-adjusted) income and the interaction of the tax system with inflation would push a greater proportion of income into higher tax brackets; and certain tax increases enacted in the Affordable Care Act (ACA) would generate increasing amounts of revenues relative to the size of the economy.”

Pages 64–65:

Under CBO’s extended baseline, marginal tax rates on income from labor and capital would rise over time. The effective federal marginal tax rate on labor income—that is, the marginal tax rate on labor income averaged across taxpayers using weights proportional to their labor income—is projected to increase from about 29 percent in calendar year 2014 to 34 percent in 2039…. By contrast, the effective federal marginal tax rate on capital income (returns on investment) is projected to rise only from 18 percent to 19 percent over that period.

Page 66:

The cumulative effect of rising prices would significantly reduce the value of some parameters of the tax system that are not indexed for inflation. As one example, CBO estimates that the amount of mortgage debt eligible for the mortgage interest deduction, which is not indexed for inflation, would fall from $1 million today to less than $600,000 in 2039 measured in today’s dollars. As another example, the portion of Social Security benefits subject to taxation would increase from about 30 percent now to about 50 percent by 2039, CBO estimates, because the thresholds for taxing benefits are not indexed for inflation.

[81] Calculated with data from:

a) Dataset: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Tab “1. Summary Data for the Extended Baseline (Percentage of Gross Domestic Product). … Revenues … 2084 [=] 23.5”

“Figure 1-3. Spending and Revenues Under CBO’s Extended Baseline, Compared With Past Averages. (Percentage of Gross Domestic Product) … Revenues … Total … Average, 1974–2013 [=] 17.4.”

b) Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 2014. <www.cbo.gov>

Page 60: “Over the past 40 years, total federal revenues have ranged from a high of 19.9 percent of GDP (in 2000) to a low of 14.6 percent (in 2009 and 2010), with no evident trend over time….”

CALCULATION: (23.5% – 17.4%) / 17.4% = 35%

[82] Dataset: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Tab “1. Summary Data for the Extended Baseline.”

[83] Calculated with the dataset: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Tab “1. Summary Data for the Extended Baseline (Percentage of Gross Domestic Product). … Total Spending … 2040 [=] 26.0.”

“Figure 1-3. Spending and Revenues Under CBO’s Extended Baseline, Compared With Past Averages. (Percentage of Gross Domestic Product) … Spending … Total … Average, 1974–2013 [=] 20.5.”

CALCULATION: (26.0% – 20.5%) / 20.5% = 27%

[84] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 2014. <www.cbo.gov>

Page 8:

CBO’s 10-year and extended baselines are meant to serve as benchmarks for measuring the budgetary effects of proposed changes in federal revenues or spending. They are not meant to be predictions of future budgetary outcomes; rather, they represent CBO’s best assessment of how the economy and other factors would affect revenues and spending if current law generally remained unchanged. In that way, the baselines incorporate the assumption that some policy changes that lawmakers have routinely made in the past—such as preventing the sharp cuts to Medicare’s payment rates for physicians that are called for by law—will not be made again.

Page 16: “… the projections incorporate the reduction in Medicare’s payments to physicians scheduled for 2015 and the reductions in Medicare spending specified in the Budget Control Act of 2011, as amended, for 2015 through 2024.”

[85] “2014 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” Centers for Medicare and Medicaid Services, July 28, 2014. <www.cms.gov>

Pages 276–277:

Statement of Actuarial Opinion

In past reports, the Board of Trustees has emphasized the virtual certainty that actual Part B expenditures will exceed the projections under current law due to further legislative action to avoid substantial reductions in the Medicare physician fee schedule. Current law would require a physician fee reduction of almost 21 percent on April 1, 2015—an implausible expectation.

Since lawmakers have overridden these scheduled reductions each year since 2003, the Trustees have changed the basis of their projections of Part B expenditures from current law to a projected baseline, which includes an assumption that the physician payment updates will equal the increase averaged over the last 10 years. This change results in a far more reasonable expectation of Medicare expenditures than occurs under current law. The projected baseline estimates are summarized throughout the main body of this report, while current-law estimates are included in appendix C.

The Affordable Care Act is making important changes to the Medicare program that are designed, in part, to substantially improve its financial outlook. While the ACA has been successful in reducing many Medicare expenditures to date, there is a strong possibility that certain of these changes will not be viable in the long range. Specifically, the annual price updates for most categories of non-physician health services will be adjusted downward each year by the growth in economy-wide productivity. The ability of health care providers to sustain these price reductions will be challenging, as the best available evidence indicates that most providers cannot improve their productivity to this degree for a prolonged period given the labor-intensive nature of these services.

Absent an unprecedented change in health care delivery systems and payment mechanisms, the prices paid by Medicare for health services will fall increasingly short of the costs of providing these services. By the end of the long-range projection period, Medicare prices for many services would be less than half of their level without consideration of the productivity price reductions. Before such an outcome would occur, lawmakers would likely intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result. Overriding the productivity adjustments, as lawmakers have done repeatedly in the case of physician payment rates, would lead to substantially higher costs for Medicare in the long range than those projected in this report.

[86] Report: “Budgetary and Economic Outcomes Under Paths for Federal Revenues and Noninterest Spending Specified by Chairman Ryan, April 2014.” Congressional Budget Office, April 2014. <www.cbo.gov>

Page 2: “The amounts of federal debt and economic output estimated for all of the scenarios in this report are highly uncertain. That uncertainty stems from the difficulties inherent in projecting the effects of federal fiscal policies, especially far into the future.”

Page 12:

The projections for debt, revenues, spending, and economic output presented in this report are highly uncertain for many reasons. The projections are based on CBO’s central estimates for key parameters of economic behavior—including the extent to which government borrowing crowds out capital investment and the effect that changes in real after-tax wages have on the supply of labor.11 Estimates of those and other economic parameters are uncertain, and analysis using different parameters can produce results that are substantially higher or lower than CBO’s central estimates.

[87] Report: “The Path to Prosperity: Fiscal Year 2015 Budget Resolution.” House Budget Committee, April 2014. <budget.house.gov>

Pages 58–59:

The Medicare reform envisioned in this budget resolution begins with a commitment to keep the promises made to those who now are in or near retirement. Consequently, for those who enter the program before 2024, the Medicare program and its benefits will remain as they are, without change.

For future retirees, the budget supports an approach known as “premium support.” Starting in 2024, seniors (those who first become eligible by turning 65 on or after January 1, 2024) would be given a choice of private plans competing alongside the traditional fee-for-service Medicare program on a newly created Medicare Exchange. Medicare would provide a premium-support payment either to pay for or offset the premium of the plan chosen by the senior, depending on the plan’s cost. For those who were 55 or older in 2013, they would remain in the traditional Medicare system.

The Medicare recipient of the future would choose, from a list of guaranteed-coverage options, a health plan that best suits his or her needs. This is not a voucher program. A Medicare premium-support payment would be paid, by Medicare, directly to the plan or the fee-for-service program to subsidize its cost. The program would operate in a manner similar to that of the Medicare prescription-drug benefit. The Medicare premium-support payment would be adjusted so that the sick would receive higher payments if their conditions worsened; lower-income seniors would receive additional assistance to help cover out-of-pocket costs; and wealthier seniors would assume responsibility for a greater share of their premiums.

This approach to strengthening the Medicare program—which is based on a long history of bipartisan reform plans—would ensure security and affordability for seniors now and into the future. In September 2013, the Congressional Budget Office analyzed illustrative options of a premium support system. They found that a program in which the premium-support payment was based on the average bid of participating plans would result in savings for affected beneficiaries as well as the federal government.52

Moreover, it would set up a carefully monitored exchange for Medicare plans. Health plans that chose to participate in the Medicare Exchange would agree to offer insurance to all Medicare beneficiaries, to avoid cherry-picking, and to ensure that Medicare’s sickest and highest-cost beneficiaries receive coverage.

While there would be no disruptions in the current Medicare fee-for-service program for those currently enrolled or becoming eligible before 2024, all seniors would have the choice to opt in to the new Medicare program once it began in 2024. This budget envisions giving seniors the freedom to choose a plan best suited for them, guaranteeing health security throughout their retirement years.

52 Congressional Budget Office, “A Premium Support System for Medicare: Analysis of Illustrative Options,” 18 Sept. 2013.

[88] Report: “The Path to Prosperity: Fiscal Year 2015 Budget Resolution.” House Budget Committee, April 2014. <budget.house.gov>

Page 59: “Also starting in 2024, the age of eligibility for Medicare would begin to rise gradually to correspond with Social Security’s retirement age and the fee-for-service benefit would be modernized to have a single deductible and by reforming supplemental insurance policies.”

[89] Calculated with “Summary Tables for the Path to Prosperity: Fiscal Year 2015 Budget Resolution.” House Budget Committee, April 2014. <budget.house.gov>

a) Table “S-3. FY2015 House Budget by Major Category (Outlays in Billions) … Medicare (Net) … 2016 [=] $552 … 2020 [=] $684 … 2024 [=] $855.”

b) Table “S-4. FY2015 House Budget vs. Current Policy by Major Category (Outlays in Billions) … Medicare (Net) … 2016 [=] $–3 … 2020 [=] $–13 … 2024 [=] $–38.”

CALCULATIONS:

  • –$3 / ($552 + $3) = –0.5%
  • –$13 / ($684 + $13) = –1.9%
  • –$38 / ($855 + $38) = –4.3%

[90] Report: “The Path to Prosperity: Fiscal Year 2015 Budget Resolution.” House Budget Committee, April 2014. <budget.house.gov>

Pages 54–55:

Provide State Flexibility on Medicaid. One way to secure the Medicaid benefit is by converting the federal share of Medicaid spending into an allotment that each state could tailor to meet its needs, indexed for inflation and population growth. Such a reform would end the misguided one-size-fits-all approach that has tied the hands of state governments. States would no longer be shackled by federally determined program requirements and enrollment criteria. Instead, each state would have the freedom and flexibility to tailor a Medicaid program that fit the needs of its unique population.

The budget resolution proposes to transform Medicaid from an open-ended entitlement into a block-granted program like SCHIP [State Children’s Health Insurance Program]. These programs would be unified under the proposal and grown together for population growth and inflation.

This reform also would improve the health-care safety net for low-income Americans by giving states the ability to offer their Medicaid populations more options and better access to care. Medicaid recipients, like all other Americans, deserve to choose their own doctors and make their own health-care decisions, instead of having Washington make those decisions for them.

There are numerous examples across the country where states have used the existing, but limited, flexibility of Medicaid’s waiver program to introduce innovative reforms that produced cost savings, quality improvements, and beneficiary satisfaction. The state of Indiana implemented such reforms through the Healthy Indiana Plan, a patient-centered system that provided health coverage to uninsured residents who didn’t qualify for Medicaid. Enrollees in this program had access to benefits such as physician services, prescription drugs, both patient and outpatient hospital care, and disease management.

The Medicaid reforms proposed in the fiscal year 2015 budget provide all states with the necessary flexibility to pursue reforms similar to the Indiana plan.

Based on this kind of reform, this budget assumes $732 billion in savings over ten years, easing the fiscal burdens imposed on state budgets and contributing to the long-term stabilization of the federal government’s fiscal path.

[91] Report: “The Path to Prosperity: Fiscal Year 2015 Budget Resolution.” House Budget Committee, April 2014. <budget.house.gov>

Page 55:

Repeal the Medicaid Expansions in the New Health-Care Law. The recently enacted health-care law calls for major expansions in the Medicaid program beginning in 2014. These expansions will have a significant impact on the federal share of the Medicaid program and will dramatically increase outlays.

In the face of enormous stress on federal and state budgets and declining quality of care in Medicaid, the new health-care law would increase the eligible population for the program by one-third. For fiscal years 2015 through 2024, CBO projects the new law will increase federal spending by $792 billion.

This future fiscal burden will have serious budgetary consequences for both federal and state governments. While the health law requires the federal government to finance 100 percent of the Medicaid costs associated with covering new enrollees, this provision begins to phase out in fiscal year 2016. At that time, state governments will be required to assume a share of this cost. This share increases from fiscal year 2016 through 2020, when states will be required to finance 10 percent of the health law’s expansion of Medicaid.

Not only does this expansion magnify the challenges to both state and federal budgets, it also binds the hands of local governments in developing solutions that meet the unique needs of their citizens. The health-care law would exacerbate the already crippling one-size-fits-all enrollment mandates that have resulted in below-market reimbursements, poor health-care outcomes, and restrictive services. The budget calls for repealing the Medicaid expansions contained in the health-care law and removing the law’s burdensome programmatic mandates on state governments. Adopting this option would save $792.4 billion over ten years.

[92] Calculated with the dataset: “Summary Tables for the Path to Prosperity: Fiscal Year 2015 Budget Resolution.” House Budget Committee, April 2014. <budget.house.gov>

a) Table “S-3. FY2015 House Budget by Major Category (Outlays in Billions) … Medicaid & Other Health … 2016 [=] $311 … 2020 [=] $343 … 2024 [=] $403.”

b) Table “S-4. FY2015 House Budget vs. Current Policy by Major Category (Outlays in Billions) … Medicaid & Other Health … 2016 [=] –$31 … 2020 [=] –$80 … 2024 [=] –$124.”

CALCULATIONS:

  • –$31 / ($311 + $31) = –9.1%
  • –$80 / ($343 + $80) = –18.9%
  • –$124 / ($403 + $124) = –23.5%

[93] Report: “The Path to Prosperity: Fiscal Year 2015 Budget Resolution.” House Budget Committee, April 2014. <budget.house.gov>

Pages 55–56:

Repeal the Exchange Subsidies Created by the New Health-Care Law. According to CBO estimates, the health law proposes to spend $1.2 trillion over the next ten years providing eligible individuals with subsidies to purchase government-approved health insurance. These subsidies can only be used to purchase plans that meet standards determined by the new health-care law. In addition to this enormous market distortion, the law also stipulates a complex maze of eligibility and income tests to determine how much of a subsidy qualifying individuals may receive.

The new law couples these subsidies with a mandate for individuals to purchase health insurance and bureaucratic controls on the types of insurance that may legally be offered. Taken together, these provisions will undermine the private insurance market, which serves as the backbone of the current U.S. health-care system. Exchange subsidies will undermine the competitive forces of the marketplace. Government mandates will drive out all but the largest insurance companies. Punitive tax penalties will force individuals to purchase coverage whether they choose to or not. Further, this budget does not condone any policy that would require entities or individuals to finance activities or make health decisions that violate their religious beliefs. This budget provides for the repeal of the President’s onerous health-care law for this and many other reasons.

Left in place, the health law will create pressures that will eventually lead to a single-payer system in which the federal government determines how much health care Americans need and what kind of care they can receive. This budget recommends repealing the architecture of this new law, which puts health-care decisions into the hands of bureaucrats, and instead allowing Congress to pursue patient-centered health-care reforms that actually bring down the cost of care by empowering consumers.

… To be clear, this budget repeals all federal spending related to the health law’s exchange subsidies and related spending.

