How Government Debt Differs From Private Debt

Read Dean Baker's Blog, "Beat The Press"

The total public debt in the United States is now greater than $12 trillion. Economist Dean Baker explains the makeup of the U.S. government debt, how the money gets paid back, and what makes government debt different from private debt.

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And now, after a year when we're all taking stock of debt, a look at what the government owes. After all the deficit spending this year and in attempt to revive the economy, the U.S. public debt tops $12 trillion. Today, it's hovering around 12.1. Yes, that's 12 with 12 zeroes after it.

Now, anyone who's ever had a credit balance shivers to think of just the interest payment. And there are plenty of economic experts who worry about the debt. Dean Baker is not among them. We'll hear his explanation of the public debt and his opinion about what it all means in just a moment.

If you have questions about the public debt, give us a call: 800-989-8255. Email us: You can also join the conversation on our Web site. That's at click on TALK OF THE NATION.

Dean Baker is an economist and co-director of the Washington-based Center for Economic and Policy Research. And he's been kind enough to join us here in Studio 3A today. Nice to see you again.

Mr. DEAN BAKER (Co-Directors, Center for Economic and Policy Research): Thanks for having me on.

CONAN: And first of all, how big is 12 trillion?

Mr. BAKER: Well, it's about two-thirds GDP, about 70 percent of GDP, which is large. But it's important to keep in mind what - how large can the debt be. We had a debt that was over 100 percent of GDP after World War II. You have countries like Japan that has a debt of 150, 160 percent of GDP. So, what matters here is how large is it relative to the size of the economy.

At some point, clearly it does become too large. We do have to worry people will question the credit of the United States. But given the fact that we've had larger debts in times past, we have other countries with much larger debts that could still borrow easily in international credit markets, there's little cause for concern anytime soon. That doesn't mean we could spend as much as we want and we never have to worry about anything. We're just not near that point.

CONAN: You mentioned Japan is one of the - has a greater proportion of -ratio of debt to GDP than we do. They're also one of our biggest creditors.

Mr. BAKER: They're one of our biggest creditors. That's right. I mean, it's important to keep in mind, a lot of people are running around, talking about the foreign debt. I know there's this ad I see all the time, I don't know who's running it. But they keep talking about our debt burden, and half of it's owned by foreigners.

Well, if we're concerned about what we're borrowing from foreigners, let's have a discussion about the trade deficit. That's how you get loans from foreigners. And that's really a totally separate issue -again, an important one, arguably. But that's not the budget deficit.

So, you know, in terms of where are we borrowing the money, insofar as we're worried we're borrowing from foreigners, let's talk about the value of the dollar, which is the main factor determining the trade deficit. Debt's not the budget deficit - totally different set of issues.

CONAN: Well, the trade deficit and the budget deficit, but nevertheless, Japan - Japanese banks are indeed some of the biggest holders of U.S. credit.

Mr. BAKER: Yeah. But let me just make a point more clearly. Suppose we had the exact same trade deficit and we're running a balanced budget, and we're now out celebrating that...

CONAN: Right.

Mr. BAKER: ...we'd still be borrowing the money from Japan. But instead of buying government debt, they would be buying up shares of private corporations' private debt. And any day they wanted, they could sell those and buy government debt. So if our concern is that Japan has control over the U.S. economy, again, that's a question about the trade deficit. We could have that discussion. That's not the budget deficit.

CONAN: Well, the same thing with China. China holds...

Mr. BAKER: The exact same story, again. You know it's there.

CONAN: The exact same story. And the two economies are - and, indeed, Japan is well - are very closely linked. We're their customers.

Mr. BAKER: That's right. And, you know, there's a symbiosis that has very undesirable side effects, I think. And again, this - it's not the budget deficit. The point is that they've - particularly China here, but Japan has done this to some extent, also. They quite deliberately prop up the dollar against their currencies in order to preserve their export markets in the United States. That's been a very effective development strategy for China, but it's had the effect of undermining manufacturing in the United States.

And I have to imagine at some point, China's going to stop doing this, and that's going to painful. But again, this is not a story about the budget deficit. It's a story about the trade deficit.

CONAN: OK. But the fact remains that isn't U.S. policy somehow constrained by the fact that China owns trillions of dollars of U.S. debt?

Mr. BAKER: Well, it may or may not be. You get the sort of odd situation where, ostensibly, you know, President Obama and President Bush before him were yelling at the Chinese leadership, saying, look. We want you to stop propping up our currency. Well, how do they prop up our currency? They buy government bonds. So it's a little bit silly. You know, supposedly, we're saying we can't press them too hard in this because they'll stop buying government bonds. Well, isn't that what we want them to do? That's what I want them to do. So I don't - I'm not really worried about that.

