Presidents and Economics: The National Debt
Last week Congress approved a national Covid relief package that is expected to cost taxpayers $1.9 trillion. President Biden sees this as something necessary to the nation, while fiscal conservatives are concerned about adding to the national debt in such a large amount, a debt that will be placed on the shoulders of subsequent generations. This month we'll look at how a number of Presidents have dealt with the economic issues that have confronted them and that have led to a national debt that is soon expected to pass the $28 trillion mark. How did government spending lead to the creation of such a huge debt today?
When the 13 Colonies were fighting the Revolutionary War, they were required to borrow money to finance the war. The United States has continuously had a fluctuating public debt from the time the Constitution went into effect on March 4, 1789. The country was briefly debt free for about a year from 1835 to 1836 near the end of the Presidency of Andrew Jackson. That didn't last long. Right from the start, under the Articles of Confederation, the Continental Congress had amassed a huge debt during the war, but it lacked the power to repay these obligations through taxation or duties on imports. The financial affairs of the new country were in terrible shape.
In 1790, Secretary of the Treasury Alexander Hamilton presented Congress with his financial plan, called the First Report on the Public Credit. A controversial part of the plan called for the federal government to assume state debts incurred during the Revolutionary War. Northern states had accumulated a war debts amounting to $21.5 million. The Southern states had lower debts, and were reluctant to accept the proposal, since they would be paying off a disproportionate share of the debt. Some states, including Virginia, had already paid off almost half of their debts, and felt that their taxpayers should not be assessed again to bail out the less responsible states. They also argued that the plan was beyond the constitutional power of the new government. James Madison, then a representative from Virginia, led a group of legislators from the South to prevent the plan from gaining approval. Thomas Jefferson supported Madison. The plan was finally adopted in what became known as the Compromise of 1790, more properly the Funding Act of 1790. Under this compromise, the state debts were all picked up by the federal Treasury, and the permanent national capital would be located in the South, along the Virginia-Maryland border in what became the District of Columbia.
Hamilton proposed that the federal Treasury would issue bonds that rich people would buy, giving them a vested interest in the success of the national government. Hamilton proposed to pay off the new bonds with revenue from a new tariff on imports. Jefferson was inclined to support the scheme, but Madison convinced him that federal control of debt would consolidate too much power in the national government. When Jefferson became president he continued the system. The credit of the U.S. was solidly established at home and abroad. This good credit rating allowed Jefferson to borrow in Europe to finance the Louisiana Purchase in 1803, and it allowed Madison to borrow to finance the War of 1812.
The debts of the federal government on January 1, 1791 amounted to $75,463,476.52, of which about $40 million was domestic debt, $12 million was foreign debt, and $18.3 million were state debts assumed by the federal government. The debt gradually was reduced from 1796 to 1811 as the result of 14 budget surpluses. The debt increased sharply as a result of the War of 1812, but in the 20 years following that war, there were 18 surpluses. On January 1, 1835, during the administration of President Andrew Jackson, the debt was fully paid off, the only time in U.S. history that has happened.
In 1836 US started to acquire debt once again. On January 1, 1836, the debt was $37,000. The debt remained at a modest level until the Civil War. The debt was just $65 million in 1860, but passed $1 billion in 1863 and reached $2.7 billion by the end of the war. During the following 47 years, there were 36 surpluses and 11 deficits. During this period 55% of the national debt was paid off.
The national debt increased again during World War I, reaching $25.5 billion by the end of the war. Approximately $17 billion in debt was raised through the selling of Liberty Bonds to the general public to finance the U.S.'s military effort. The war was followed by 11 consecutive surpluses that saw the debt lowered by 36% by the end of the 1920s. Warren G. Harding was elected president in 1920 and believed the federal government should be fiscally managed in a way similar to a private sector business. He had campaigned on the slogan, "Less government in business and more business in government." Under Harding, federal spending declined from $6.3 billion in 1920 to $5 billion in 1921 and $3.3 billion in 1922. This trend continued during the Presidency of Calvin Coolidge, and the national debt was reduced by one third.