[94] Dataset: “Budgetary and Economic Outcomes Under Paths for Federal Revenues and Noninterest Spending Specified by Chairman Ryan, April 2014.” Congressional Budget Office, April 1, 2014. <www.cbo.gov>

Figure “9. Spending Excluding Interest Payments Under Various Budget Scenarios, With Macroeconomic Effects (Percentage of Gross Domestic Product) … Paths for Revenues and Noninterest Spending Specified by Chairman Ryan … 2015 [=] 18.9 … 2025 [=] 16.0 … 2035 [=] 16.4”

[95] Dataset: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

“Figure 1-3. Spending and Revenues Under CBO’s Extended Baseline, Compared With Past Averages (Percentage of Gross Domestic Product). … Spending … Net Interest … Average, 1947 to 2013 [=] 2.2 … Total Spending… Average, 1947 to 2013 [=] 20.5”

CALCULATION: 20.5 – 2.2 = 18.3 total spending less net interest

[96] Dataset: “Budgetary and Economic Outcomes Under Paths for Federal Revenues and Noninterest Spending Specified by Chairman Ryan, April 2014.” Congressional Budget Office, April 1, 2014. <www.cbo.gov>

Figure “11. Revenues Under Various Budget Scenarios, With Macroeconomic Effects (Percentage of Gross Domestic Product) … Paths for Revenues and Noninterest Spending Specified by Chairman Ryan … 2015 [=] 18.2 … 2025 [=] 18.4 … 2032 [=] 19.0”

[97] Dataset: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

“Figure 1-3. Spending and Revenues Under CBO’s Extended Baseline, Compared With Past Averages (Percentage of Gross Domestic Product). … Revenues … Total Revenues … Average, 1947 to 2013 [=] 17.4”

[98] These debt projections account for the economic effects of federal debt, taxes, and spending. As explained by CBO:

The results with economic feedback include the economic effects of the budget policies and the effects of that economic feedback on the budget. Those results are CBO’s central estimates from ranges determined by alternative assessments about how much deficits “crowd out” investment in capital goods such as factories and computers (because a larger portion of people’s savings is being used to purchase government securities) and how much people respond to changes in after-tax wages by adjusting the number of hours they work.†

† Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 2014. <www.cbo.gov>. Page 76.

[99] Constructed with data from:

a) Dataset: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

“Figure 1-1. Federal Debt Held by the Public”

“Figure 6-3. Long-Run Effects of the Fiscal Policies in CBO’s Extended Alternative Fiscal Scenario”

b) Dataset: “The Budget and Economic Outlook: 2018 to 2028.” Congressional Budget Office, April 2018. <www.cbo.gov>

“Summary Figure 2. Federal Debt Held by the Public”

c) Dataset: “Budgetary and Economic Outcomes Under Paths for Federal Revenues and Noninterest Spending Specified by Chairman Ryan.” Congressional Budget Office, April 1, 2014. <www.cbo.gov>

[100] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 2014. <www.cbo.gov>

Pages 19–20:

Spending for the Major Health Care Programs and Social Security

Mandatory programs have accounted for a rising share of the federal government’s noninterest spending over the past few decades, averaging 60 percent in recent years. Most of the growth in mandatory spending has involved the three largest programs—Social Security, Medicare, and Medicaid. Federal outlays for those programs together made up more than 40 percent of the government’s noninterest spending, on average, during the past 10 years, compared with less than 30 percent four decades ago.

Most of the anticipated growth in noninterest spending as a share of GDP over the long term is expected to come from the government’s major health care programs: Medicare, Medicaid, the Children’s Health Insurance Program, and the subsidies for health insurance purchased through the exchanges created under the ACA. CBO projects that, under current law, total outlays for those programs, net of offsetting receipts, would grow much faster than the overall economy, increasing from just below 5 percent of GDP now to 8 percent in 2039…. Spending for Social Security also would increase relative to the size of the economy, but by much less—from almost 5 percent of GDP in 2014 to more than 6 percent in 2039 and beyond….

Those projected increases in spending for Social Security and the government’s major health care programs are attributable primarily to three causes: the aging of the population, rising health care spending per beneficiary, and the ACA’s expansion of federal subsidies for health insurance.

[101] Report: “Deficit Reduction: Focus Mostly on Spending but Keep Taxes in Mix.” Pew Research Center, February 21, 2013. <www.people-press.org>

The poll finds new evidence of the public’s concern over the federal budget deficit. Fully 70% say it is essential for the president and Congress to pass major legislation to reduce the federal budget deficit, including wide majorities across party lines. …

Overall, 19% say the focus of deficit reduction efforts should be only on spending cuts; just 3% want to concentrate only on tax increases. …

When those who favor a balanced approach to reducing the deficit are asked if the focus should mostly be on spending cuts or tax increases, they overwhelmingly say spending cuts. Overall, 73% say efforts by the president and Congress to reduce the deficit should be only or mostly focused on spending cuts while just 19% say the focus should be only or mostly on tax increases.

[102] Report: “As Sequester Deadline Looms, Little Support for Cutting Most Programs.” Pew Research Center, February 22, 2013. <www.people-press.org>

Page 1: “Public Rejects Cuts in Government Spending in Most Areas … Increase … Medicare [=] 36 … Same … Medicare [=] 46 … Decrease … Medicare [15] … Increase … Social Security [=] 41 … Same … Social Security [=] 46 … Decrease … Social Security [=] 10”

[103] Poll: “NBC News/Wall Street Journal Survey.” HART/McInturff, February 2011. <msnbcmedia.msn.com>

Interviews: 1000 adults, including 200 reached by cell phone

Date: February 24–28, 2011 …

Q19 Thinking (now/again) about YOURSELF AND YOUR FAMILY, when you think about our federal budget problems, including our growing federal budget deficit and our increasing national debt, how much does this concern you personally, in terms of how it impacts you and your family's future— a great deal, quite a bit, only a little, or not at all?

A great deal [=] 48%

Quite a bit [=] 32% …

Q23 If the deficit cannot be eliminated solely by cutting wasteful federal spending, which one of these steps would you most favor—cutting important programs, raising taxes, or postponing elimination of the deficit?

Cutting important programs [=] 35%

Raising taxes [=] 33%

Postponing elimination of the deficit [=] 26%

[104] Article: “Poll Shows Budget-Cuts Dilemma.” By Neil King Jr. and Scott Greenberg. Wall Street Journal, March 3, 2011. <www.wsj.com>

Asked directly if they thought cuts to Medicare were necessary to “significantly reduce” the deficit, 18% of respondents said yes, while 54% said no; the rest were not sure or had no opinion. On Social Security, 22% said cuts would be needed, while 49% said they weren’t.

[105] Article: “AP-CNBC Poll: Cut Services to Balance the Budget.” By Alan Fram and Jennifer Agiesta. Associated Press, November 30, 2010. <archive.boston.com>

Eighty-five percent worry that growing red ink will harm future generations—the strongest expression of concern since AP polls began asking the question in 2008. Fifty-six percent think the shortfalls will spark a major economic crisis in the coming decade. …

Asked to choose between two paths lawmakers could follow to balance the budget, 59 percent in the AP-CNBC Poll preferred cutting unspecified government services while 30 percent picked unspecified tax increases.

[106] Article: “Experts Warn Debt May Threaten Economy.” By Robert Tanner. Associated Press, Aug 27, 2005. <ap.org>

The AP/Ipsos poll of 1,000 adults taken July 5–7 found that a sweeping majority—70 percent—worried about the size of the federal deficit either “some” or “a lot.”

But only 35 percent were willing to cut government spending and experience a drop in services to balance the budget. Even fewer—18 percent—were willing to raise taxes to keep current services. Just 1 percent wanted to both raise taxes and cut spending. The poll has a margin of error of 3 percentage points.

[107] Report “The Tea Is Cooling: The First Session of the 113th Congress.” National Taxpayers Union Foundation, July 10, 2014. <www.ntu.org>

Page 2: “During the First Session of the 113th Congress, Representatives authored 496 spending bills and 112 savings bills. Senators drafted 332 increase bills and 56 savings bills. While the number of increases was the lowest seen since the 105th Congress, this is also the first time in several years that there were fewer cut bills introduced compared to the preceding Congress.”

[108] Appendix C: “BillTally Methodology Rules.” National Taxpayers Union Foundation. Accessed May 18, 2015 at <www.ntu.org>

Pages i–ii:

In cases where a Member cosponsors the same spending in more than one bill (e.g., cosponsored more than one universal health care bill), the same spending is offset and thus is not counted twice toward the Member’s total. …

Inclusions

In estimating the cost of reauthorization and appropriation bills, NTUF [National Taxpayers Union Foundation] counts only the net increase or decrease in cost over the prior year’s authorization or appropriation.

Page iv:

Sources of Cost Estimates

The estimates contained in the BillTally study are generally obtained from sources outside of NTUF. Where there is more than one estimate available for a given bill, NTUF uses the most credible source. Where NTUF obtains estimates from more than one equally credible source, NTUF uses the least optimistic (largest increase/smallest reduction) estimate. In cases where cost estimates are not readily available from any outside source, NTUF will attempt to calculate an estimate (with the assistance of the sponsor where possible). Generally, these estimates prove to be low compared to the actual cost of the program.

Page vi:

Accuracy

The scope and nature of the BillTally cost survey make total precision impossible. To maximize accuracy and ensure fairness, NTUF provides Members of Congress with a significant review period to comment confidentially on the accuracy of their own reports. In response to these comments, NTUF makes appropriate changes to the BillTally database. To the extent that more up-to-date information comes to light, it will be reflected in subsequent reports. However, the comprehensive nature of the database makes it unlikely that errors with respect to individual bills will alter the general findings of this study.

[109] Report “The Tea Is Cooling: The First Session of the 113th Congress.” National Taxpayers Union Foundation, July 10, 2014. <www.ntu.org>

Pages 1–3:

This report summarizes data from NTUF’s [National Taxpayers Union Foundation’s] BillTally accounting software, which computes the cost or savings of all legislation introduced in the First Session of the 113th Congress that affects spending by at least $1 million. Agenda totals for individual lawmakers were developed by cross indexing their sponsorship and cosponsorship records with cost estimates for 608 House bills and 388 Senate bills under BillTally accounting rules that prevent the double counting of overlapping proposals. All sponsorship and cost data in this report were reviewed confidentially by each Congressional office prior to publication. Appendix A lists all Members alphabetically, Appendix B lists members by state delegation, and Appendix C gives a thorough explanation of the BillTally methodology. …

In the House, the average Democrat called for net spending hikes of $396.5 billion—nearly a hundred billion less than in the previous Congress and the lowest since the 107th Congress. This spending would have boosted FY 2013’s total outlays by 11 percent.

During the previous Congress, the typical House Republican proposed, on net, a record level of spending cuts: $130.2 billion. In this current Congress, the amount of cuts receded by over a third, to $82.6 billion. Relative to FY 2013 total outlays, this would have reduced spending by just over 2 percent.

As recently as the 111th Congress (2009), the average Senate Democrat supported legislation that would have increased total spending by $133.7 billion (which would have represented a 4 percent increase in total budgetary outlays for that year). In this Congress their average net agenda amounted to $18.3 billion in new spending, which would grow the budget by one half of a percentage point. This marks the Senate Democrats’ lowest recorded net spending agenda since the 104th Congress.

As in the previous Congress, the average Senate Republican was a net cutter, but called for a smaller level of reductions. The result was a net agenda that went from –$238.7 billion to –$159.1 billion (both net cuts). That amount would have shaved FY 2013 total outlays by 4.6 percent. …

A Senator’s or Representative’s record of authored and sponsored bills can be viewed as his or her legislative “wish list,” free from the pressure of party leaders that normally comes with the voting process. By tabulating the cost and/or savings of each Member’s agenda, taxpayers can gain a better understanding of the policy interests as well as the guiding budgetary philosophies of their elected representatives.

Pages 8–10:

Table 3. House Sponsorship of Legislation in the First Sessions of the Past Twelve Congresses by Party (Dollar Amounts in Millions) … Democrats … 113th Congress … Proposed Increases [=] $406,795 … Proposed Cuts [=] ($10,311) … Net Agendas [=] $396,483 … Percent Change in Fiscal Year Budget Outlays [=] 11.48 … Republicans … 113th Congress … Proposed Increases [=] $8,633 … Proposed Cuts [=] ($91,280) … Net Agendas [=] ($82,647) … Percent Change in Fiscal Year Budget Outlays [=] -2.39

Table 4. Senate Sponsorship of Legislation in the First Sessions of the Past Twelve Congresses by Party (Dollar Amounts in Millions) … Democrats … 113th Congress … Proposed Increases [=] $21,530 … Proposed Cuts [=] ($3,233) … Net Agendas [=] $18,296 … Percent Change in Fiscal Year Budget Outlays [=] 0.53 … Republicans … 113th Congress … Proposed Increases [=] $5,792 … Proposed Cuts [=] ($164,895) … Net Agendas [=] ($159,103) … Percent Change in Fiscal Year Budget Outlays [=] -4.61

[110] Report “The Tea Is Cooling: The First Session of the 113th Congress.” National Taxpayers Union Foundation, July 10, 2014. <www.ntu.org>

Pages 8–10: “Table 3. House Sponsorship of Legislation in the First Sessions of the Past Twelve Congresses by Party (Dollar Amounts in Millions)” … “Table 4. Senate Sponsorship of Legislation in the First Sessions of the Past Twelve Congresses by Party (Dollar Amounts in Millions)”

[111] Speech: “Address of the President to Joint Sessions of Congress.” President George W. Bush, February 27, 2001. <georgewbush-whitehouse.archives.gov>

[112] Article: “$1.35 Trillion Tax Cut Becomes Law.” By Kelly Wallace. CNN, June 7, 2001. <www.cnn.com>

“President George W. Bush signed into law Thursday the first major piece of legislation of his presidency, a $1.35 trillion tax cut over 10 years.”

[113] Calculated with data from the footnote above and:

a) Webpage: “The Debt to the Penny and Who Holds It.” Bureau of the Public Debt, United States Department of the Treasury. Accessed August 29, 2018 at <www.treasurydirect.gov>

“Total Public Debt Outstanding … 06/07/2001 [=] 5,672,373,164,658 … 01/20/2009 [=] 10,626,877,048,913”

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised August 29, 2018. <www.bea.gov>

“Gross Domestic Product (billions $) … 2001 Q2 [=] 10,597.8 … 2009 Q1 [=] 14,394.5”

c) Webpage: “Calculate Duration Between Two Dates.” Accessed August 29, 2018 at <www.timeanddate.com>

“From and including: Thursday, June 7, 2001 … To, and including: Tuesday, January 20, 2009 … It is 2785 days from the start date to the end date, end date included”

CALCULATIONS:

  • 2,785 days / 365.25 days per year = 7.63 years
  • $5,672,373,164,658 debt on June 7, 2001 / $10,597,800,000,000 GDP in 2001Q2 = 53.5%
  • $10,626,877,048,913 debt on January 20, 2009 / $14,394,500,000,000 GDP in 2009Q1 = 73.8%
  • (73.8% – 53.5%) / 7.63 years = 2.66% per year

[114] Webpage: “Vetoes by President George W. Bush.” United States Senate. Accessed March 15, 2011 at <www.senate.gov>

Vetoes overridden:

H.R.2419: Food, Conservation, and Energy Act of 2008*

H.R.6124: Food, Conservation, and Energy Act of 2008*

H.R.6331: Medicare Improvement for Patients and Providers Act of 2008

H.R.1495: Water Resources Development Act of 2007

* NOTE: “The House and Senate passed H.R. 2419 over veto, enacting 14 of 15 farm bill titles into law. The trade title (title III) was inadvertently excluded from the enrolled bill. To remedy the situation, both chambers re-passed the farm bill conference agreement (including the trade title) as H.R. 6124, again over veto. H.R. 6124, in section 4, repealed Public Law 110-234 and amendments made by it, effective on the date of that Act’s enactment.” Webpage: “H.R.2419: Food, Conservation, and Energy Act of 2008.” Library of Congress. Accessed November 2, 2016 at <www.congress.gov>

[115] Calculated with data from:

a) Report: “H.R. 2419, Food, Conservation, and Energy Act of 2008.” Congressional Budget Office, May 13, 2008. <www.cbo.gov>

Relative to CBO’s March 2008 baseline projections, we estimate that enacting H.R. 2419 would increase direct spending by about $3.6 billion over the 2008-2018 period, assuming that the legislation would remain in effect throughout that period. JCT and CBO estimate that revenues would increase under the legislation by $0.7 billion over the same period. On balance, those changes would produce net costs (increases in deficits or reductions in surpluses) of about $2.9 billion over the 11-year period, relative to CBO’s most recent baseline projections.

b) Report: “H.R. 6331, Medicare Improvements for Patients and Providers Act of 2008.” Congressional Budget Office, July 23, 2008. <www.cbo.gov>

CBO estimates that enacting H.R. 6331 will increase direct spending by less than $50 million over the 2008–2013 period and by $0.3 billion over the 2008–2018 period. In addition, the Joint Committee on Taxation (JCT) estimates that the act will increase federal revenues by $0.2 billion over the 2008–2013 period and by $0.4 billion over the 2008–2018 period. In total, CBO estimates that the act will reduce deficits (or increase surpluses) by $0.1 billion over the 2008–2013 period and by less than $50 million over the 2008–2018 period.

c) Report: “H.R. 1495: Water Resources Development Act of 2007.” Congressional Budget Office, September 24, 2007. <www.cbo.gov>

Assuming appropriation of the necessary amounts, including adjustments for increases in anticipated inflation, CBO estimates that implementing this conference agreement for H.R. 1495 would result in discretionary outlays of about $11.2 billion over the 2008–2012 period and an additional $12.0 billion over the 10 years after 2012. (Some construction costs and operations and maintenance would continue or commence after those first 15 years.)