CONAN: But are we also telling them, look, your currency is not slotted - is not valued correctly? You need to adjust that.

Mr. BAKER: Absolutely. The two are related, because what we care about is their currency relative to our currency.

CONAN: Right.

Mr. BAKER: And the way they keep their currency down is they take all their earnings, their surplus - they have a huge trade surplus. They take their earnings and they use a very large portion of it to buy up U.S. dollar assets - not just government bonds, but U.S. dollar assets. And in principle, if we say we want you to raise the value of your currency, what we mean by that is we want you to stop buying U.S. assets, including bonds.

So we're - ostensibly, we get this absurd story. We're saying, what are we asking them to do? When President Obama's in a room with them, is he saying, I want you to keep buying bonds? I want you to keep the dollar overvalued against your currency, or your currency undervalued, if you like? Or is he saying, no, stop doing that. We need to get the dollar down. Those are directly contradictory. And somehow, we have people saying he's doing both. I don't believe that.

CONAN: Let's see if can get some callers in on this conversation. We're talking with Dean Baker, an economist, about the national debt. 800-989-8255. Email:

And Henry's on the line from Philadelphia.

HENRY (Caller): Hello. Thank you for taking my call.

CONAN: Go ahead.

HENRY: I have a question for the economist. When Volcker raised rates in the '80s above 20 percent, those were real returns. When people bought a treasury debt security, they got real returns above the rate of inflation. And I'm worried that we'll never be able to get back to that high rates of return again on our debt because the government won't want to raise rates that fast to outpace inflation now that our debt is owned by foreigners and our debt is increasingly short-term securities.

CONAN: Paul Volcker, he's referring to the former secretary of the Treasury.

Mr. BAKER: Of course. Well, a very good question. Actually - usually, economists think of us as trying to keep interest rates and government debt down. So the idea is that, you know, in general, they won't quarrel with this, but the idea is usually we want low interest and government debt. We'd rather see people make money by investing in private assets, the idea of being that if people put their money into Microsoft stock, a Verizon or startup companies, that that will create capital for the economy to grow.

So in a lot of ways, economic policy is typically directed towards the idea of having - actually having well interest than government debt. That's usually what we strive for. And right now, of course, it is very, very low. It's just a three-and-a-half percent interest rate in tenure bonds, near lows - near post-war lows.

CONAN: Henry, thank you. The interest, though, I can't do the calculation that quickly in my head, but three-and-a-half percent of $12 trillion, just in debt service every year, that's a lot of money.

Mr. BAKER: Well, it is. But again, the important thing is how large is it relative to the size of the economy? It's about two percent of GDP. That's not trivial, but it's somewhere around three-and-a-half percent GDP back in '92, '93 when we had, again, a high interest burden and also high interest rates. So we're starting out with a relatively low interest burden, at least compared to where we've been. Now, of course, it would be wonderful if it were zero.

CONAN: Yeah.

Mr. BAKER: But, you know, the world doesn't work that way. So, you know, if people compare, wouldn't it be nice to pay a zero interest? Of course. You know, if we had - I'd rather not pay my mortgage, too. But that's not the way the world works.

CONAN: Well, back in the early '90s, it looked as impossible as it does now. Nevertheless, over the course of those boom years in the '90s, the budget deficit was eliminated, and indeed, the federal debt, instead of growing all the time, began to shrink.

Mr. BAKER: Exactly. And I think that's really the point we have to keep in mind. We have the experience of the '90s, or we could look back to the early post-war years from the end of World War II until 1980, when the debt-to-GDP ratio fell from 110 percent of GDP and - just after World War II, to about 30 percent back in 1980. And the way we did that was with good economic growth.

So the point is, if you get the economy growing, one, you'll get the deficits down. We actually got to surpluses at the end of the Clinton years. But more importantly, you'll raise that denominator. You raise the size of GDP so the debt burn isn't that great. And just - you know, I'll give another story, if I owe a million dollars, that's a big deal. On the other hand, if I'm Bill Gates and I owe a million dollars, so what?

CONAN: In other words, if any individuals and any - yeah, I get your point.

Mr. BAKER: If the economy grows a lot (unintelligible).

CONAN: If the economy grows, you can grow your way out of the debt problem.

Mr. BAKER: Exactly.

CONAN: And, in fact, it's happened in the past. Let's see if we can get another caller in. And let's go to Eric, Eric in Portland.

