Blessing or Danger? Stats and Strategies for Teaching Debt and Deficits
Can you guess who these people are? They both are considered founding fathers of our nation, their importance acknowledged by their recognition on our currency today. Yet their political views could not have been more different—one believing that "a national debt, if it is not excessive, will be to us a national blessing," the other viewing public debt as "the greatest of dangers to be feared." If you guessed Alexander Hamilton (first quote) and Thomas Jefferson (second quote), you are right. Historians and scholars of central banking today still study these two statesmen's famous debate on the virtue of debt and the merits of the First Bank of the United States. And regardless of whether you agree with the arguments of our first Secretary of the Treasury or our nation's third president, the current U.S. national debt stands at more than $17 trillion dollars. Divided by the U.S. population, that comes to more than $54,000 a person.
What is debt and what is deficit?
The first task is to define what it is we are really talking about, and we have to start with deficit. A deficit occurs when the amount of revenue the U.S. government receives from taxes and other payments is less than the amount of money it spends. The national debt is the total accumulation of these yearly deficits. When the government runs a deficit, it must borrow money to keep operating, and to do that, it sells securities such as Treasury bills, bonds, and notes.
How did we get here?
To understand how we got to the point where the numbers are moving so quickly, and also to know why solving the problem is more complicated than just "spending less," students will need a history lesson.
Alexander Hamilton's belief in debt as a blessing led him to issue the first public debt in 1789, as a way to clear $75 million in debts left over from the American Revolution. By the time Andrew Jackson became president in 1835, America was debt-free—and it never would be again, thanks in part to upcoming wars.
War and economic crises are the main drivers for deficit spending, and the Civil War was just a couple of decades away. By 1863, two years after the start of the Civil War, the federal debt surpassed $1 billion, and landed at nearly triple that by the war's end. By the end of World War I, the U.S. debt reached $22 billion. Then New Deal spending to combat the Great Depression brought record peacetime spending deficits. By the end of the World War II, federal debt was more than a $250 billion dollars. Yet as the economy grew, the debt actually shrank in relation to gross domestic product (GDP), which meant the country had a relatively modest debt-to-GDP level of 24 percent by the middle of the 1970s.
Recession, 1980s tax cuts, and the military buildup during the Cold War brought an explosion of debt during the 1980s and early 1990s.This was repeated in the early years of the 21st century as the nation was hit with recession and war again. The Great Recession marked the debt level's passage above $10 trillion, and the Congressional Budget Office projects that it will be double this by 2023. The current debt level, in excess of $17 trillion, exceeds U.S. GDP and requires an interest payment of roughly $600,000 per minute. More than $3 billion is being added to the total every day.
Can we fix it?
You can have students look at a neat graphic that the Internal Revenue Service (IRS) furnishes at the end of its tax booklets (you can access these on the IRS website). The graphic is a pie chart that shows the government's revenues and expenditures. Your students will quickly see that national defense is not the largest expense in the federal budget, but the second largest, at 24 percent. The largest budget outlay—38 percent—goes to Social Security, Medicare, and other support for the disabled and elderly; this part of the budget makes up what is referred to as entitlements. In other words, they are obligations the government must pay under current laws. Another area of the budget comprising entitlements is the 21 percent that goes to social programs such as Medicaid and food stamps. Finally, 6 percent of the budget goes to pay interest on the federal debt.
When economic times are bad, spending on entitlements grows while tax revenues fall—which can quickly put a budget out of balance, just as if a household were to buy a new more expensive house or car and then have a family member become unemployed. And unless the United States wants to default on its debt payments, interest on the debt is also a nonnegotiable spending item. While some may argue national defense spending could be cut, it certainly cannot be eliminated. Add up these four items, and you already have 89 percent of federal expenditures.
So what's left for the remaining 11 percent to do? Everything else! This includes law enforcement, agriculture, education, spending on the environment, science and the space program, energy, transportation, job training, community development, and natural resources.
The Concord Coalition hosts an online "Federal Budget Challenge" based on spending-and-revenue pie charts. The challenge is for site visitors to try to balance the federal budget in each of the spending categories. It is both eye-opening and difficult. You can go to the website to print the results to use as a classroom assignment. For each suggested cut or spending increase, the site lists "pros and cons," which are useful for classroom discussions and debate. A paper version, "Principles and Priorities," is also available from the site, as is a video tutorial. The Coalition's website provides current news stories on the debt and the deficit as well as numerous educational resources.
Why should we care?
On the website of the Bureau of the Public Debt, you will find a banner bearing another Hamiltonian quote: "The United States debt, foreign and domestic, was the price of liberty." The core of the department's self-proclaimed mission is to borrow money needed to operate the federal government. The site includes lots of information right from the agency responsible for administering the debt. For those who would like to contribute all or part of their $54,000 share, the FAQ section includes information on how you can make a contribution to reduce the debt by mail or online payment. Primary sources from the U.S. Treasury housed on the site describe the ownership of the debt, its composition, and budgetary statistics.
If you are looking to tie common core standards into the discussion, the Federal Reserve Bank of St. Louis offers a lesson using its FRED (Federal Reserve Economic Data) graphing tool that explores the federal deficit, debt, and the debt's percentage of GDP. The goal of the lesson is to teach students how to view and interpret the data, edit and create graphs, and transform data in a step-by-step lesson that uses the latest numbers and statistics. Included in the lesson is the difference between deficits and the debt along with data exercises that show students how to build graphs showing current and historical debt levels and the ratio of debt to GDP.
President Herbert Hoover once said, "Blessed are the young, for they shall inherit the national debt." The national debt is the result of choices made in the past, but the young, who inherit the results of those decisions, can help influence the future and how much debt we accumulate in years to come. Understanding the consequences of debt and how we got there, and the resulting trade-offs required by deficit spending and debt, is the first step.
By Lesley Mace, senior economic and financial education specialist at the Jacksonville Branch of the Federal Reserve Bank of Atlanta
March 28, 2014