CALCULATION: $2.9 billion (over 2008–2018 for H.R. 2419) + $0.1 billion (over 2008–2013 for H.R. 6331) + $11.2 billion (over 2008–2012 for H.R. 1495) + $12.0 billion (over 2013–2022) = 26.2 billion over 2008–2022

[116] “Remarks at the Fiscal Responsibility Summit.” By Barack Obama. Government Printing Office, February 23, 2009. <www.whitehouse.gov>

[117] Transcript: “Obama’s Remarks at Stimulus Bill Signing.” Washington Post, February 17, 2009. <www.washingtonpost.com>

“The American Recovery and Reinvestment Act that I will sign today, a plan that meets the principles I laid out in January, is the most sweeping economic recovery package in our history.”

[118] Calculated with data from the footnote above and:

a) Webpage: “The Debt to the Penny and Who Holds It.” Bureau of the Public Debt, United States Department of the Treasury. Accessed April 20, 2018 at <www.treasurydirect.gov>

“Total Public Debt Outstanding … 02/17/2009 [=] 10,789,783,760,341 … 01/20/2017 [=] 19,947,304,555,212”

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised March 28, 2018. <www.bea.gov>

“Gross Domestic Product (billions $) … 2009 Q1 [=] 14,383.9 … 2017 Q1 [=] 19,057.7”

c) Webpage: “Calculate Duration Between Two Dates.” Accessed April 20, 2018 at <www.timeanddate.com>

“From and including: Tuesday, February 17, 2009 … To and including: Friday, January 20, 2017 … It is 2895 days from the start date to the end date, end date included”

CALCULATIONS:

  • 2,895 days / 365.25 days per year = 7.92 years
  • $10,789,783,760,341 debt on February 17, 2009 / $14,383,900,000,000 GDP in 2009 Q1 = 75.0%
  • $19,947,304,555,212 debt on January 20, 2017 / $19,057,700,000,000 GDP in 2017 Q1 = 104.6%
  • (104.6% – 75.0%) / 7.92 years = 3.7 percentage points per year

[119] Webpage: “Vetoes by President Barack H. Obama.” United States Senate. Accessed April 20, 2018 at <www.senate.gov>

“S.2040 … Justice Against Sponsors of Terrorism Act … Sep 23, 2016 … Veto overridden by the House on Sep 28 by vote No. 564 (348-77) … Veto overridden by the Senate on Sep 28 by vote No. 148 (97-1).”

[120] Report: “S. 2040: Justice Against Sponsors of Terrorism Act.” Congressional Budget Office, January 28, 2016. <www.cbo.gov>

“CBO estimates that implementing S. 2040 would have no significant effect on the federal budget.”

[121] “2010 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.” United States Social Security Administration, August 9, 2010. <www.ssa.gov>

Page 138: “The Federal Old-Age and Survivors Insurance (OASI) Trust Fund was established on January 1, 1940 as a separate account in the United States Treasury. The Federal Disability Insurance (DI) Trust Fund, another separate account in the United States Treasury, was established on August 1, 1956. All the financial operations of the OASI and DI programs are handled through these respective funds.”

[122] Report: “Debt Limit: History and Recent Increases.” By D. Andrew Austin. Congressional Research Service, April 29, 2008. <digitalcommons.ilr.cornell.edu>

Summary: “[D]ebt increases when the federal government issues debt to certain government accounts, such as the Social Security, Medicare, and Transportation trust funds, in exchange for their reported surpluses. This increases debt held by government accounts.”

[123] Webpage: “Debt Versus Deficit: What’s the Difference?” United States Department of the Treasury, Bureau of the Public Debt, August 5, 2004. Last updated September 24, 2014. <www.treasurydirect.gov>

“Additionally, the Government Trust Funds are required by law to invest accumulated surpluses in Treasury securities. The Treasury securities issued to the public and to the Government Trust Funds (intragovernmental holdings) then become part of the total debt.”

[124] “2010 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.” Board of Trustees of the Federal OASDI Trust Funds, August 9, 2010. <www.ssa.gov>

Page 221: “Funds not withdrawn for current monthly or service benefits, the financial interchange, and administrative expenses are invested in interest-bearing Federal securities, as required by law; the interest earned is also deposited in the trust funds.”

[125] Report: “Federal Debt and Interest Costs.” Congressional Budget Office, December 2010. <www.cbo.gov>

Page IX:

Because those trust funds and other government accounts are part of the federal government, transactions between them and the Treasury are intragovernmental; that is, the government securities in those funds are an asset to the individual programs but a liability to the rest of the government. The resources needed to redeem the government securities in the trust funds and other accounts in some future year must be generated from taxes, income from other government sources, or borrowing by the government in that year.

[126] Report: “Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2011.” White House Office of Management and Budget. <www.gpo.gov>

Page 57: “The … Federal social insurance and employee retirement programs … own 93 percent of the debt held by Government accounts….”

[127] Webpage: “The Debt to the Penny and Who Holds It.” United States Department of the Treasury, Bureau of the Public Debt. Accessed April 5, 2011 at <www.treasurydirect.gov>

NOTE: As shown in this source, the Bureau of the Public Debt breaks down the “Total Public Debt Outstanding” into “Debt Held by the Public” and “Intragovernmental Holdings.” Forthcoming facts define these terms.

[128] Report: “Debt Limit: History and Recent Increases.” By D. Andrew Austin. Congressional Research Service, April 29, 2008. <digitalcommons.ilr.cornell.edu>

Summary:

Total debt of the federal government can increase in two ways. First, debt increases when the government sells debt to the public to finance budget deficits and acquire the financial resources needed to meet its obligations. This increases debt held by the public. Second, debt increases when the federal government issues debt to certain government accounts, such as the Social Security, Medicare, and Transportation trust funds, in exchange for their reported surpluses. This increases debt held by government accounts. The sum of debt held by the public and debt held by government accounts is the total federal debt.

[129] Webpage: “Frequently Asked Questions About the Public Debt.” United States Department of the Treasury, Bureau of the Fiscal Service. Last updated April 1, 2016. <www.treasurydirect.gov>

What is the Debt Held by the Public?

The Debt Held by the Public is all federal debt held by individuals, corporations, state or local governments, Federal Reserve Banks, foreign governments, and other entities outside the United States Government less Federal Financing Bank securities. Types of securities held by the public include, but are not limited to, Treasury Bills, Notes, Bonds, TIPS, United States Savings Bonds, and State and Local Government Series securities.

[130] Paper: “Government Debt.” By Douglas W. Elmendorf (Federal Reserve Board) and N. Gregory Mankiw (Harvard University and the National Bureau of Economic Research), January 1998. <www.federalreserve.gov>

Page 2: “The figure shows federal debt ‘held by the public,’ which includes debt held by the Federal Reserve System but excludes debt held by other parts of the federal government, such as the Social Security trust fund.”

[131] Report: “Federal Debt and Interest Costs.” Congressional Budget Office, December 2010. <www.cbo.gov>

Pages 13–14:

Ownership of Federal Debt Held by the Public

A significant amount of federal debt is held by the Federal Reserve—the nation’s central bank and an independent entity within the government that is responsible for conducting monetary policy, among other activities.

[132] Report: “Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2011.” White House Office of Management and Budget. <www.gpo.gov>

Page 56: “The gross Federal debt is defined to consist of both the debt held by the public and the debt held by Government accounts. Nearly all the Federal debt has been issued by the Treasury and is sometimes called ‘public debt,’ but a small portion has been issued by other Government agencies and is called ‘agency debt.’

[133] Report: “Debt Limit: History and Recent Increases.” By D. Andrew Austin. Congressional Research Service, April 29, 2008. <digitalcommons.ilr.cornell.edu>

Summary: “[D]ebt increases when the federal government issues debt to certain government accounts, such as the Social Security, Medicare, and Transportation trust funds, in exchange for their reported surpluses. This increases debt held by government accounts.”

[134] Testimony: “An Overview of Federal Debt.” By Paul L. Posner. United States General Accounting Office, June 24, 1998. <www.gao.gov>

Page 2: “[G]overnment held debt is expected to grow due to the large projected increases in trust fund surpluses invested in special Treasury securities.”

[135] Webpage: “Frequently Asked Questions About the Public Debt.” United States Department of the Treasury, Bureau of the Fiscal Service. Last updated April 1, 2016. <www.treasurydirect.gov>

What are Intragovernmental Holdings?

Intragovernmental Holdings are Government Account Series securities held by Government trust funds, revolving funds, and special funds; and Federal Financing Bank securities. A small amount of marketable securities are held by government accounts.

[136] Report: “Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2011.” White House Office of Management and Budget. <www.gpo.gov>

Page 56: “For the purposes of the Budget, ‘debt held by the public’ is defined as debt held by investors outside of the Federal Government, both domestic and foreign, including U.S. State and local governments and foreign governments. It also includes debt held by the Federal Reserve.”

[137] “2009 Financial Report of the United States Government.” U.S. Department of the Treasury, February 26, 2010. <www.fiscal.treasury.gov>

Page 4: “[T]he largest contributors to the Government’s net cost include … the interest paid on debt held by the public (i.e., publicly-held debt).”

[138] Report: “Monthly Statement of the Public Debt of the United States.” U.S. Bureau of the Public Debt, March 31, 2018. <www.treasurydirect.gov>

“Table I—Summary of Treasury Securities Outstanding, March 31, 2018 (Millions of Dollars) … Debt Held By the Public … Total Public Debt Outstanding [=] $15,428,010 … Intragovernmental Holdings … Total Public Debt Outstanding [=] $5,661,633 … Totals … Total Public Debt Outstanding [=] $21,089,643”

[139] United States Code Title 31, Subtitle III, Chapter 31, Subchapter II, Section 3123: “Payment of Obligations and Interest on the Public Debt.” Accessed December 6, 2017 at <www.law.cornell.edu>

Section (a): “The faith of the United States Government is pledged to pay, in legal tender, principal and interest on the obligations of the Government issued under this chapter.”

[140] Report: “Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2011.” White House Office of Management and Budget. <www.gpo.gov>

Page 57:

However, issuing debt to Government accounts does not have any of the credit market effects of borrowing from the public. It is an internal transaction of the Government, made between two accounts that are both within the Government itself. Issuing debt to a Government account is not a current transaction of the Government with the public; it is not financed by private saving and does not compete with the private sector for available funds in the credit market. While such issuance provides the account with assets—a binding claim against the Treasury—those assets are fully offset by the increased liability of the Treasury to pay the claims, which will ultimately be covered by taxation or borrowing. Similarly, the current interest earned by the Government account on its Treasury securities does not need to be financed by other resources. …

For all these reasons, debt held by the public and debt net of financial assets are both better gauges of the effect of the budget on the credit markets than gross Federal debt.

[141] Report: “Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2010.” White House Office of Management and Budget. <www.gpo.gov>

Page 223: “Debt is the largest legally binding obligation of the Federal Government. At the end of 2008, the Government owed $5,803 billion of principal to the individuals and institutions who had loaned it the money to fund past deficits.”

NOTE: As proof that the statement above excludes the debt owed to federal entities, consider that at the end of fiscal year 2008 (September 30, 2008), the gross national debt was $10,025 billion, which consisted of $5,809 billion of publicly held debt and $4,216 billion of government-held debt. [Webpage: “The Debt to the Penny and Who Holds It.” United States Department of the Treasury, Bureau of the Public Debt. Accessed April 4, 2011 at <www.treasurydirect.gov>]

[142] Report: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010 (Revised August 2010). <www.cbo.gov>

Page 13:

The most meaningful measure of federal debt for such projections is debt held by the public, which represents the amount that the government is borrowing in the financial markets (by issuing Treasury securities) to pay for federal operations and activities. That borrowing competes with other participants in the credit markets for financial resources and can crowd out private investment.14

14 In contrast, debt held by trust funds and other government accounts—which, together with debt held by the public, make up gross federal debt—represents internal transactions of the government and thus has no effect on credit markets.

[143] “2008 Financial Report of the United States Government.” U.S. Department of the Treasury, 2008. <www.fiscal.treasury.gov>

Page 26: “Intra-governmental debt is not shown on the balance sheet because claims of one part of the Government against another are eliminated for consolidation purposes (see Financial Statement Note 11).”

[144] “2010 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.” United States Social Security Administration, August 9, 2010. <www.ssa.gov>

Page 141: “Another source of income to the trust funds is interest received on investments held by the trust funds. That portion of each trust fund that is not required to meet the current cost of benefits and administration is invested, on a daily basis, primarily in interest-bearing obligations of the U.S. Government (including special public-debt obligations described below).”

Page 2: “Total income was $807 billion ($689 billion in tax revenue and $118 billion in interest earnings), and assets held in special issue U.S. Treasury securities grew to $2.5 trillion.”

[145] Dataset: “Table VI.F7. Operations of the Combined OASI and DI Trust Funds, in Constant 2010 Dollars, Calendar Years 2010–85 [In billions].” United States Social Security Administration, Office of the Chief Actuary. Last reviewed or modified August 5, 2010. <www.ssa.gov>

NOTES:

  • The “combined OASI and DI Trust Funds” comprise the “Social Security Trust Fund.”
  • Just Facts has conducted extensive research on Social Security, and all of the Social Security Administration’s solvency projections include the monies owed to the program by the federal government.

[146] “Status of the Social Security and Medicare Programs: A Summary of the 2000 Annual Reports.” Social Security and Medicare Boards of Trustees, April 2000. <www.ssa.gov>

Page 1: “Trust fund operations, in billions of dollars … HI [Hospital Insurance, a.k.a., Medicare Part A] … Assets (end of 1999) [=] 44.8”

[147] “Prosperity for America’s Families: The Gore Lieberman Economic Plan.” Gore/Lieberman, Inc., September 2000. <www.cnn.com>

NOTE: Just Facts searched this document from cover to cover three times while examining all uses of the word “debt.” In all such instances, the intergovernmental debt is not mentioned, acknowledged, or included in any of the data. This document uses the phrases “publicly held debt” and “debt held by the public” a total of five times. On more than 150 other occasions, the document uses terms such as “debt,” “federal debt,” and “national debt,” when in fact, it is actually referring only to the publicly held debt in many of these cases.

[148] “Prosperity for America’s Families: The Gore Lieberman Economic Plan.” Gore/Lieberman, Inc., September 2000. <www.cnn.com>

Page 12: “But with Social Security projected to become insolvent in 2037* and Medicare in 2025,† they face looming challenges that are just around the corner.”

NOTES:

  • * The Social Security program required the money owed to it by the federal government in order to remain solvent until the date given in the Gore-Liebermann proposal. In 2000, Social Security tax revenues were “expected to exceed expenditures until 2015,” but the program was projected to remain solvent until 2037 by collecting on the principal and interest owed by the federal government to the Social Security trust fund. [“2000 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds.” Board of Trustees of the Federal OASDI Trust Funds, March 30, 2000. <www.ssa.gov>
    Pages 3–4: “Under the intermediate assumptions, OASDI [Social Security] tax revenues are estimated to exceed expenditures until 2015 (1 year later than estimated in last year’s report). Total income (including interest earnings on the trust funds) will exceed expenditures through 2024. It is estimated that beginning in 2025, trust fund assets would have to be redeemed to cover the difference until the assets of the combined funds are exhausted in 2037, 3 years later than estimated in last year’s report.”]
  • † The same applies here. The Medicare program required the money owed to it by the federal government in order to remain solvent until the date given in the Gore-Liebermann proposal. [“Status of the Social Security and Medicare Programs: A Summary of the 2000 Annual Reports.” Social Security and Medicare Boards of Trustees, April 2000. <www.ssa.gov>
    Page 8: “Key Dates For The Trust Funds … HI [i.e., Hospital Insurance or Medicare Part A] … First year outgo exceeds income including interest [=] 2017 … Year trust fund assets are exhausted [=] 2025”]
  • For more details about how the Gore Lieberman Economic Plan misleads with regard to the national debt, visit Just Facts’ essay, “The Impact of Social Security on the National Debt.”

