Does the National Debt Really Matter?
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The Fiscal Times
September 4, 2011

The Fiscal Times
Author John Steele Gordon has chronicled the history of American business and finance in books such as Hamilton's Blessing: the Extraordinary Life and Times of Our National Debt; The Great Game: The Emergence of Wall Street as a World Power, 1653-2000; and Empire of Wealth: The Epic History of American Economic Power. He spoke with The Fiscal Times’ Yuval Rosenberg about our national debt and its long history as a subject for political debate. An edited transcript:

TFT: First, can you explain what exactly the national debt is and how it’s  different from the public debt?

JSG: The national debt consists of all of what are called the Treasury securities—either bonds or notes or bills, depending upon how soon they come to an end. The public debt is the bonds, notes, and bills that are held by the public or by banks or by foreign governments or whomever other than the United States government itself. And then you have the intra-governmental debt, which are the federal bonds that are held by other agencies of the federal government, principally the Social Security Trust Fund.

TFT: Let’s take that last part, intra-governmental debt and the Social Security Trust Fund—you have argued that should rightly be included in the national debt. Why?

JSG: It’s because those bonds will eventually have to be redeemed. They bear the full faith and credit of the United States, just like the federal bonds that China owns. Those bonds cannot be sold in the marketplace; they can only be redeemed by the Treasury. And therefore when the Social Security Trust Fund starts running deficits because of the baby boomers increasingly retiring, the Fund is going to start taking those federal bonds down to the Treasury and saying, “Give me the money.” At which point Congress, basically, is going to have to decide whether to raise taxes to redeem those bonds, cut spending elsewhere to redeem those bonds, or borrow the money in the public bond market, which is overwhelmingly the likely thing for them to do. So those bonds that are now intra-governmental debt will, in the fullness of time, become part of the regular debt.

TFT: You have written that the debt has primarily been increased over our history in order to fight wars or counteract recessions.

JSG: Right. No major country has ever fought a… major war without borrowing money in order to do it. In the Civil War the national debt went from $65 million to about $2.7 billion in four years. And that’s one of the main ways the North was able to win the war, because we could borrow money, whereas the South increasingly could not. And therefore they had to print it, which caused a raging inflation in the Confederacy.

TFT: How is our current scenario different? We’ve been fighting wars that have cost $3.7 trillion or however much it is and, of course, fighting a recession. So why has the size of the debt become such a problem now? Are we maybe too fixated on it?

JSG: Well, the wars we have been fighting in the last 10 years in Iraq and in Afghanistan have been, compared with previous wars, very small potatoes. Now, war is always very, very expensive. But compared with Vietnam or the Korean War or World War II especially, they take up a very small part of the total federal budget. And therefore we could have funded them by cutting elsewhere or finding efficiencies in the government, which would not be hard to find if people would look for them. Unfortunately, bureaucrats are institutionally incentivized not to find ways to cut money. In the private sector, if you come up with a way to do something more efficiently, you are rewarded. You get a raise, you get a corner office, what have you. There’s no incentive in government to become more efficient.

TFT: Would you say that the size of the debt,now at 97.2% of GDP, warrants the kind of attention and priority we’ve given it in recent months?

Executive Editor Yuval Rosenberg oversees coverage of business, the economy, technology and Wall Street. A former web editor at WNYC, Fortune and Newsweek, he also writes on a wide range of subjects.