When Franklin D. Roosevelt took office in 1933, the debt was almost $20 billion, 20% of the country's gross domestic product (GDP). Tax revenues dropped and spending on social programs increased during the Great Depression increased the debt and by 1936, the debt had increased to $33.7 billion, approximately 40% of GDP. During its first term, the Roosevelt administration ran large annual deficits of between 2 and 5% of GDP. By 1939, the debt held by the public had increased to $39.65 billion or 43% of GDP. The buildup and involvement in World War II led to the largest increase in public debt. The national debt rose to more than 100% of GDP to pay for the mobilization before and during the war. The debt was $251.43 billion or 112% of GDP at the conclusion of the war in 1945 and was $260 billion in 1950.
The public debt fell rapidly after the end of World War II under the presidency of Harry S. Truman, as the U.S. and the rest of the world experienced a post-war economic expansion. Even the Korean War did not lead to an increase in the public debt. But the rate of economic growth in Western countries began to slow in the mid-1960s. Beginning in the mid-1970s and afterwards, U.S. national debt began to increase faster than GDP. In 1974, the Congressional Budget and Impoundment Control Act of 1974 reformed the budget process to allow Congress to challenge the president's budget. As a result, deficits became increasingly difficult to control.
The debt rose rapidly again in the 1980s. President Ronald Reagan had lowered tax rates significantly, dropping the top income tax rate from 70% to 28%, although bills passed in 1982 and 1984 later partially reversed those tax cuts. Military spending also increased, while congressional Democrats blocked cuts to social programs. As a result, the debt as a share of GDP increased from 26.2% in 1980 to 40.9% in 1988. It continued to rise during the presidency of George H. W. Bush, reaching 48.3% of GDP in 1992.
The debt reached a high of 49.5% of GDP at the beginning of President Bill Clinton's first term. However, it fell to 34.5% of GDP by the end of Clinton's presidency due to decreased military spending, increased taxes (in 1990, 1993 and 1997), and increased tax revenue resulting from the 1990s boom. For the first time in a long time, the nation had budget surpluses at the end of the decade. The surpluses led to a decline in the public debt from about 43% of GDP in 1998 to about 33% by 2001.
In the early 21st century, the debt relative to GDP rose again, in part due to the Bush tax cuts and due increased military spending caused by the wars in Afghanistan and Iraq. During the presidency of George W. Bush, the debt nearly doubled from $3.339 trillion in September 2001 to $6.369 trillion by the end of 2008. The global financial crisis of 2007–08 resulted in significant revenue declines and spending increases. The debt increased to $11.917 trillion by the end of July 2013, during the presidency of Barack Obama. On August 5, 2011, during the United States debt-ceiling crisis of 2011, the credit rating agency Standard & Poor's downgraded the rating of the federal government from AAA to AA+. It was the first time the U.S. had been downgraded since it was originally given a AAA rating on its debt 1917.
The Obama Administration made significant accounting changes to more accurately report total federal government spending. These included accounting for the wars in Iraq and Afghanistan in the budget, rather than through supplemental appropriations, accounting for the full costs of Medicare reimbursements, and budgeting for expenditures for natural disaster relief.
As a presidential candidate, Donald Trump pledged to eliminate $19 trillion in federal debt in eight years. He pledged to radically decrease federal spending in order to reduce the country's budget deficit. A first estimate of $10.5 trillion in spending cuts over 10 years was predicted on January 19, 2017, but cuts of this size did not appear in President Trump's 2018 budget. Despite stronger predicted economic growth in the short term, the budget deficit has continued to grow a share of GDP. The debt is predicted to increase by $11.7 trillion over the next decade. The Trump administration proposed its 2018 budget on February 27, 2017, containing $54 billion in cuts to federal agencies and an increase in defense spending. On March 16, 2017, President Trump sent his budget proposal to Congress. There was a deficit of $779 billion in the 2018 fiscal year. As of the end of fiscal year 2020, the debt was $26.9 trillion. President Trump had added $6.7 trillion to the debt since President Obama's last budget, a 33.1% increase, due in large measure to the effects of the coronavirus pandemic.
The national debt continues to rise as evidenced by the national debt clock. At the time of this writing, it is over $27.966 trillion. In the short term, the public benefits from deficit spending, which drives economic growth. In the long run however, as the debt-to-GDP ratio increases, debt holders can demand larger interest payments as compensation for an increasing risk they won't be repaid. Increased interest rates slow the economy. Many economists are concerned that the amount of federal spending today points to high-interest payments on the debt in the near future.
