chAPTER ThiRTEEn • DomEsTic AnD Economic Policy 311
held by foreigners was only 15 percent. Table 13–1 on the right shows the
net public debt of the federal government since 1940.^3
Table 13–1 does not take into account two very important variables:
inflation and increases in population. A better way to examine the rela-
tive importance of the public debt is to compare it with the gross domes-
tic product (GDP), as is done in Figure 13–1 on the next page. (As noted
earlier in this chapter, the gross domestic product is the dollar value of
all final goods and services produced in a one-year period.) In the figure,
you see that the public debt reached its peak during World War II and fell
until 1975. From about 1960 to 2008, the net public debt as a percent-
age of GDP ranged between 30 and 62 percent.Deficit spending. Can deficit spending go on forever? Certainly, it
can go on for quite a long time for the U.S. government. After all,
as long as individuals, businesses, and foreigners (especially foreign
governments) are willing to purchase Treasury securities, the govern-
ment can continue to engage in deficit spending. If deficit spending
goes on long enough, however, the rest of the world—which owns
about 50 percent of all treasuries—may lose faith in our government.
Consequently, U.S. government borrowing might become more expen-
sive. We, as taxpayers, are responsible for the interest that the fed-
eral government pays when it issues treasuries. A vicious cycle might
occur—more deficit spending could lead to higher interest rate costs
on the U.S. debt, leading in turn to even larger deficits.
So far, however, there has been little sign that such a problem is immi-
nent. On the contrary, following the financial crisis that struck on September
15, 2008, panicked investors bought large amounts of treasuries in the
belief that they were the safest instruments in existence. The interest that
the U.S. government must pay on its borrowing is also very low. In May
2013, the average interest rate on four-week Treasury bills—the shortest
term Treasury obligations—was 0.025 percent—for all practical purposes,
an interest rate of zero. Correcting for inflation, anyone buying short-term
treasuries was paying the U.S. government for the privilege of making loans
to it. In 2011, the bond rating agency Standard & Poor’s issued a warning
about treasuries, but it had no effect on the market for the securities.The Public Debt in Perspective. From 1960 until 1998, the federal
government spent more than it received in all but two years. Some
observers considered those on going budget deficits to be the nega-
tive result of Keynesian policies. Others argued that the deficits actually
resulted from the abuse of Keynesianism. Politicians have been more
than happy to run budget deficits in recessions, but they have often
refused to implement the other side of Keynes’s recommendations—to
run a budget surplus during boom times.
In 1993, however, President Bill Clinton (1993–2001) obtained a
tax increase as the nation emerged from a mild recession. Between the
tax increase and the “dot-com boom,” the United States had a budgetTABlE 13–1: net Public
Debt of the Federal
governmentYearTotal (Billions of
Current Dollars)
1940 $ 42.8
1945 235.2
1950 219.0
1960 236.8
1970 283.2
1980 711.9
1990 2,411.5
1995 3,604.3
1996 3,734.1
1997 3,772.3
1998 3,721.1
1999 3,632.4
2000 3,409.8
2001 3,319.6
2002 3,540.4
2003 3,913.4
2004 4,295.5
2005 4,592.2
2006 4,829.0
2007 5,035.1
2008 5,803.1
2009 7,544.7
2010 9,018.9
2011 10,128.0
2012 11,578.0*
2013 12,637.0*
2014 13,445.0*
End of year.
*Estimate.
Source: U.S. Office of Management and
Budget.- Some sources use a much larger figure called the gross public debt. This statistic, however, includes
sums that the federal government owes to itself.
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