[149] United States Code Title 31, Subtitle II, Chapter 11, Section 1102: “Fiscal Year.” Accessed April 23, 2018 at <www.law.cornell.edu>

“The fiscal year of the Treasury begins on October 1 of each year and ends on September 30 of the following year.”

[150] Webpage: “The Debt to the Penny and Who Holds It.” United States Department of the Treasury, Bureau of the Public Debt. Accessed April 5, 2011 at <www.treasurydirect.gov>

October 1, 2009: $11,920,519,164,319

September 30, 2010: $13,561,623,030,892

CALCULATION: $13,561,623,030,892 – $11,920,519,164,319 = $1,641,103,866,573 increase in national debt during fiscal year 2010

NOTE: Using a different methodology, the White House Office of Management and Budget arrives at a very similar figure of $1,653 billion. [Report: “Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2012.” White House Office of Management and Budget. <www.gpo.gov>. Page 61: “In [fiscal year] 2010 the … gross Federal debt increased by $1,653 billion….”]

[151] “Economic Report of the President (Together with the Annual Report

of the Council of Economic Advisers).” White House, February 2011. <obamawhitehouse.archives.gov>

Page 40: “The Federal budget deficit on September 30, the end of fiscal year 2010, was $1.29 trillion, down about 8.5 percent from $1.41 trillion the year before.”

[152] Article: “Obama’s Budget Deficit: Still $1.3 Trillion.” By Richard Wolf. USA Today, October 15, 2010. <content.usatoday.com>

“The $1.29 trillion is the official U.S. budget deficit for the 2010 fiscal year, which ended two weeks ago.”

[153] Article: “Fiscal 2010 Deficit Thins to $1.29 Trillion.” By Donna Smith. Reuters, October 16, 2010. <www.reuters.com>

[154] Report: “Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2012.” White House Office of Management and Budget. <www.gpo.gov>

Page 136: “Unified budget includes receipts from all sources and outlays for all programs of the Federal Government, including both on- and off-budget programs.”

Page 137: “The Federal Government has used the unified budget concept as the foundation for its budgetary analysis and presentation since the 1969 Budget….”

Page 64: “Debt held by Government accounts.—The amount of Federal debt issued to Government accounts depends largely on the surpluses of the trust funds, both on-budget and off-budget, which owned 92 percent of the total Federal debt held by Government accounts at the end of 2010. … The remainder of debt issued to Government accounts is owned by a number of special funds and revolving funds.”

Page 73: “The trust fund surplus reduces the total budget deficit or increases the total budget surplus….”

Pages 68–69 contain a listing of all federal programs to which money is owed: “Debt Held by Government Accounts (in Millions of Dollars) … Investment or Disinvestment … 2010 Actual [=] 178,723”

NOTE: To understand how this all fits together, see the calculation shown two footnotes below.

[155] Report: “Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2012.” White House Office of Management and Budget. <www.gpo.gov>

Page 139:

To illustrate the budgetary and non-budgetary components of a credit program, consider a portfolio of new direct loans made to a cohort of college students. To encourage higher education, the Government offers loans at a lower cost than private lenders. Students agree to repay the loans according to the terms of their promissory notes. The loan terms may include lower interest rates or longer repayment periods than would be available from private lenders. Some of the students are likely to become delinquent or default on their loans, leading to Government losses to the extent the Government is unable to recover the full amount owed by the students. … In other words, the subsidy cost is the difference in present value between the amount disbursed by the Government and the estimated value of the loan assets the Government receives in return. Because the loan assets have value, the remainder of the transaction (beyond the amount recorded as a subsidy) is simply an exchange of financial assets of equal value and does not result in a cost to the Government.

Page 129:

Borrowing is not exactly equal to the deficit, and debt repayment is not exactly equal to the surplus, because of the other means of financing such as those discussed in this section. …

The budget treats borrowing and debt repayment as a means of financing, not as receipts and outlays. …

In 2010, the Government borrowed $1,474 billion from the public, bringing debt held by the public to $9,019 billion. This borrowing financed the $1,293 billion deficit in that year as well as the net effect of other means of financing, such as changes in cash balances and other accounts discussed below. …

The budget records the net cash flows of credit programs in credit financing accounts. These accounts include the transactions for direct loan and loan guarantee programs, as well as the equity purchase programs under TARP….

Page 63: “In 2010 the deficit was $1,293 billion while these other factors—primarily the net disbursements of credit financing accounts—increased the need to borrow by $181 billion.”

NOTE: To understand how this all fits together, see the calculation shown in the next footnote.

[156] The following calculation reconciles the reported budget deficit for fiscal year 2010 and the increase in national debt during this period. All data are from the footnotes above.

CALCULATION: $1,293 billion “deficit” + $181 billion “other means of financing” + $179 billion increase in “debt held by government accounts” = $1,653

This figure of $1,653 is exactly the same as that cited in the source for all of the data used in this calculation. [Report: “Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2012.” White House Office of Management and Budget. <www.gpo.gov>. Page 61: “In [fiscal year] 2010 the … gross Federal debt increased by $1,653 billion….”]

[157] Webpage: “About PolitiFact.” Accessed November 4, 2016 at <www.politifact.com>

PolitiFact is a project of the Tampa Bay Times and its partners to help you find the truth in politics.

Every day, reporters and researchers from PolitiFact and its partner news organization examine statements by members of Congress, state legislators, governors, mayors, the president, cabinet secretaries, lobbyists, people who testify before Congress and anyone else who speaks up in American politics. We research their statements and then rate the accuracy on our Truth-O-Meter—True, Mostly True, Half True, Mostly False and False. The most ridiculous falsehoods get our lowest rating, Pants on Fire.

[158] Article: “$5 Trillion Added to National Debt Under Bush.” By Angie Drobnic Holan. PolitiFact, January 22, 2009. <www.politifact.com>

At the end of the Clinton administration, there were several years of budget surpluses. …

When Bush took office, the national debt was $5.73 trillion. When he left, it was $10.7 trillion. …

[159] See the statement above. Also, per the source below, the national debt was $5.73 trillion on Bush’s inauguration date of January 20, 2001.

[160] Webpage: “The Debt to the Penny and Who Holds It.” United States Department of the Treasury, Bureau of the Public Debt. Accessed April 9, 2011 at <www.treasurydirect.gov>

NOTE: In cases where data for the exact date is not available, the closest date is used (never more than four days away).

Year

National debt (in billions $)

at start of fiscal year (October 1)

1993

4,406

1994

4,693

1995

4,988

1996

5,235

1997

5,421

1998

5,541

1999

5,653

2000

5,662

2001

5,806

NOTE: The facts contained in this footnote pertain to the differing accounting criteria that PolitiFact applied to Bush and Clinton. Facts regarding the actual figures and the propriety of linking the national debt solely to the president are presented further below.

[161] Calculated with data from the reports: “2017 Average Historical Monthly Interest Rates.” U.S. Treasury, Bureau of the Fiscal Service. Last updated January 4, 2018. <www.treasurydirect.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[162] Calculated with the dataset: “Table 3.2. Federal Government Current Receipts and Expenditures (Billions of Dollars).” United States Department of Commerce, Bureau of Economic Analysis. Last revised May 30, 2018. <www.bea.gov>

“Total receipts … 2017 [=] 3,860.0”

CALCULATION: $455,643,262,199 interest / $3,860,000,000,000 total receipts = 11.8%

[163] Calculated with the dataset: “Table 3.2. Federal Government Current Receipts and Expenditures (Billions of Dollars).” United States Department of Commerce, Bureau of Economic Analysis. Last revised May 30, 2018. <www.bea.gov>

“Taxes on corporate income … 2017 [=] 401.3”

CALCULATION: $455,643,262,199 interest / $401,300,000,000 corporate income tax receipts = 1.1

[164] Calculated with data from the report: “Fiscal Year 2019 Historical Tables: Budget of the U.S. Government.” White House Office of Management and Budget, February 3, 2018. <www.whitehouse.gov>

Pages 60–73: “Table 3.2—Outlays by Function and Subfunction: 1962–2023 (in Millions of Dollars … Elementary, secondary, and vocational education … 2017 [=] 40,631 … Higher education [=] 71,801”

CALCULATION: $455,643,262,199 interest / ($40,631,000,000 + $71,801,000,000) federal education expenditure = 4.0

NOTE: The available data on federal education expenditures is for the federal government’s 2017 fiscal year, which was October 1, 2016 to September 30, 2017.

[165] Calculated with the dataset: “Table 3.2. Federal Government Current Receipts and Expenditures (Billions of Dollars).” United States Department of Commerce, Bureau of Economic Analysis. Last revised May 30, 2018. <www.bea.gov>

“Excise Taxes … 2017 [=] 93.8”

CALCULATION: $455,643,262,199 interest / $93,800,000,000 excise tax receipts = 4.8

[166] Calculated with data from the report: “Fiscal Year 2019 Historical Tables: Budget of the U.S. Government.” White House Office of Management and Budget, February 12, 2018. <www.whitehouse.gov>

Pages 215–240: “Table 11.3—Outlays for Payments for Individuals by Category and Major Program: 1940–2023 (in Millions of Dollars) … 2017 … Total … SNAP [Supplemental Nutrition Assistance Program] (formerly Food stamps) (including Puerto Rico) [=] 70,147”

CALCULATION: $455,643,262,199 interest / $70,147,000,000 SNAP expense = 6.5

NOTE: The available data on the federal SNAP expenditure is for the federal government’s 2017 fiscal year, which was October 1, 2016 to September 30, 2017.

[167] Calculated with data from the report: “Fiscal Year 2019 Historical Tables: Budget of the U.S. Government.” White House Office of Management and Budget, February 12, 2018. <www.whitehouse.gov>

Pages 60–73: “Table 3.2—Outlays by Function and Subfunction: 1962–2023 (in Millions of Dollars).”

Pages 24–25: “Table 1.1—Summary of Receipts, Outlays, and Surpluses or Deficits (–): 1789–2023 (in Millions of Dollars).”

NOTE: An Excel file containing the data and calculations is available upon request.

[168] Report: “How Treasury Issues Debt.” By Grant A. Driessen. Congressional Research Service, August 18, 2016. <fas.org>

Page 19:

Interest paid on the federal debt increases the overall cost of borrowing. … If interest rates are low, interest payments on Treasury securities may also be low, thereby making debt less costly. However, increased borrowing will increase the supply of Treasury securities, which generally leads to higher interest rates and future net interest payments.

Despite the recent increases in federal borrowing during the recent economic recession and subsequent recovery, the actions of the Fed have kept interest rates near zero since late 2008. Therefore, borrowing costs to the Treasury currently remain low.

[169] Report: “The Budget and Economic Outlook: 2018 to 2028.” Congressional Budget Office, April 2018. <www.cbo.gov>

Page 62: “Although several factors affect the federal government’s net interest costs—such as the rate of inflation for Treasury inflation-protected securities and the maturity

structure of outstanding securities (for example, longer-term securities generally yield higher interest)—its primary drivers are the amount of debt held by the public and interest rates on Treasury securities.”

[170] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 2014. <www.cbo.gov>

Page 14: “When the federal debt is large, the government ordinarily must make substantial interest payments to its lenders, and growth in the debt causes those interest payments to increase.”

Page 21: “The growth in net interest payments and debt is mutually reinforcing: rising interest payments push up deficits and debt, and rising debt pushes up interest

payments.”

[171] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 2014. <www.cbo.gov>

Page 14: “When the federal debt is large, the government ordinarily must make substantial interest payments to its lenders, and growth in the debt causes those interest payments to increase. (Net interest payments are currently fairly small relative to the size of the economy because interest rates are exceptionally low, but CBO anticipates that those payments will increase considerably as interest rates return to more typical levels.)”

[172] Calculated with data from:

a) Report: “Fiscal Year 2019 Historical Tables: Budget of the U.S. Government.” White House Office of Management and Budget, February 12, 2018. <www.whitehouse.gov>

Pages 60–73: “Table 3.2—Outlays by Function and Subfunction: 1962–2023 (in Millions of Dollars).”

b) Dataset: “Historical Debt Outstanding—Annual, 1950–1999.” United States Department of the Treasury, Bureau of the Public Debt. Updated May 5, 2013. <www.treasurydirect.gov>

c) Webpage: “The Debt to the Penny and Who Holds It.” United States Department of the Treasury, Bureau of the Public Debt. Accessed February 8, 2018 at <www.treasurydirect.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[173] Calculated with data from:

a) Reports: “Schedules of Federal Debt.” U.S. Treasury, Bureau of the Fiscal Service, December 2016, January 2017, February 2017, March 2017, April 2017, May 2017, June 2017, July 2017, August 2017, October 2017, November 2017, December 2017.

Page 3: “Note 4. Interest Expense”

b) Report: “Financial Audit: Bureau of the Fiscal Service’s Fiscal Years 2017 and 2016 Schedules of Federal Debt.” United States Government Accountability Office, November 9, 2017. <www.gao.gov>

Page 32: “Note 4. Interest Expense”

c) Webpage: “The Debt to the Penny and Who Holds It.” United States Department of the Treasury, Bureau of the Public Debt. Accessed June 15, 2018 at <www.treasurydirect.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[174] Report: “How Treasury Issues Debt.” By Grant A. Driessen. Congressional Research Service, August 18, 2016. <fas.org>

Page 16: “[Debts issued] to finance the operations of the federal government, are offered at a mix of maturities…. Longer-term securities generally command higher interest rates compared to shorter-term securities because investors demand greater compensation for incurring risk over a longer period of time.”

[175] Entry: “Interest Rates.” The Concise Encyclopedia of Economics, 2008. <www.econlib.org>

In general, lenders demand a higher rate of interest for loans of longer maturity. … The longer the period to maturity of the bond, the greater is the potential fluctuation in price when interest rates change. If you hold a bond to maturity, you need not worry if the price bounces around in the interim. But if you have to sell prior to maturity, you may receive less than you paid for the bond. The longer the maturity of the bond, the greater is the risk of loss because long-term bond prices are more volatile than shorter-term issues. To compensate for that risk of price fluctuation, longer-term bonds usually have higher interest rates than shorter-term issues.

[176] Article: “Interest Rate Risk—When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall.” SEC Office of Investor Education and Advocacy, June 1, 2013. <www.sec.gov>

The Effect of Maturity on Interest Rate Risk and Coupon Rates

A bond’s maturity is the specific date in the future at which the face value of the bond will be repaid to the investor. A bond may mature in a few months or in a few years. Maturity can also affect interest rate risk. The longer the bond’s maturity, the greater the risk that the bond’s value could be impacted by changing interest rates prior to maturity, which may have a negative effect on the price of the bond. Therefore, bonds with longer maturities generally have higher interest rate risk than similar bonds with shorter maturities. …

To compensate investors for this interest rate risk, long-term bonds generally offer higher coupon rates than short-term bonds of the same credit quality.

[177] Book: The Federal Reserve System Purposes & Functions (10th edition). Board of Governors of the Federal Reserve System, October 2016. <www.federalreserve.gov>

Page 25:

When inflation is low and stable, individuals can hold money without having to worry that high inflation will rapidly erode its purchasing power. … Longer-term interest rates are also more likely to be moderate when inflation is low and stable. …

… [I]f inflation persisted near zero, short-term interest rates would likely also be quite low….