In an age of polarization in politics, how will the president and Congress handle the looming debt crisis? Over the next 20 years, the Social Security Trust Fund won't have enough to cover the retirement benefits promised to baby boomers. That could mean higher taxes or it could mean lower or deferred benefits. Budgeting and management of the debt has always been one of the major problems on the president's desk, and will continue to be so in the future.
When the 13 Colonies were fighting the Revolutionary War, they were required to borrow money to finance the war. The United States has continuously had a fluctuating public debt from the time the Constitution went into effect on March 4, 1789. The country was briefly debt free for about a year from 1835 to 1836 near the end of the Presidency of Andrew Jackson. That didn't last long. Right from the start, under the Articles of Confederation, the Continental Congress had amassed a huge debt during the war, but it lacked the power to repay these obligations through taxation or duties on imports. The financial affairs of the new country were in terrible shape.
In 1790, Secretary of the Treasury Alexander Hamilton presented Congress with his financial plan, called the First Report on the Public Credit. A controversial part of the plan called for the federal government to assume state debts incurred during the Revolutionary War. Northern states had accumulated a war debts amounting to $21.5 million. The Southern states had lower debts, and were reluctant to accept the proposal, since they would be paying off a disproportionate share of the debt. Some states, including Virginia, had already paid off almost half of their debts, and felt that their taxpayers should not be assessed again to bail out the less responsible states. They also argued that the plan was beyond the constitutional power of the new government. James Madison, then a representative from Virginia, led a group of legislators from the South to prevent the plan from gaining approval. Thomas Jefferson supported Madison. The plan was finally adopted in what became known as the Compromise of 1790, more properly the Funding Act of 1790. Under this compromise, the state debts were all picked up by the federal Treasury, and the permanent national capital would be located in the South, along the Virginia-Maryland border in what became the District of Columbia.
Hamilton proposed that the federal Treasury would issue bonds that rich people would buy, giving them a vested interest in the success of the national government. Hamilton proposed to pay off the new bonds with revenue from a new tariff on imports. Jefferson was inclined to support the scheme, but Madison convinced him that federal control of debt would consolidate too much power in the national government. When Jefferson became president he continued the system. The credit of the U.S. was solidly established at home and abroad. This good credit rating allowed Jefferson to borrow in Europe to finance the Louisiana Purchase in 1803, and it allowed Madison to borrow to finance the War of 1812.
The debts of the federal government on January 1, 1791 amounted to $75,463,476.52, of which about $40 million was domestic debt, $12 million was foreign debt, and $18.3 million were state debts assumed by the federal government. The debt gradually was reduced from 1796 to 1811 as the result of 14 budget surpluses. The debt increased sharply as a result of the War of 1812, but in the 20 years following that war, there were 18 surpluses. On January 1, 1835, during the administration of President Andrew Jackson, the debt was fully paid off, the only time in U.S. history that has happened.
In 1836 US started to acquire debt once again. On January 1, 1836, the debt was $37,000. The debt remained at a modest level until the Civil War. The debt was just $65 million in 1860, but passed $1 billion in 1863 and reached $2.7 billion by the end of the war. During the following 47 years, there were 36 surpluses and 11 deficits. During this period 55% of the national debt was paid off.
The national debt increased again during World War I, reaching $25.5 billion by the end of the war. Approximately $17 billion in debt was raised through the selling of Liberty Bonds to the general public to finance the U.S.'s military effort. The war was followed by 11 consecutive surpluses that saw the debt lowered by 36% by the end of the 1920s. Warren G. Harding was elected president in 1920 and believed the federal government should be fiscally managed in a way similar to a private sector business. He had campaigned on the slogan, "Less government in business and more business in government." Under Harding, federal spending declined from $6.3 billion in 1920 to $5 billion in 1921 and $3.3 billion in 1922. This trend continued during the Presidency of Calvin Coolidge, and the national debt was reduced by one third.
When Franklin D. Roosevelt took office in 1933, the debt was almost $20 billion, 20% of the country's gross domestic product (GDP). Tax revenues dropped and spending on social programs increased during the Great Depression increased the debt and by 1936, the debt had increased to $33.7 billion, approximately 40% of GDP. During its first term, the Roosevelt administration ran large annual deficits of between 2 and 5% of GDP. By 1939, the debt held by the public had increased to $39.65 billion or 43% of GDP. The buildup and involvement in World War II led to the largest increase in public debt. The national debt rose to more than 100% of GDP to pay for the mobilization before and during the war. The debt was $251.43 billion or 112% of GDP at the conclusion of the war in 1945 and was $260 billion in 1950.
