A Quick Look at U.S. Government Debt



The U.S. government historically went into debt suddenly to fight wars and then gradually repaid the debt, entirely or in large part, in the postwar period. This pattern held until the Great Depression and World War II, when the government went massively into debt, but did not pay off much of that debt afterward. However, it did not add much to the debt between 1946 and the early 1980s, so for more than thirty years, the real debt hovered in the neighborhood of $2 trillion (dollars of 2010 purchasing power).

As the charts show, however, a new debt regime became established at that time. Afterward, real debt increased relentlessly except during Clinton’s second term. As soon as the George W. Bush administration began to steer the ship of state, the debt accelerated. Under Obama, it has exploded. The only previous such explosion occurred when the U.S. government undertook to engage in World War II.

For more than three decades after the end of World War II, the U.S. economy grew faster than the outstanding debt, and therefore the ratio of debt to GDP fell. During the Reagan and George H. W. Bush administrations, this pattern was broken. Under Obama, it has been smashed with a vengeance, although, to be fair, one ought to note that the George W. Bush administration had got the smashing well under way before Obama took office.

Federal debt held by the public now stands at nearly $10 trillion, and it will soon fly past this marker. As the government continues to run budget deficits of $1.5 trillion or more, the debt will mount rapidly. Although the government projects a turnaround in this fiscal profligacy, its actions so far belie its promises. Nevertheless, the bond market may eventually rein in the Treasury, as investors lose confidence in the government’s ability to meet its contracted obligations.

The foregoing discussion relates to the official debt. The government has also assumed effective possession and control of Fannie Mae and Freddie Mac, which means that it has also assumed responsibility for those institutions’ debts, which amounted to approximately $5 trillion at the time they were taken over. How much of this indebtedness will end up as a burden to U.S. taxpayers depends on Fannie and Freddie’s future net earnings, which in turn depend on future events in the housing market and the overall economy.

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