[178] Report: “The Budget and Economic Outlook: 2017 to 2027.” Congressional Budget Office, January 2017. <www.cbo.gov>

Page 80: “Inflation also has an impact on outlays for net interest because it affects interest rates. If inflation was 1 percentage point higher than CBO projects, for example, then interest rates would be 1 percentage point higher (all else being equal). As a result, new federal borrowing would incur higher interest costs, and outstanding inflation-indexed securities would be more costly for the federal government.”

[179] “Minutes of the Federal Open Market Committee, June 12–13, 2018.” Board of Governors of the Federal Reserve System, July 5, 2018.

<www.federalreserve.gov>

Page 5: “Figure 3.E provides the distribution of participants’ judgments regarding the appropriate target—or midpoint of the target range—for the federal funds rate at the end of each year from 2018 to 2020 and over the longer run. The distributions of projected policy rates through 2020 shifted modestly higher, consistent with the revisions to participants’ projections of real GDP growth, the unemployment rate, and inflation.”

Page 6: “Incoming data suggested that GDP growth strengthened in the second quarter of this year, as growth of consumer spending picked up after slowing earlier in the year. … They also generally expected that further gradual increases in the target range for the federal funds rate would be consistent with sustained expansion of economic activity….”

[180] Speech: “Why Are Interest Rates So Low? Causes and Implications.” By Stanley Fischer, October 17, 2016. <www.federalreserve.gov>

One theme that will emerge is that depressed long-term growth prospects put sustained downward pressure on interest rates. …

Lower long-run trend productivity growth, and thus lower trend output growth, affects the balance between saving and investment through a variety of channels. A slower pace of innovation means that there will be fewer profitable opportunities in which to invest, which will tend to push down investment demand. Lower productivity growth also reduces the future income prospects of households, lowering their consumption spending today and boosting their demand for savings. Thus, slower productivity growth implies both lower investment and higher savings, both of which tend to push down interest rates.

[181] Report: “Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2018.” White House Office of Management and Budget. <www.whitehouse.gov>

Page 12: “As growth increases, the Administration expects that interest rates will begin to rise to values more consistent with historical experience. … Economic theory suggests that real GDP growth rates and interest rates are positively correlated, so interest rates are expected to be propelled higher by the stronger growth that the Administration anticipates.”

NOTE: It is important to realize that association does not prove causation, and it is often difficult to determine causation in economics and other social sciences. This is because numerous variables might affect a certain outcome, and there is frequently no objective way to identify all of these factors and isolate the interplay between them.

[182] Report: “A Citizen’s Guide to the Federal Budget: Budget of the United States Government, Fiscal Year 1998.” White House Office of Management and Budget, February 6, 1997. <fraser.stlouisfed.org>

“The deficit forces the Government to borrow money in the private capital markets. That borrowing competes with (1) borrowing by businesses that want to build factories and machines that make workers more productive and raise incomes, and (2) borrowing by families who hope to buy new homes, cars, and other goods. The competition for funds tends to produce higher interest rates.”

[183] Article: “Projections of Interest Rates.” By Edward Gamber. Congressional Budget Office, February 1, 2017. <www.cbo.gov>

“Other factors are projected to push real interest rates up from their earlier average…. Federal debt is projected to be higher as a percentage of GDP, increasing the supply of Treasury securities.”

[184] Report: “How Treasury Issues Debt.” By Grant A. Driessen. Congressional Research Service, August 18, 2016. <fas.org>

Page 19: “[I]ncreased borrowing will increase the supply of Treasury securities, which generally leads to higher interest rates and future net interest payments.”

[185] Paper: “New Evidence on the Interest Rate Effects of Budget Deficits and Debt.” By Thomas Laubach. Board of Governors of the Federal Reserve System, May 2003. <www.federalreserve.gov>

Page 1 (of PDF): “ The estimated effects of government debt and deficits on interest rates are statistically and economically significant: a one percentage point increase in the projected deficit-to-GDP ratio is estimated to raise long-term interest rates by roughly 25 basis points.”

[186] Report: “Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2018.” White House Office of Management and Budget. <www.whitehouse.gov>

Page 41: “If Treasury were unable to make timely interest payments or redeem securities, investors would cease to view U.S. Treasury securities as free of credit risk and Treasury’s interest costs would increase. … Foreign investors would likely shift out of dollar-denominated assets, driving down the value of the dollar and further increasing interest rates on non-Federal, as well as Treasury, debt.”

[187] Report: “A Debt Crisis in America: What It Might Look Like.” U.S. Congress, House Budget Committee, February 22, 2013. <budget.house.gov>

Page 4: “In recent years, foreigners have flocked to Treasury debt in a ‘flight to quality,’ which helped to keep U.S. borrowing rates at record low levels. But these investment flows work both ways, as Europe’s debt crisis illustrates. As risk perceptions change, particularly with regard to sovereign credit, investors could seek to avoid U.S. debt, thereby helping to drive up interest rates.”

[188] Report: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010 (Revised August 2010). <www.cbo.gov>

Page xi: “Over time, higher debt would increase the probability of a fiscal crisis in which investors would lose confidence in the government’s ability to manage its budget, and the government would be forced to pay much more to borrow money.”

[189] Article: “Projections of Interest Rates.” By Edward Gamber. Congressional Budget Office, February 1, 2017. <www.cbo.gov>

[Congressional Budget Office] also expects the demand for Treasury securities relative to the demand for risky assets to be higher than its 1990–2007 average. That relatively higher demand for Treasury securities implies higher prices and therefore lower interest rates. …

… Current prices in financial markets indicate that investors expect short-term interest rates to rise only gradually and to remain low, possibly because they expect certain forces putting downward pressure on interest rates in the United States to persist over the next decade. One force is weakness in global financial and monetary conditions, which has resulted in a flight to low-risk securities and currencies, especially U.S. Treasury securities.

[190] According to the law of supply and demand, “if demand increases, while supply remains constant, prices will rise.”† When it comes to federal debt, price increases mean lower interest rates.‡ Lending money to the federal government is considered to be the lowest-risk investment in the world because the payments are “backed by the full faith and credit of the U.S. government.”§ When there is financial uncertainty, investors prefer lower-risk assets in a “flight to quality.”# The increased demand to purchase low-risk assets during and after the Great Recession of 2007 was large enough to outweigh the increased supply of U.S. debt, which contributed to higher prices (lower interest rates) during that period.£

NOTES:

  • † Textbook: Introduction to Economics (6th edition). By Alec Cairncross and Peter Sinclair. Butterworths, 1982. Page 138: “If supply increases, while demand remains constant, prices will fall; if demand increases, while supply remains constant, prices will rise.”
  • ‡ Article: “Interest Rate Risk—When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall.” SEC Office of Investor Education and Advocacy, June 1, 2013. <www.sec.gov>. Page 1: “A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions. When market interest rates rise, prices of fixed-rate bonds fall.” Page 4: “The seesaw effect between interest rates and bond prices applies to all bonds, even to those that are insured or guaranteed by the U.S. government.”
  • § Article: “The Treasury Securities Market: Overview and Recent Developments.” By Dominique Dupont and Brian Sack. Federal Reserve Board Bulletin, December 1999. <www.federalreserve.gov>. Page 792: “The payments of principal and interest on the securities are backed by the full faith and credit of the U.S. government. In light of the sound financial history of the federal government and its ability to raise substantial tax revenues, Treasury securities are considered to have the lowest risk of default of any major financial investment in the world.”
  • # Article: “On the Supply of, and Demand for, U.S. Treasury Debt.” By David Andolfatto and Andrew Spewak. Federal Reserve Bank of St. Louis Economic Synopses, March 2018. <doi.org>. “As financial instability increases, investors replace risky assets with high-quality, safe ones in a so-called ‘flight to quality.’ Treasuries are widely considered to be among the safest assets in the world, so investors tend to invest in them during times of uncertainty.”
  • £ Article: “Flight to Safety and U.S. Treasury Securities.” By Bryan J. Noeth and Rajdeep Sengupta. Regional Economist (a publication of the Federal Reserve Bank of St. Louis), 2017. <www.stlouisfed.org>. “In fact, the increase in the demand for Treasuries was sufficiently large so that prices actually rose with an increase in the supply of government securities. … Although the supply of Treasuries was relatively constant in the second half of 2007 and the first half of 2008, yields on both short-term and long-term government securities continued to fall.”

[191] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 2014. <www.cbo.gov>

Page 108:

In CBO’s [the Congressional Budget Office’s] assessment, the following factors will probably reduce future interest rates on government securities relative to their 1990–2007 average: …

The risk premium—the additional return that investors require to hold assets that are riskier than Treasury securities—will probably remain higher in the future than it was, on average, in the 1990–2007 period. Financial markets were already showing less appetite for risk in the early 2000s, so the risk premium was higher toward the end of that 18-year period than the average over the whole period. In addition, CBO expects that the demand for low-risk assets will be stronger in the wake of the financial crisis….

[192] Article: “Quantitative Easing: How Well Does This Tool Work?” by Stephen D. Williamson. Regional Economist (a publication of the Federal Reserve Bank of St. Louis), 2017. <www.stlouisfed.org>

Quantitative easing (QE)—large-scale purchases of assets by central banks—led to a large increase in the Federal Reserve’s balance sheet during the global financial crisis (2007-2008) and in the long recovery from the 2008-2009 recession. … QE consists of large-scale asset purchases by central banks, usually of long-maturity government debt but also of private assets, such as corporate debt or asset-backed securities. Typically, QE occurs in unconventional circumstances, when short-term nominal interest rates are very low, zero or even negative. …

Traditionally, the interest rate that the Fed targets is the federal funds (fed funds) rate. Suppose, though, that the fed funds rate target is zero, but inflation is below the Fed’s 2 percent target and aggregate output is lower than potential. If the effective lower bound were not a binding constraint, the Fed would choose to lower the fed funds rate target, but it cannot. What then? The Fed faced such a situation at the end of 2008, during the financial crisis, and resorted to unconventional monetary policy, including a series of QE experiments that continued into late 2014. …

At the 2010 Jackson Hole conference, then-Fed Chairman Ben Bernanke attempted to articulate the Fed’s rationale for QE. Bernanke’s view was that, with short-term nominal interest rates at zero, purchases by the central bank of long-maturity assets would act to push up the prices of those securities because the Fed was reducing their net supply. Thus, long-maturity bond yields should go down, for example, if the Fed purchases long-maturity Treasury securities.

[193] Webpage: “What Were the Federal Reserve’s Large-Scale Asset Purchases?” Board of Governors of the Federal Reserve System. Last updated December 22, 2015. <www.federalreserve.gov>

With short-term interest rates at nearly zero, the Federal Reserve made a series of large-scale asset purchases (LSAPs) between late 2008 and October 2014.

In conducting LSAPs, the Fed purchased longer-term securities issued by the U.S. government and longer-term securities issued or guaranteed by government-sponsored agencies such as Fannie Mae or Freddie Mac. … The Fed’s purchases reduced the available supply of securities in the market, leading to an increase in the prices of those securities and a reduction in their yields.

[194] Report: “How Treasury Issues Debt.” By Grant A. Driessen. Congressional Research Service, August 18, 2016. <fas.org>

Pages 6–7:

The Fed’s monetary policy actions can affect interest rates on Treasury securities in the short run. The Fed conducts its monetary policy by setting a federal funds rate, the price at which banks buy and sell reserves on an overnight basis, based on the supply and demand for bank reserves. Monetary actions by the Fed generally affect short-term nominal interest rates. If the Fed lowers the federal funds rate, resulting in a lower short-term interest rate, long-term interest rates are likely to fall also, though they may not fall as much or as quickly.27

27 The federal funds rate is linked to the interest rates that banks and other financial institutions charge for loans—or the provision of credit. Thus, while the Fed may directly influence only a very short-term interest rate, this rate influences other longer-term rates. However, this relationship is far from being on a one-to-one basis since the longer-term market rates are influenced not only by what the Fed is doing today, but what it is expected to do in the future and what inflation is expected to be in the future.

[195] Book: The Federal Reserve System Purposes & Functions (10th edition). Board of Governors of the Federal Reserve System, October 2016. <www.federalreserve.gov>

Page 22:

Prior to the financial crisis that began in 2007, the Federal Reserve bought or sold securities issued or backed by the U.S. government in the open market on most business days in order to keep a key short-term money market interest rate, called the federal funds rate, at or near a target set by the Federal Open Market Committee, or FOMC (figure 3.2). (The FOMC is the monetary policymaking arm of the Federal Reserve.) Changes in that target, and in investors’ expectations of what that target would be in the future, generated changes in a wide range of interest rates paid by borrowers and earned by savers.

Pages 27–28:

Short-term interest rates—for example, the rate of return paid to holders of U.S. Treasury bills or commercial paper (a short-term debt security) issued by private companies—are affected by changes in the level of the federal funds rate.

Short-term interest rates would likely decline if the FOMC reduced its target for the federal funds rate, or if unfolding events or Federal Reserve communications led the public to think that the FOMC would soon reduce the federal funds rate to a level lower than previously expected. Conversely, short-term interest rates would likely rise if the FOMC increased the funds rate target, or if unfolding events or Federal Reserve communications prompted the public to believe that the funds rate would soon be moved to a higher level than had been anticipated.

These changes in short-term market interest rates resulting from a change in the FOMC’s target for the federal funds rate typically are transmitted to medium- and longer-term interest rates, such as those on Treasury notes and bonds, corporate bonds, fixed-rate mortgages, and auto and other consumer loans. Medium- and longer-term interest rates are also affected by how people expect the federal funds rate to change in the future. For example, if borrowers and lenders think, today, that the FOMC is likely to raise its target for the federal funds rate substantially over the next several years, then medium-term interest rates today will be appreciably higher than short-term interest rates.

[196] Report: “US Business Cycle Expansions and Contractions.” National Bureau of Economic Research, September 20, 2010. <www.nber.org>

Contractions (recessions) start at the peak of a business cycle and end at the trough. ... Peak [=] December 2007 (IV) … Trough [=] June 2009 (II)”

[197] Book: The Federal Reserve System Purposes & Functions (10th edition). Board of Governors of the Federal Reserve System, October 2016. <www.federalreserve.gov>

Page 22: “To support the economy during the financial crisis that began in 2007 and during the ensuing recession, the FOMC [Federal Open Market Committee] lowered its target for the federal funds rate to near zero at the end of 2008.”

Pages 46–47: “Another way that the Federal Reserve responded to the crisis was through its traditional policy tool, the federal funds rate. Beginning in the fall of 2007, the FOMC cut its target for the federal funds rate and by the end of 2008, that target had been reduced from 5¼ percent to a range of 0 to ¼ percentage point (figure 3.6).”

[198] Book: The Federal Reserve System Purposes & Functions (10th edition). Board of Governors of the Federal Reserve System, October 2016. <www.federalreserve.gov>

Page 22: “To support the economy during the financial crisis that began in 2007 and during the ensuing recession, the FOMC [Federal Open Market Committee] lowered its target for the federal funds rate to near zero at the end of 2008. It then began to use less traditional approaches to implementing policy, including buying very large amounts of longer-term government securities to apply downward pressure on longer-term interest rates.”

Pages 46–47: “In addition, between March 2009 and October 2009, the Federal Reserve purchased $300 billion of longer-term Treasury securities. Later, in the face of a sluggish economic recovery, the Federal Reserve expanded its asset holdings in a second purchase program between November 2010 and June 2011, buying an additional $600 billion of longer-term Treasury securities.”