The public debt fell rapidly after the end of World War II under the presidency of Harry S. Truman, as the U.S. and the rest of the world experienced a post-war economic expansion. Even the Korean War did not lead to an increase in the public debt. But the rate of economic growth in Western countries began to slow in the mid-1960s. Beginning in the mid-1970s and afterwards, U.S. national debt began to increase faster than GDP. In 1974, the Congressional Budget and Impoundment Control Act of 1974 reformed the budget process to allow Congress to challenge the president's budget. As a result, deficits became increasingly difficult to control.
The debt rose rapidly again in the 1980s. President Ronald Reagan had lowered tax rates significantly, dropping the top income tax rate from 70% to 28%, although bills passed in 1982 and 1984 later partially reversed those tax cuts. Military spending also increased, while congressional Democrats blocked cuts to social programs. As a result, the debt as a share of GDP increased from 26.2% in 1980 to 40.9% in 1988. It continued to rise during the presidency of George H. W. Bush, reaching 48.3% of GDP in 1992.
The debt reached a high of 49.5% of GDP at the beginning of President Bill Clinton's first term. However, it fell to 34.5% of GDP by the end of Clinton's presidency due to decreased military spending, increased taxes (in 1990, 1993 and 1997), and increased tax revenue resulting from the 1990s boom. For the first time in a long time, the nation had budget surpluses at the end of the decade. The surpluses led to a decline in the public debt from about 43% of GDP in 1998 to about 33% by 2001.
In the early 21st century, the debt relative to GDP rose again, in part due to the Bush tax cuts and due increased military spending caused by the wars in Afghanistan and Iraq. During the presidency of George W. Bush, the debt nearly doubled from $3.339 trillion in September 2001 to $6.369 trillion by the end of 2008. The global financial crisis of 2007–08 resulted in significant revenue declines and spending increases. The debt increased to $11.917 trillion by the end of July 2013, during the presidency of Barack Obama. On August 5, 2011, during the United States debt-ceiling crisis of 2011, the credit rating agency Standard & Poor's downgraded the rating of the federal government from AAA to AA+. It was the first time the U.S. had been downgraded since it was originally given a AAA rating on its debt 1917.
The Obama Administration made significant accounting changes to more accurately report total federal government spending. These included accounting for the wars in Iraq and Afghanistan in the budget, rather than through supplemental appropriations, accounting for the full costs of Medicare reimbursements, and budgeting for expenditures for natural disaster relief.
As a presidential candidate, Donald Trump pledged to eliminate $19 trillion in federal debt in eight years. He pledged to radically decrease federal spending in order to reduce the country's budget deficit. A first estimate of $10.5 trillion in spending cuts over 10 years was predicted on January 19, 2017, but cuts of this size did not appear in President Trump's 2018 budget. Despite stronger predicted economic growth in the short term, the budget deficit has continued to grow a share of GDP. The debt is predicted to increase by $11.7 trillion over the next decade. The Trump administration proposed its 2018 budget on February 27, 2017, containing $54 billion in cuts to federal agencies and an increase in defense spending. On March 16, 2017, President Trump sent his budget proposal to Congress. There was a deficit of $779 billion in the 2018 fiscal year. As of the end of fiscal year 2020, the debt was $26.9 trillion. President Trump had added $6.7 trillion to the debt since President Obama's last budget, a 33.1% increase, due in large measure to the effects of the coronavirus pandemic.
The national debt continues to rise as evidenced by the national debt clock. At the time of this writing, it is over $27.966 trillion. In the short term, the public benefits from deficit spending, which drives economic growth. In the long run however, as the debt-to-GDP ratio increases, debt holders can demand larger interest payments as compensation for an increasing risk they won't be repaid. Increased interest rates slow the economy. Many economists are concerned that the amount of federal spending today points to high-interest payments on the debt in the near future.
In an age of polarization in politics, how will the president and Congress handle the looming debt crisis? Over the next 20 years, the Social Security Trust Fund won't have enough to cover the retirement benefits promised to baby boomers. That could mean higher taxes or it could mean lower or deferred benefits. Budgeting and management of the debt has always been one of the major problems on the president's desk, and will continue to be so in the future.