ERIC (Caller): Hi. Thanks for taking my call.

CONAN: Sure.

ERIC: I've got a question: If the comparison with World War II and indeed with the '90s isn't - not disingenuous, but just not as accurate and that there was an end point, the end point of World War II, of course, in spending when the war was over. The end point in the Clinton years were the radical cutbacks and spending that accompanied the boom. What is the current endgame plan to stop spending now? That's what (unintelligible)...

CONAN: To stop this peak, this spiral. Yeah.

ERIC: ...what I'm concerned about more than anything.

Mr. BAKER: OK. Well, we have to be careful how we got here. So we're in a situation where we had a somewhat higher deficit than, you know, at least I will consider desirable - I think most economists would consider desirable - in the years until this economic collapse, till we hit the recession in 2007 and then the economy really fell through the floor last year. That was - that would have required doing some, I think, relatively minor measures. Suddenly, we've got a much, much bigger debt, over a trillion dollars for fiscal year 2009 and very close to that for fiscal 2010. That's because of the downturn.

We had huge write-offs associated with Fannie May and Freddie Mac, some additional money with the TARP. These are one-time events. Now, if we get the economy growing again and get back towards more normal levels of unemployment, our deficits will be back towards sustainable levels. Now...

CONAN: In other words, because more people will be working and paying taxes and the government income will be greater.

Mr. BAKER: Exactly. And on the other side, we're paying out money in unemployment benefits, food stamps, all these other payments that are associated with unemployment.

So if we got the economy back towards normal levels of operation of full employment, we would largely get the deficit under control. Now, over the long term, I have to say, there is an issue with health care. And, you know, President Obama has talked about that. The health care proposal supposed to at least, in part, fix that. We'll have to come back to it, I'm sure. That's the big story for the long term. But for the time being, if we can get the economy back close to full employment, I think we'll have deficits we could live with for some time.

CONAN: Thanks very much, Eric.

ERIC: Thank you.

CONAN: Why is do we keep hearing, obviously, the state governments are having exactly the same problems, much less income and they're spending a lot on those unemployment benefits and other things, too. Yet they, for the most part, they have to run a balanced budget.

Mr. BAKER: Well, they do, and they've had enormous problems with that. You have a lot of states that are laying off school teachers, in some cases, firefighters, essential personnel. In many states, they're raising taxes, the last thing on earth you want to do in the middle of a downturn. So, I mean, if we're to impose that policy on the federal government, we would see a much worse downturn today. So maybe we'd all be really happy if we could save a balanced budget, but we might have 15 percent unemployment.

CONAN: We're talking with Dean Baker, co-director of the Center for Economic and Policy Research in Washington. And he's telling us why the $12 trillion debt - not to worry, or not to worry so much.

You're listening to TALK OF THE NATION from NPR News.

And let's go now to Bruce, Bruce with us in Golden in Colorado.

BRUCE (CALLER): Good afternoon, gentlemen. I have to disagree with Mr. Baker's analysis for this reason: I don't disagree that this maybe a lesser percentage of GDP than we've seen in the past, but there are two problems with this. Number one, there is no trend towards correcting the problem. We are simply getting deeper and deeper and deeper and deeper in debt. The Clinton balanced budget event that occurred for a year or two was an aberration based upon relatively recent history.

Number two, when you start talking about a percentage of GDP, the only way you pay this debt off - and, in particular, what we're doing is only paying interest payments - is by raising taxes. And, yes, you expand the economy, that would generate tax revenues. But the bottom line is the cost is going up. And ultimately, we're going to get to a point where we can't pay the bill.

Mr. BAKER: OK. Well, taking those points in turn, first off, we actually were in a trend that wasn't that bad even prior to this downturn. So President Bush had his tax cuts. We have the costs of the wars in Iraq and Afghanistan, which is very large. There are huge increases in defense spending over the course of this decade, which often goes unmentioned, but that is a very big factor contributing to the deficits.

But on top of that, if you just look further back, in fact, most of the post-war period, the ratio of the debt to GDP was coming down. So it really, from '40s - from '45 until 1980, the debt-to-GDP ratio was coming down. It starts to rise rapidly in the Reagan years. And then, when President Clinton came into office in '92 and '93, it again began to come down.

So, actually, the history has been exactly as I'm saying. For the most part, the debt was becoming more manageable through time, not less manageable. So I'm really not worried. Remember, we don't ever have to pay it off. I mean, politically, someone may get out there and say, we're going to pay it off. There's no reason economically we have to do so.

CONAN: We never have to pay it off?