[199] Article: “Quantitative Easing: How Well Does This Tool Work?” by Stephen D. Williamson. Regional Economist (a publication of the Federal Reserve Bank of St. Louis), 2017. <www.stlouisfed.org>

Quantitative easing (QE)—large-scale purchases of assets by central banks—led to a large increase in the Federal Reserve’s balance sheet during the global financial crisis (2007-2008) and in the long recovery from the 2008-2009 recession. … QE consists of large-scale asset purchases by central banks, usually of long-maturity government debt but also of private assets, such as corporate debt or asset-backed securities. Typically, QE occurs in unconventional circumstances, when short-term nominal interest rates are very low, zero or even negative. …

Traditionally, the interest rate that the Fed targets is the federal funds (fed funds) rate. Suppose, though, that the fed funds rate target is zero, but inflation is below the Fed’s 2 percent target and aggregate output is lower than potential. If the effective lower bound were not a binding constraint, the Fed would choose to lower the fed funds rate target, but it cannot. What then? The Fed faced such a situation at the end of 2008, during the financial crisis, and resorted to unconventional monetary policy, including a series of QE experiments that continued into late 2014. …

At the 2010 Jackson Hole conference, then-Fed Chairman Ben Bernanke attempted to articulate the Fed’s rationale for QE. Bernanke’s view was that, with short-term nominal interest rates at zero, purchases by the central bank of long-maturity assets would act to push up the prices of those securities because the Fed was reducing their net supply. Thus, long-maturity bond yields should go down, for example, if the Fed purchases long-maturity Treasury securities.

[200] Webpage: “What Does the Federal Reserve Mean When It Talks About the Normalization of ‘Monetary Policy’?” Board of Governors of the Federal Reserve System. Last updated May 15, 2017. <www.federalreserve.gov>

The global financial crisis that began in 2007 had profound effects on the U.S. economy and other economies around the world. To support a return to the Federal Reserve‘s statutory goals of maximum employment and price stability, the Federal Open Market Committee (FOMC) reduced short-term interest rates to nearly zero and held them at that exceptionally low level for seven years. The FOMC [Federal Open Market Committee] also undertook large-scale open-market purchases of longer-term U.S. Treasury securities and mortgage-backed securities (MBS) to put downward pressure on longer-term interest rates. The term “normalization of monetary policy” refers to plans for returning both short-term interest rates and the Federal Reserve’s securities holdings to more normal levels.

In September 2014, the FOMC published a statement of Policy Normalization Principles and Plans describing the overall strategy it intends to follow in normalizing the stance of monetary policy following the period of extraordinarily accommodative policies taken in the aftermath of the 2008-09 recession.

[201] Report: “How Treasury Issues Debt.” By Grant A. Driessen. Congressional Research Service, August 18, 2016. <fas.org>

Page 19:

Despite the recent increases in federal borrowing during the recent economic recession and subsequent recovery, the actions of the Fed have kept interest rates near zero since late 2008. … The Fed cited soft business investment measures and uncertainty surrounding global economic and financial developments in its decision to keep interest rates low in FY2016. However, the Fed also suggested that it will raise interest rates in the near future if the labor market continues to strengthen and economic inflation increases.

[202] Book: The Federal Reserve System Purposes & Functions (10th edition). Board of Governors of the Federal Reserve System, October 2016. <www.federalreserve.gov>

Page 50:

In December 2015, the FOMC [Federal Open Market Committee] began the normalization process by raising its target range for the federal funds rate by ¼ percentage point—the first change since December 2008—bringing the target range to 25 to 50 basis points. The FOMC based its decision on the considerable improvement in labor market conditions during 2015 and reasonable confidence that inflation, which had been running below the Committee’s objective, would rise to 2 percent over the medium term. During normalization, the FOMC is continuing to set a target range for the federal funds rate and communicate its policy through this rate.

[203] Press release: “Federal Reserve Issues FOMC Statement.” Board of Governors of the Federal Reserve System, December 16, 2015. <www.federalreserve.gov>

“Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent.”

[204] Press release: “Federal Reserve Issues FOMC Statement.” Board of Governors of the Federal Reserve System, June 13, 2018. <www.federalreserve.gov>

“In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-3/4 to 2 percent.”

[205] Dataset: “H.15 Selected Interest Rates.” Board of Governors of the Federal Reserve System. Accessed June 15, 2018. <www.federalreserve.gov>

“Market yield on U.S. Treasury securities at 3-month constant maturity, quoted on investment basis … 2015-12-01 [=] 0.21 … Market yield on U.S. Treasury securities at 10-year constant maturity, quoted on investment basis … 2015-12-01 [=] 2.15”

[206] Webpage: “Selected Interest Rates.” Board of Governors of the Federal Reserve System, June 15, 2018. <www.federalreserve.gov>

“2018 June 14 … Instruments … Treasury constant maturities … 3-month [=] 1.94 … 10-year [=] 2.94”

[207] Dataset: “2015 Average Historical Monthly Interest Rates.” U.S. Treasury, Bureau of the Fiscal Service. Last updated January 7, 2016. <www.treasurydirect.gov>

“December 31, 2015 … Total Marketable [=] 2.041”

[208] Dataset: “Average Interest Rates on U.S. Treasury Securities.” U.S. Treasury, Bureau of the Fiscal Service. Last updated July 5, 2018. <www.treasurydirect.gov>

“June 30, 2018 … Total Marketable [=] 2.287”

[209] Report: “How Treasury Issues Debt.” By Grant A. Driessen. Congressional Research Service, August 18, 2016. <fas.org>

Page 16:

Generally, a strong economy will be accompanied by higher interest rates. If Treasury issues long-term debt during this time, they are committing to paying higher interest rates for a longer period and may decide to purchase short-term securities. However, this leads to uncertainties over the longer term, since the interest rate will likely change. During periods of economic downturn and low interest rates, Treasury may decide to finance at shorter maturities to take advantage of lower borrowing costs. This, however, may lead to more volatile and uncertain yearly interest payments because Treasury has to enter the market more often.

[210] Report: “Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2018.” White House Office of Management and Budget. <www.whitehouse.gov>

Page 34: “Historically, the average maturity of outstanding debt issued by Treasury has been about five years. The average maturity of outstanding debt was 70 months at the end of 2016.”

[211] Click here to see the current interest rates for government debt with various maturities. [Webpage: “Selected Interest Rates.” Board of Governors of the Federal Reserve System. <www.federalreserve.gov>]

[212] Report: “How Treasury Issues Debt.” By Grant A. Driessen. Congressional Research Service, August 18, 2016. <fas.org>

Page 6: “Special issue securities are available only to trust funds and are designated as nonmarketable, earning interest on a semi-annual basis. The interest rate is determined by formula, based on the average yield of certain marketable securities.”

[213] Federal laws define the method for setting interest rates on debt owed to each government trust fund. For instance, the interest rates paid to the two military retirement funds are “determined by the Secretary of the Treasury, taking into consideration current market yields on outstanding marketable obligations of the United States of comparable maturities.”† ‡ The interest rate paid to the Unemployment Trust Fund is a set formula: the average interest rate of all outstanding debt held by the public.§

NOTES:

  • † United States Code Title 10, Subtitle A, Part II, Chapter 74, Section 1467: “Department of Defense Military Retirement Fund, Investment of Assets of Fund.” Accessed July 11, 2018 at <www.law.cornell.edu>. “Such investments shall be in public debt securities with maturities suitable to the needs of the Fund, as determined by the Secretary of Defense, and bearing interest at rates determined by the Secretary of the Treasury, taking into consideration current market yields on outstanding marketable obligations of the United States of comparable maturities.”
  • ‡ United States Code Title 10, Subtitle A, Part II, Chapter 56, Section 1117: “Department of Defense Medicare-Eligible Retiree Health Care Fund, Investment of Assets of Fund.” Accessed July 11, 2018 at <www.law.cornell.edu>. “Such investments shall be in public debt securities with maturities suitable to the needs of the Fund, as determined by the Secretary of Defense, and bearing interest at rates determined by the Secretary of the Treasury, taking into consideration current market yields on outstanding marketable obligations of the United States of comparable maturities.”
  • § United States Code Title 42, Chapter 7, Subchapter IX, Section 1104: “Unemployment Trust Fund, Investments.” Accessed July 11, 2018 at <www.law.cornell.edu>. “Such special obligations shall bear interest at a rate equal to the average rate of interest, computed as of the end of the calendar month next preceding the date of such issue, borne by all interest-bearing obligations of the United States then forming part of the public debt….”

[214] About 72% of intergovernmental debt is owed to Social Security, Medicare, the Civil Service Retirement and Disability Fund, and the Postal Service Retiree Health Benefits Fund.† The interest rates paid to these funds is the average interest rate of long-term debt held by the public. The next five footnotes provide the laws defining this rule.

NOTE: † Calculated with data from the report: “Monthly Statement of the Public Debt of the United States.” U.S. Treasury, Bureau of the Fiscal Service. June 30, 2018. <www.treasurydirect.gov>

Pages 2–13:

Table III—Detail of Treasury Securities Outstanding, June 30, 2018 … Amounts in Millions of Dollars … Current Month Outstanding … Federal Old-Age and Survivors Insurance Trust Fund [=] 2,832,803 … Federal Disability Insurance Trust Fund [=] 89,410 … Federal Hospital Insurance Trust Fund [=] 200,132 … Federal Supplementary Medical Insurance Trust Fund [=] 81,579 … Civil Service Retirement and Disability Fund [=] 882,425 … Postal Service Retiree Health Benefits Fund [=] 48,072 … Total Government Account Series—Intragovernmental Holdings [=] 5,701,525

CALCULATION: (2,832,803 + 89,410 + 200,132 + 81,579 + 882,425 + 48,072) / 5,701,525= 72.5%

[215] United States Code Title 42, Chapter 7, Subchapter II, Section 401: “Social Security, Trust Funds, Investments.” Accessed July 10, 2018 at <www.law.cornell.edu>

Such obligations issued for purchase by the Trust Funds shall have maturities fixed with due regard for the needs of the Trust Funds and shall bear interest at a rate equal to the average market yield (computed by the Managing Trustee on the basis of market quotations as of the end of the calendar month next preceding the date of such issue) on all marketable interest-bearing obligations of the United States then forming a part of the public debt which are not due or callable until after the expiration of four years from the end of such calendar month; except that where such average market yield is not a multiple of one-eighth of 1 per centum, the rate of interest of such obligations shall be the multiple of one-eighth of 1 per centum nearest such market yield.

[216] United States Code Title 42, Chapter 7, Subchapter XVIII, Part A, Section 1395i: “Federal Hospital Insurance Trust Fund, Investment of Trust Fund by Managing Trustee.” Accessed July 10, 2018 at <www.law.cornell.edu>

Such obligations issued for purchase by the Trust Fund shall have maturities fixed with due regard for the needs of the Trust Fund and shall bear interest at a rate equal to the average market yield (computed by the Managing Trustee on the basis of market quotations as of the end of the calendar month next preceding the date of such issue) on all marketable interest-bearing obligations of the United States then forming a part of the public debt which are not due or callable until after the expiration of 4 years from the end of such calendar month; except that where such average market yield is not a multiple of one-eighth of 1 per centum, the rate of interest on such obligations shall be the multiple of one-eighth of 1 per centum nearest such market yield.

[217] United States Code Title 42, Chapter 7, Subchapter XVIII, Part B, Section 1395t: “Federal Supplementary Medical Insurance Trust Fund, Investment of Trust Fund by Managing Trustee.” Accessed July 10, 2018 at <www.law.cornell.edu>

Such obligations issued for purchase by the Trust Fund shall have maturities fixed with due regard for the needs of the Trust Fund and shall bear interest at a rate equal to the average market yield (computed by the Managing Trustee on the basis of market quotations as of the end of the calendar month next preceding the date of such issue) on all marketable interest-bearing obligations of the United States then forming a part of the public debt which are not due or callable until after the expiration of 4 years from the end of such calendar month; except that where such average market yield is not a multiple of one-eighth of 1 per centum, the rate of interest on such obligations shall be the multiple of one-eighth of 1 per centum nearest such market yield.

[218] United States Code Title 5, Part III, Subpart G, Chapter 83, Subchapter III, Section 8348: “Civil Service Retirement and Disability Fund.” Accessed July 11, 2018 at <www.law.cornell.edu>

The obligations issued for purchase by the Fund shall have maturities fixed with due regard for the needs of the Fund and bear interest at a rate equal to the average market yield computed as of the end of the calendar month next preceding the date of the issue, borne by all marketable interest-bearing obligations of the United States then forming a part of the public debt which are not due or callable until after the expiration of 4 years from the end of that calendar month. If the average market yield is not a multiple of â…› of 1 percent, the rate of interest on the obligations shall be the multiple of â…› of 1 percent nearest the average market yield.

[219] United States Code Title 5, Part III, Subpart G, Chapter 89, Section 8909a: “Postal Service Retiree Health Benefit Fund.” Accessed July 12, 2018 at <www.law.cornell.edu>

“The Secretary of the Treasury shall immediately invest, in interest-bearing securities of the United States such currently available portions of the Fund as are not immediately required for payments from the Fund. Such investments shall be made in the same manner as investments for the Civil Service Retirement and Disability Fund under section 8348.”

NOTE: See the previous footnote for the text of section 8348.

[220] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 2014. <www.cbo.gov>

Page 110: “The Social Security and Medicare trust funds hold special-issue bonds that generally earn interest rates that are higher than the average real interest rate on federal debt.”

[221] Calculated with data from:

a) Reports: “Schedules of Federal Debt.” U.S. Treasury, Bureau of the Fiscal Service, December 2016, January 2017, February 2017, March 2017, April 2017, May 2017, June 2017, July 2017, August 2017, October 2017, November 2017, December 2017.

Page 3: “Note 4. Interest Expense”

b) Report: “Financial Audit: Bureau of the Fiscal Service’s Fiscal Years 2017 and 2016 Schedules of Federal Debt.” United States Government Accountability Office, November 9, 2017. <www.gao.gov>

Page 32: “Note 4. Interest Expense”

c) Webpage: “The Debt to the Penny and Who Holds It.” United States Department of the Treasury, Bureau of the Public Debt. Accessed June 15, 2018 at <www.treasurydirect.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[222] Calculated with data from the report “Monthly Statement of the Public Debt of the United States.” U.S. Treasury, Bureau of the Fiscal Service. June 30, 2018. <www.treasurydirect.gov>

Pages 2–13: “Table III—Detail of Treasury Securities Outstanding, June 30, 2018 … Amounts in Millions of Dollars … Current Month Outstanding … Federal Old-Age and Survivors Insurance Trust Fund [=] 2,832,803 … Federal Disability Insurance Trust Fund [=] 89,410 … Total Government Account Series—Intragovernmental Holdings [=] 5,701,525”

CALCULATION: (2,832,803 + 89,410) / 5,701,525= 51.3%

[223] Actuarial Note: “Social Security Trust Fund Investment Policies and Practices.” By Jeffrey L. Kunkel. United States Social Security Administration, January 1999. <www.ssa.gov>

The administrative policy followed since 1959 (with rare exceptions) has been to spread the maturity dates of each trust fund‘s portfolio of special obligations as evenly as possible over the next 1 to 15 years, with the month and day of maturity always being June 30. (At the time the policy was set, June 30 was the end of the government’s fiscal year.) The policy calls for immediately investing income received by the trust funds in short-term special obligations, called certificates of indebtedness, that mature on the next June 30. On June 30, the certificates of indebtedness and any other special issues that mature on that date are reinvested (“rolled over”) as special issue notes or bonds with maturity dates designed to achieve an even 1-to-15 year spread.

[224] “2018 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.” United States Social Security Administration, June 5, 2018. <www.ssa.gov>

Pages 29–30:

Daily trust fund receipts are invested in the short-term certificates of indebtedness which mature on the next June 30 following the date of issue. The trust fund normally acquires long-term special-issue bonds when special issue securities of either type mature on June 30 and must be reinvested. …

Section 201(d) of the Social Security Act provides that the obligations issued for purchase by the OASI and DI Trust Funds shall have maturities fixed with due regard for the needs of the funds. The usual practice has been to reinvest the maturing special issue securities, as of each June 30, so that the value of the securities maturing in each of the next 15 years are approximately equal.

[225] Report: “How Treasury Issues Debt.” By Grant A. Driessen. Congressional Research Service, August 18, 2016. <fas.org>

Page 6:

When revenues in the trust funds exceed benefit payments, the unspent monies must remain in the trust fund for future use. However, this excess cash is transferred to the Treasury’s General Fund and is used to finance other activities which fall outside the specific purpose of the trust fund. In exchange, the trust fund is issued a Treasury “special issue” security to be redeemed at face value at any time in the future when the funds are needed.

[226] Report: “Federal Debt and Interest Costs.” Congressional Budget Office, December 2010. <www.cbo.gov>

Page 20: “When a trust fund’s expenses exceed its cash income, the agency administering the trust fund redeems its Treasury securities for cash as needed; the Treasury must obtain that cash from tax revenues or other sources of income or by borrowing from the public.”

[227] Calculated with data from:

a) Report: “Treasury Bulletin.” U.S. Department of the Treasury, Financial Management Service, March 2018. <www.fiscal.treasury.gov>

Page 42: “Table OFS-2—Estimated Ownership of U.S. Treasury Securities”

b) Report: “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.” U.S. Federal Reserve, September 28, 2017. <www.federalreserve.gov>

Table “1. Factors Affecting Reserve Balances of Depository Institutions”

c) Report: “Monthly Statement of the Public Debt of the United States.” U.S. Bureau of the Public Debt, September 30, 2017.

<www.treasurydirect.gov>

“Table I—Summary of Treasury Securities Outstanding, September 30, 2017”

“Table III—Detail of Treasury Securities Outstanding, September 30, 2017”

d) Dataset: “Major Foreign Holders of Treasury Securities Holdings (In Billions of Dollars).” U.S. Department of the Treasury, April 16, 2018. <ticdata.treasury.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[228] Calculated with data from the report: “Monthly Statement of the Public Debt of the United States.” U.S. Bureau of the Public Debt, September 30, 2017.

<www.treasurydirect.gov>

“Table I—Summary of Treasury Securities Outstanding, September 30, 2017 … (Millions of Dollars) …

Debt Held By the Public … Total Public Debt Outstanding [=] $14,673,429

Intragovernmental Holdings … Total Public Debt Outstanding [=] $5,571,471

Totals … Total Public Debt Outstanding [=] $20,244,900”

CALCULATIONS:

  • $14,673,429 / $20,244,900 = 72%
  • $5,571,471 / $20,244,900 = 28%

[229] Paper: “Government Debt.” By Douglas W. Elmendorf (Federal Reserve Board) and N. Gregory Mankiw (Harvard University and the National Bureau of Economic Research), January 1998. <www.federalreserve.gov>

Page 2: “The figure shows federal debt ‘held by the public,’ which includes debt held by the Federal Reserve System….”

[230] Calculated with data from:

a) Report: “Treasury Bulletin.” U.S. Department of the Treasury, Financial Management Service, March 2018. <www.fiscal.treasury.gov>

Page 42: “Table OFS-2—Estimated Ownership of U.S. Treasury Securities”

b) Report: “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.” U.S. Federal Reserve, September 28, 2017. <www.federalreserve.gov>

Table “1. Factors Affecting Reserve Balances of Depository Institutions [Millions of Dollars]”

c) Report: “Monthly Statement of the Public Debt of the United States.” U.S. Bureau of the Public Debt, September 30, 2017.

<www.treasurydirect.gov>

“Table I—Summary of Treasury Securities Outstanding, September 30, 2017”

d) Dataset: “Major Foreign Holders of Treasury Securities (In Billions of Dollars).” U.S. Department of the Treasury, April 16, 2018. <ticdata.treasury.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[231] Report: “Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2018.” White House Office of Management and Budget. <www.whitehouse.gov>

Page 41:

During most of American history, the Federal debt was held almost entirely by individuals and institutions within the United States. In the late 1960s, foreign holdings were just over $10 billion, less than 5 percent of the total Federal debt held by the public. Foreign holdings began to grow significantly starting in the 1970s and now represent almost half of outstanding [publicly held] debt.

[232] Calculated with data from:

a) Report: “Treasury Bulletin.” U.S. Department of the Treasury, Financial Management Service, March 2018. <www.fiscal.treasury.gov>

Page 42: “Table OFS-2—Estimated Ownership of U.S. Treasury Securities [In Billions of Dollars]”

b) Report: “Monthly Statement of the Public Debt of the United States.” U.S. Bureau of the Public Debt, September 30, 2017.

<www.treasurydirect.gov>

“Table I—Summary of Treasury Securities Outstanding, September 30, 2017”

c) Dataset: “Major Foreign Holders of Treasury Securities (In Billions of Dollars).” U.S. Department of the Treasury, April 16, 2018. <ticdata.treasury.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[233] Article: “Experts Warn Debt May Threaten Economy.” By Robert Tanner. Associated Press, Aug 27, 2005. <ap.org>

“In a very real sense, the U.S. economy is dependent on the central banks of Japan, China and other nations to invest in U.S. Treasuries and keep American interest rates down. The low rates here keep American consumers buying imported goods.”

[234] Report: “China’s Holdings of U.S. Securities: Implications for the U.S. Economy.” By Wayne M. Morrison and Marc Labonte. Congressional Research Service, January 9, 2008. <www.justfacts.com>

Page 9:

All else equal, Chinese government purchases of U.S. assets increases the demand for U.S. assets, which reduces U.S. interest rates.

If China attempted to reduce its holdings of U.S. securities, they would be sold to other investors (foreign and domestic), who would presumably require higher interest rates than those prevailing today to be enticed to buy them. … All else equal, the reduction in Chinese Treasury holdings would cause the overall foreign demand for U.S. assets to fall, and this would cause the dollar to depreciate. … The magnitude of these effects would depend on how many U.S. securities China sold; modest reductions would have negligible effects on the economy given the vastness of U.S. financial markets.

[235] Report: “China’s Holdings of U.S. Securities: Implications for the U.S. Economy.” By Wayne M. Morrison and Marc Labonte. Congressional Research Service, January 9, 2008. <www.justfacts.com>

Pages 10–11:

A potentially serious short-term problem would emerge if China decided to suddenly reduce their liquid U.S. financial assets significantly. The effect could be compounded if this action triggered a more general financial reaction (or panic), in which all foreigners responded by reducing their holdings of U.S. assets. The initial effect could be a sudden and large depreciation in the value of the dollar, as the supply of dollars on the foreign exchange market increased, and a sudden and large increase in U.S. interest rates, as an important funding source for investment and the budget deficit was withdrawn from the financial markets. The dollar depreciation would not cause a recession since it would ultimately lead to a trade surplus (or smaller deficit), which expands aggregate demand.28 (Empirical evidence suggests that the full effects of a change in the exchange rate on traded goods takes time, so the dollar may have to “overshoot” its eventual depreciation level in order to achieve a significant adjustment in trade flows in the short run.)29 However, a sudden increase in interest rates could swamp the trade effects and cause a recession. Large increases in interest rates could cause problems for the U.S. economy, as these increases reduce the market value of debt securities, cause prices on the stock market to fall, undermine efficient financial intermediation, and jeopardize the solvency of various debtors and creditors. Resources may not be able to shift quickly enough from interest-sensitive sectors to export sectors to make this transition fluid. The Federal Reserve could mitigate the interest rate spike by reducing short-term interest rates, although this reduction would influence long-term rates only indirectly, and could worsen the dollar depreciation and increase inflation.

Some U.S. officials have expressed doubts that a Chinese sell-off of U.S. securities would cause liquidity problems or have much of an impact on the U.S. economy. In January 2007, Secretary of Treasury Henry Paulson was asked at a Senate Banking Committee hearing whether or not he was concerned over China’s large ownership of U.S. debt. Paulson stated that the daily volume of trade in Treasury securities was larger than China’s total Treasury securities holdings and concluded: “given the size of our debt outstanding and the way it trades and the diversity and so on, that’s not at the top of the list.”

28 A sharp decline in the value of the dollar would also reduce living standards, all else equal, because it would raise the price of imports to households. This effect, which is referred to as a decline in the terms of trade, would not be recorded directly in GDP, however.

29 Since the decline in the dollar would raise import prices, this could temporarily increase inflationary pressures. The effect would likely be modest, however, since imports are small as a share of GDP and import prices would only gradually rise in response to the fall in the dollar.

[236] Report: “China’s Holdings of U.S. Securities: Implications for the U.S. Economy.” By Wayne M. Morrison and Marc Labonte. Congressional Research Service, January 9, 2008. <www.justfacts.com>

Pages 11–12:

The likelihood that China would suddenly reduce its holdings of U.S. securities is questionable because it is unlikely that doing so would be in China’s economic interests. First, a large sell-off of China’s U.S. holdings could diminish the value of these securities in international markets, which would lead to large losses on the sale, and would, in turn, decrease the value of China’s remaining dollar-denominated assets. This would also occur if the value of the dollar were greatly diminished in international currency markets due to China’s sell-off.34

Second, such a move would diminish U.S. demand for Chinese imports, either through a rise in the value of the yuan against the dollar or a reduction in U.S. economic growth (especially if other foreign investors sold their U.S. asset holdings, and the United States was forced to raise interest rates in response).35 The United States purchases about 30% of China’s total merchandise exports. A sharp reduction of U.S. imports from China could have a significant impact on China’s economy, which heavily depends on exports for its economic growth (and is viewed by the government as a vital source of political stability).36

[237] Article: “Clinton Wraps Asia Trip by Asking China to Buy U.S. Debt.” By Lachlan Carmichael. Sydney Morning Herald, February 22, 2009. <www.smh.com.au>

“By continuing to support American Treasury instruments the Chinese are recognising our interconnection. We are truly going to rise or fall together,” Clinton said at the US embassy here. …

“We have to incur more debt. It would not be in China’s interest if we were unable to get our economy moving again.” …

Clinton added: “The US needs the investment in Treasury bonds to shore up its economy to continue to buy Chinese products.”

[238] Article: “China Threatens ‘Nuclear Option’ of Dollar Sales.” By Ambrose Evans-Pritchard. London Telegraph, August 8, 2007. <www.telegraph.co.uk>

Two officials at leading Communist Party bodies have given interviews in recent days warning—for the first time—that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. …

Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing’s foreign reserves should be used as a “bargaining chip” in talks with the US. …

He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.

“China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.

“China is unlikely to follow suit as long as the yuan’s exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar,” he told China Daily.

[239] Article: “Chinese See U.S. Debt as Weapon in Taiwan Dispute.” By Bill Gertz. Washington Times, February 10, 2010. <washingtontimes.com>

Gen. Luo warned that China could attack the U.S. “by oblique means and stealthy feints,” and he called for retaliation for the arms sale.

“For example, we could sanction them using economic means, such as dumping some U.S. government bonds,” Gen. Luo said.

“Our retaliation should not be restricted to merely military matters, and we should adopt a strategic package of counterpunches covering politics, military affairs, diplomacy and economics to treat both the symptoms and root cause of this disease,” said Gen. Luo, a researcher at the Academy of Military Sciences.

[240] Article: “Beijing Vows Not to Use U.S. Debt for Political Gain.” Washington Times, March 10, 2010. <www.washingtontimes.com>

“The U.S. Treasury market is the world’s largest government bond market,” said Yi Gang, the head of the State Administration of Foreign Exchange. “Our foreign exchange reserves are huge, so you can imagine that the U.S. Treasury market is important to us,” he said during the annual session of China’s parliament.

Mr. Yi emphasized his hope that China’s investment in U.S. Treasury securities would not become a political football.

“This is purely market-driven investment behavior. I would hope not to see this matter politicized,” he said in response to a question about American concerns that Beijing’s holdings of U.S. debt posed a political threat.

[241] Calculated with data from the report: “Monthly Statement of the Public Debt of the United States.” U.S. Bureau of the Public Debt, September 30, 2017.

<www.treasurydirect.gov>

“Table I—Summary of Treasury Securities Outstanding, September 30, 2017”

“Table III—Detail of Treasury Securities Outstanding, September 30, 2017”

NOTE: An Excel file containing the data and calculations is available upon request.

[242] Article: “Congress Sends Budget Cut Bill to Obama.” By Andrew Taylor, Associated Press, April 14, 2011. <www.northjersey.com>

[243] Article: “Budget Deal to Cut $38 Billion Averts Shutdown.” By Carl Hulse. New York Times, April 8, 2011. <www.nytimes.com>

[244] Article: “New Cuts Detailed in Agreement for $38 Billion in Reductions.” By Lisa Mascaro. Los Angeles Times, April 12, 2011. <www.latimes.com>

[245] “Cost estimate for H.R. 1473, the Department of Defense and Full-Year Continuing Appropriations Act of 2011 (Additional Information).” Congressional Budget Office, April 14, 2011. <www.cbo.gov>

The estimated range provided above is lower than the estimated net change in budget authority (the authority for federal agencies to enter into obligations) for 2011 that would result from enactment of H.R. 1473 [i.e., “the $38 billion budget cut”], compared with earlier continuing resolutions. For example, Public Law 111-322, which funded the government’s operations through March 4, provided (on an annualized basis) budget authority of $1,087.5 billion for nonemergency appropriations for fiscal year 2011—an amount that is relatively close to the funding level for 2010.* In contrast, H.R. 1473 would provide net new budget authority of $1,049.8 billion, producing a difference of $37.7 billion. That difference reflects reductions in budget authority for BOTH regularly appropriated discretionary programs and some mandatory programs.

NOTES:

  • To help sort through the intricacies of this matter, Just Facts queried the legislative director of a U.S. congressman to identify the proper baselines for these cuts (referenced in this footnote and the one below). Just Facts then double-checked these figures in various ways to ensure continuity.
  • * This figure is $1,089.7 billion, which equates to a cut of $39.9 billion relative to 2010.† [Document: “Subcommittee Allocations for FY 11 Continuing Resolution - 302(b)s.” U.S. House of Representatives, Committee on Appropriations, February, 3, 2011. <appropriations.house.gov>
    “The following table outlines the spending limits and cuts announced by Chairman Rogers for each Appropriations Subcommittee for the CR [continuing resolution] … Regular [i.e., nonemergency] Discretionary only (Budget authority; in millions) … Total Fiscal Year 2010 Enacted [=] 1,089,671”]

† CALCULATION: $1,089.7 billion (enacted budget authority during 2010) – $1,049.8 billion (budget authority under the 2011 budget cut) = $39.9 billion differential

[246] Calculated with data from:

a) “Fiscal Year 2012 Historical Tables, Budget of the U.S. Government.” White House Office of Management and Budget, 2010. <www.gpo.gov>

Page 21: “Table 1.1—Summary of Receipts, Outlays, and Surpluses or Deficits, 1789–2016”

Page 211: “Table 10.1—Gross Domestic Product and Deflators used in the Historical Tables, 1940–2016”

b) Report: “An Analysis of the President’s Budgetary Proposals for Fiscal Year 2012.” Congressional Budget Office, April 2011. <www.cbo.gov>

Page 2: “Table 1-1. Comparison of Projected Revenues, Outlays, and Deficits Under CBO’s March 2011 Baseline and CBO’s Estimate of the President’s Budget (Billions of dollars) … 2011 … Revenues [=] 2,230 … Outlays [=] 3,629 … Total Deficit = –1,399.”

Page 4: “Table 1-2. CBO’s Estimate of the President’s Budget … Gross Domestic Product … 2011 [=] 15,034 [billions $]”

NOTE: An Excel file containing the data and calculations is available upon request.

[247] Same as above.

[248] Same as above.

[249] Commentary: “The Graph All Budget Discussions Should Start with.” By Ezra Klein. Washington Post, April 11, 2011. <www.washingtonpost.com>

[250] Examine the graph available via the hyperlink in the footnote above.

[251] Dataset: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010. <www.cbo.gov>

Tab: “Summary Extended-Baseline”

[252] Commentary: “The Graph All Budget Discussions Should Start with.” By Ezra Klein. Washington Post, April 11, 2011. <www.washingtonpost.com>

NOTE: The graph shows revenues and expenditures, but the vertical axis is unlabeled. Thus, one cannot see that the data represents percentages of GDP, while the text of the piece provides a misleading impression for the scale of the tax increases.