Mr. BAKER: We never have to pay it off. You know, think of a�

CONAN: When China gets into a big problem and says, wait a minute. We've got all this paper. Here, we want our trillions back.

Mr. BAKER: Well, the other people are willing to buy it. I mean, (unintelligible) look at what the markets say. They're willing to hold 10-year debt at three-and-half percent, you know. So they're not worried about it. And, you know, if you look at a big company, if you look at a Verizon, a General Electric, they're more in debt today than they were 10, 15, 20 years ago. They'll probably be more in debt 10 years from now. The idea is that they're growing. And if any of these - if the CEO of General Electric were to come to the shareholders and say, you know, we had a real bad year. We lost all our money, but I paid off the debt. He'd fired in a second.

CONAN: Bruce, thanks.

BRUCE: As to the second point I made?

CONAN: The second point was, quickly?

BRUCE: Which is it's getting - the cost is getting larger and larger. We're only paying interest. And the only way to do that is either expanding the economy, which is not in the near horizon, or raising taxes, essentially raising revenue.

Mr. BAKER: Well, again, as we - we actually - the debt - the deficits are projected to shrink, and they're projected to stay in a more or less constant relative to GDP. They rise a little bit over the next decade once we got through this immediate period where we have very high unemployment. And the economy is growing, by the way. So I've never been an optimist about the economy, but I do expect it to grow, and I think just about every economist does, as well.

CONAN: Bruce, thanks very much. An email from Sally in Grand Rapids. Can you explain how the Federal Reserve loans the government money? I have a relative who insists the federal government is paying billions of dollars in interest to the Federal Reserve. They also say that Federal Reserve is a private company making billions off the U.S. taxpayer.

Mr. BAKER: Well, the Federal Reserve - it's (unintelligible). It's essentially a public agency. There are some complications because the banks actually do have a lot of control over the Fed, so it's sort of this private/public. But for practical purposes, I think it's best to think of it as a public central bank. And the way they loan the government is they do it - and we joke about this - the old fashion way: They print it. So the Federal Reserve essentially has the authority to print money, and they could simply buy up government bonds based on their own credit. So that's, in fact, what they do.

And if we turn to the case in Japan, where I was talking about they have a debt of 160 percent of GDP, much of it is actually owned by their central bank. So they're, in effect, printing money and using that to buy debt from - bonds from the government, which, again, you might say, well, they're just making it up. But the fact is people are happy to hold - you know, I was saying in the United States, they pay three-and-a-half percent interest, a very low interest rate. In Japan, it's just one-and-a-half percent. So no one's apparently fearful that Japan's going to have runaway inflation. They won't be able to meet their bills. It doesn't mean that will never be true, but they're obviously not near that point right now.

CONAN: And let's see if we can squeeze in David. David, we just have a little bit of time - there in Minneapolis. Go ahead, please.

DAVID (CALLER): Hi. I, too, am dismayed. And I think you're missing the forest for the trees by not talking about what the money is spent on. The money is borrowed, but will it bring economic return? Or are we studying in frogs in San Francisco Bay and waging wars in other countries?

Mr. BAKER: A very good question. I mean, again, we always have to ask that. Even if we have a budget surplus, we should ask where our money's going. But, you know, the raising frogs, I'll just have to say about this. I mean, you have a lot of politicians. I know John McCain ran around the country talking about the Woodstock Museum. Maybe it was a waste of money, but that was $1 million. You couldn't find that in the federal budget, it's such a small amount of money.

So you get a lot of examples that maybe they're bad, maybe they're good. But they don't amount to a hill beans. If you want to know where the money is, it's a relatively small number of programs. It's Social Security, Medicare, Medicaid and defense. You know, there's a few others, but that's really the largest share of the budget. So if we want to say, well, we're really overspending. We're doing things that are bad or wasteful, look at those areas, and you have to decide. I mean, I can tell you what I think of those programs, but you don't care. The point is, if you want to say we're spending too much money, look at those four programs. That's where it is.

CONAN: David, thanks very much. And we need to thank Dean Baker for his time. We appreciate you coming in to help us explain this.

Mr. BAKER: Thanks a lot for having me on.

CONAN: Dean Baker, an economist and co-director of the Washington-based Center for Economic and Policy Research. You can find a link to his blog Beat the Press - I don't like that - at our Web site.

Tomorrow, Political Junkie Ken Rudin has a holiday gift for us: a new trivia question. And, of course, we'll look at the stocking full of presents politicians left for us this past year in politics. Join us then. I'm Neal Conan. It's the TALK OF THE NATION from NPR News.

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