[253] Report: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010 (Revised August 2010). <www.cbo.gov>

Page 6: “Revenues would also rise considerably under current law; by the 2020s, they would reach higher levels relative to the size of the economy than ever recorded in the nation’s history. … First, ongoing increases in real income would push taxpayers into higher tax brackets. Second, ongoing inflation, even if modest, would cause more people to owe tax under the AMT [Alternative Minimum Tax]. And third, the recently enacted excise tax on certain high-premium health insurance plans would have a growing effect on revenues.”

Page 13: “[T]he effective marginal tax rate on labor income would rise from 29 percent today to about 38 percent in 2035. … All told, average tax rates (taxes as a share of income) would rise considerably, and people at various points in the income scale would pay a very different percentage of their income in taxes than people at the same points do today.”

Page 60: “Estate and gift taxes are projected to increase as a share of GDP following the reinstatement of the estate tax after 2010. The dollar amount of an estate that is exempt from taxation will remain fixed at $1 million starting in 2011 and not be indexed for inflation thereafter; as a result, a greater share of wealth would become subject to the tax over time.”

Page 64: “Over the coming decades, the cumulative effect of rising prices will sharply reduce the value of some parameters of the tax system that are not indexed for inflation. Under the extended-baseline scenario, the estate tax exemption, which will be $1 million in 2011 under current law, would be worth about $600,000 (in 2010 dollars) by 2035….”

[254] Calculated with data from:

a) Report: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010 (Revised August 2010). <www.cbo.gov>

Page 55: “Over the past 40 years, total federal revenues have ranged from 14.8 percent to 20.6 percent of GDP, averaging 18.1 percent, with no evident trend over time….”

NOTE: Using data from the source cited below, Just Facts updated the figure for average federal revenues over the past 40 years to reflect 40-year backward look from 2011 instead of 2010. This changes the figure from 18.1% to 18.0%.

b) Dataset: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010. <www.cbo.gov>

Figure A-1: “Revenues and Primary Spending, by Category, Under CBO’s Long-Term Budget Scenarios, Through 2084 (percentage of gross domestic product). … Extended-Baseline Scenario”

NOTE: An Excel file containing the data and calculations is available upon request.

[255] Calculated with the dataset: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010. <www.cbo.gov>

Figure A-1: “Revenues and Primary Spending, by Category, Under CBO’s Long-Term Budget Scenarios, Through 2084 (percentage of gross domestic product). … Extended-Baseline Scenario”

NOTE: An Excel file containing the data and calculations is available upon request.

[256] Transcript: “Fareed Zakaria GPS.” CNN, February 14, 2010. <transcripts.cnn.com>

NOTE: Credit for bringing this fact to our attention belongs to NewsBusters [“Fareed Zakaria: Bush Tax Cuts Are Largest Cause of Budget Deficit.” By Noel Sheppard. February 14, 2010. <www.newsbusters.org>].

[257] Letter: “From Peter R. Orszag (CBO Director) to John M. Spratt, Jr. (House Budget Committee Chairman).” Congressional Budget Office, July 20, 2007. <www.cbo.gov>

JCT [the Joint Committee on Taxation] estimated the revenue effects of EGTRRA and JGTRRA at the time the acts were considered in 2001 and 2003, respectively. Taken together, those estimates imply a loss of revenues totaling $165 billion in 2007. As you requested, CBO has calculated the debt-service costs that would result in 2007 from the legislation under an assumption that they were financed in full by additional debt rather than offset elsewhere in the budget. On that basis, CBO estimates that the revenue loss in JCT’s projections would lead to additional debt-service costs of $46 billion in 2007, for a total budgetary cost of $211 billion. On the same basis, the agency estimates the total budgetary costs, including interest, for 2008 through 2011 to be $233 billion, $245 billion, $269 billion, and $215 billion, respectively.

NOTES:

  • Per the Bureau of Labor Statistics’ “CPI Inflation Calculator,” $269 billion in 2007 had the same buying power as $282.90 in 2010. [Accessed April 13, 2011 at <www.bls.gov>]
  • The projections in this letter are likely overestimates given the ensuing recession’s widespread negative effects on tax revenues.

[258] Just Facts has conducted a search of all federal agencies for this data and found that the previous footnote provides the most current federal source for this data. On April 11, 2011, Just Facts sent correspondence to the Congressional Budget Office, White House Office of Management and Budget, and Joint Committee on Taxation asking if they had “published research that quantifies the actual (not projected) revenue effects of EGTRRA and JGTRRA during 2010.” These acronyms collectively refer to the “Bush tax cuts” and stand for the “Economic Growth and Taxpayer Relief Act of 2001” and the “Jobs and Growth Tax Relief Reconciliation Act of 2003.” The Joint Committee on Taxation and White House Office of Management and Budget replied negatively. The Congressional Budget Office did not respond. Just Facts located several estimates by nonprofit organizations but found the methodologies questionable. In 2016, Just Facts conducted another search of CBO and found nothing later than the previous footnote.

[259] Calculated with data from the footnote above and “Analytical Perspectives: Budget of the U.S. Government, Fiscal Year 2012.” White House Office of Management and Budget. <www.gpo.gov>

Page 120: “Table 12–1. Totals For the Budget and the Federal Government (In billions of dollars) … 2010 Actual … Outlays (Unified) [=] 3,456 … Deficit (Unified) [=] 1,293.”

CALCULATIONS:

  • $282.90 billion reduced revenue from the Bush tax cuts / $1,293 reported budget deficit = 21.9%
  • $282.90 billion reduced revenue from the Bush tax cuts / $3,456 budget outlays = 8.2%

[260] Report: “The 2014 Long-Term Budget Outlook.” Congressional Budget Office, July 15, 2014. <www.cbo.gov>

Page 56: “CBO’s baseline and extended baseline are meant to be benchmarks for measuring the budgetary effects of legislation, so they mostly reflect the assumption that current laws remain unchanged.”

Page 66:

Most parameters of the tax code are not indexed for real income growth, and some are not indexed for inflation. As a result, the personal exemption, the standard deduction, the amount of the child tax credit, and the thresholds for taxing income at different rates all would tend to decline relative to income over time under current law. One consequence is that, under the extended baseline, average federal tax rates would increase in the long run.

NOTE: For more details about this phenomenon, which is known as “bracket creep,” see Just Facts’ research on taxes.

[261] Report: “The Budget and Economic Outlook: An Update.” Congressional Budget Office, August 2011. <www.cbo.gov>

Page 85:

Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA): This legislation (Public Law 107-16) significantly reduced tax liabilities (the amount of tax owed) between 2001 and 2010 by cutting individual income tax rates, increasing the child tax credit, repealing estate taxes, raising deductions for married couples who file joint returns, increasing tax benefits for pensions and individual retirement accounts, and creating additional tax benefits for education. EGTRRA phased in many of those changes, including some that did not become fully effective until 2010. For legislation that modified or extended provisions of EGTRRA, see Jobs and Growth Tax Relief Reconciliation Act of 2003 and Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

[262] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

NOTES:

  • This data extends back to 1929. That federal revenues never exceeded 20.4% of GDP prior to 1929 is ascertained from a 2010 Congressional Budget Office report that (1) projected federal revenues (as a portion of GDP) in 2020 will exceed those in 2000 by one tenth of a percentage point and (2) makes the following statement: “Revenues would also rise considerably under current law; by the 2020s, they would reach higher levels relative to the size of the economy than ever recorded in the nation’s history.” [Report: “The Long-Term Budget Outlook.” Congressional Budget Office, June 2010 (Revised August 2010). <www.cbo.gov>]
  • An Excel file containing the data and calculations is available upon request.

[263] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[264] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[265] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[266] Report: “US Business Cycle Expansions and Contractions.” National Bureau of Economic Research, September 20, 2010. <www.nber.org>

Contractions (recessions) start at the peak of a business cycle and end at the trough. … Peak [=] December 2007 (IV) … Trough [=] June 2009 (II)”

[267] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[268] Report: “Major Tax Issues in the 111th Congress.” By Jane G. Gravelle and Pamela J. Jackson. Congressional Research Service, May 6, 2009. <royce.house.gov>

Pages 5–6:

In response to deteriorating economic conditions, Congress enacted a second stimulus bill in February 2009, the American Recovery and Reinvestment Act of 2009, P.L. 111-5. This package cost $787 billion, and included spending programs, but about 40% of the cost was tax cuts. The elements include the following:

• Temporary income tax cuts for individuals, including $116.2 billion for a 6.2% credit for earnings with a maximum of $400 for singles and $800 for couples, phased out for taxpayers with incomes over $75,000 ($150,000 for joint returns); $4.7 billion for a temporary increase in the earned income credit, $14.8 to increase refundability of the child credit, $13.9 billion to expend tuition tax credits and make them 40% refundable (the refundability feature accounts for $3.9 billion). These provisions are effective for 2009 and 2010, though the associated revenue loss extends over FY2009–FY2011. For 2009 there is also an exclusion for $2,400 of unemployment benefits costing $4.7 billion, a sales tax deduction for new auto purchases at $1.7 billion and an extension of the AMT “patch”, mainly a temporary increase in the AMT exemption, at a cost of $70.1 billion. An extension and revision of the first time homebuyers credit has revenue consequences over a longer period, costing $6.6 billion over FY2009–2019. Overall, the individual income tax cuts were $230 billion.

• Tax provisions for business, which lose revenue in FY2009–FY2010 and gain revenue thereafter, including $37.8 billion for extending bonus depreciation, $12.9 billion for the deferral and exclusion of income from the discharge of indebtedness, $4.1 billion for a temporary five year loss carryback for 2008 and 2009 for small business, and $1.1 billion for extending small business expensing. Along with a few other minor provisions, there is a revenue gain from enacting legislation to restrict the carryover of losses with an ownership change, reversing a Treasury ruling from 2007. Because these are largely timing provisions the overall revenue loss for FY2009–FY2010 is $6.2 billion.

• A series of provisions relating to tax exempt bonds aimed at aiding State and local governments, which cost $3.8 billion for FY2009–2010, and $30.0 billion from FY2009–FY2019. Almost half the revenue loss arises from allowing a taxable bond options which would make bonds attractive to tax exempt investors. Other major provisions measured by dollar cost are qualified school construction bonds, recovery zone bonds, and provisions allowing financial institutes more freedom to buy tax exempt bonds.

• A one-year delay in the 3% withholding for government contractors, which costs $5.8 billion in FY2011, gains most of the revenue in the next year, and costs $0.3 billion for FY2009–2019.

• Energy provisions, some permanent and some temporary, totaling $3.4 billion in FY2009–FY2011 and $20.0 billion in FY2009–2019. There is also a provision substituting grants for credits for certain energy projects which shifts benefits to the present.

• The proposal also includes a substitution of grants for the low-income housing credit, which shifts benefits to FY2009 ($3 billion), with a negligible effect over the long term. The plan also includes a much smaller provision to substitute grants for certain energy credits.

• A minor provision ($231 million for FY2009–2019) would provide incentives for hiring unemployed veterans and disconnected youth.

[269] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[270] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[271] Calculated with data from:

a) Dataset: “Table 3.2. Federal Government Current Receipts and Expenditures.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

b) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised September 29, 2016. <www.bea.gov>

NOTE: An Excel file containing the data and calculations is available upon request.

[272] Constitution of the United States. Signed September 17, 1787. <justfacts.com>

Article I, Section 7:

[Clause 1] All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.

[Clause 2] Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States; If he approve he shall sign it, but if not he shall return it, with his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together with the Objections, to the other House, by which it shall likewise be reconsidered, and if approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes of both Houses shall be determined by yeas and Nays, and the Names of the Persons voting for and against the Bill shall be entered on the Journal of each House respectively. If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.

Article I, Section 8, Clause 1: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States….”

[273] Report: “The Debt Limit: History and Recent Increases.” By D. Andrew Austin. Congressional Research Service, November 2, 2015. <fas.org>

Page 4: “The debt limit also provides Congress with the strings to control the federal purse, allowing Congress to assert its constitutional prerogatives to control spending. The debt limit also imposes a form of fiscal accountability that compels Congress and the President to take visible action to allow further federal borrowing when the federal government spends more than it collects in revenues.”

[274] Article: “$5 Trillion Added to National Debt Under Bush.” By Angie Drobnic Holan. PolitiFact, January 22, 2009. <www.politifact.com>

At the end of the Clinton administration, there were several years of budget surpluses. …

When Bush took office, the national debt was $5.73 trillion. When he left, it was $10.7 trillion. …

… the debt increased greatly under Bush.

[275] Calculated with data from:

a) Dataset: “Table 1.1.5. Gross Domestic Product.” U.S. Department of Commerce, Bureau of Economic Analysis. Last revised March 28, 2018. <www.bea.gov>

b) Webpage: “Dates of Sessions of the Congress.” Accessed April 26, 2018 at <www.senate.gov>

c) Webpage: “Past Inauguration Ceremonies.” Joint Congressional Committee on Inaugural Ceremonies. Accessed April 26, 2018 at <www.inaugural.senate.gov>

d) Webpage: “Party Divisions of the House of Representatives (1789–Present).” U.S. House of Representatives, Office of the Clerk. Accessed April 26, 2018 at

<history.house.gov>

e) Webpage: “Party Division in the Senate, 1789–Present.” U.S. Senate Historical Office. Accessed April 26, 2018 at

<www.senate.gov>

f) Webpage: “The Debt to the Penny and Who Holds It.” Bureau of the Public Debt, United States Department of the Treasury. Accessed April 26, 2018 at <www.treasurydirect.gov>

NOTES:

  • Debt/GDP calculations are performed with seasonally adjusted GDP figures from the quarters in which presidential and congressional power shifts occurred.
  • In cases where a congressional and presidential power shift occur in the same quarter, the date of the presidential power shift is used as the milestone for the debt.
  • An Excel file containing the data and calculations is available upon request.

[276] Report: “A Citizen’s Guide to the Federal Budget: Fiscal Year 2000.” White House Office of Management and Budget, January 1999. <www.gpo.gov>

• Discretionary spending, which accounts for one-third of all Federal spending, is what the President and Congress must decide to spend for the next year through the 13 annual appropriations bills. It includes money for such activities as the FBI and the Coast Guard, for housing and education, for space exploration and highway construction, and for defense and foreign aid.

• Mandatory spending, which accounts for two-thirds of all spending, is authorized by permanent laws, not by the 13 annual appropriations bills. It includes entitlements—such as Social Security, Medicare, veterans’ benefits, and Food Stamps—through which individuals receive benefits because they are eligible based on their age, income, or other criteria. It also includes interest on the national debt, which the Government pays to individuals and institutions that hold Treasury bonds and other Government securities. The President and Congress can change the law in order to change the spending on entitlements and other mandatory programs—but they don’t have to.

[277] Report: “GAO Strategic Plan, 2007–2012.” U.S. Government Accountability Office, March 2007. <www.gao.gov>

Page 15:

Table 2: Forces Shaping the United States and Its Place in the World

Changing security threats: The world has changed dramatically in overall security, from the conventional threats posed during the Cold War era to more unconventional and asymmetric threats. Providing for people’s safety and security requires attention to threats as diverse as terrorism, violent crime, natural disasters, and infectious diseases. The response to many of these threats depends not only on the action of the U.S. government but also on the cooperation of other nations and multilateral organizations, as well as on state and local governments and the private and independent sectors. Complicating such efforts are a number of failed states allowing the trade of arms, drugs, or other illegal goods; the spread of infectious diseases; and the accommodation of terrorist groups. …

Economic growth and competitiveness: Economic growth and competition are also affected by the skills and behavior of U.S. citizens, the policies of the U.S. government, and the ability of the private and public sectors to innovate and manage change. … Importantly, the saving and investment behavior of U.S. citizens affects the capital available to invest in research, development, and productivity enhancement. …

Global interdependency: Economies as well as governments and societies are becoming increasingly interdependent as more people, information, goods, and capital flow across increasingly porous borders. …

Societal change: The U.S. population is aging and becoming more diverse. As U.S. society ages and the ratio of elderly persons and children to persons of working age increases, the sustainability of social insurance systems will be further threatened. Specifically, according to the 2000 census, the median age of the U.S. population is now the highest it has ever been, and the baby boomer age group—people born from 1946 to 1964, inclusive—was a significant part of the population.

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