When was the last time we paid down the national debt?
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Listener Dana Gibson asked:
When was the last time any of the principal of the national debt was paid?
The U.S. is bumping up against its debt ceiling deadline again. Last month, Treasury Secretary Janet Yellen warned that the government could default on its debt obligations after Dec. 15 if there isn’t an increase in the debt limit.
If Congress fails to strike a deal, the U.S. would default for the first time ever.
At the end of October, the national debt stood at around $28.9 trillion. The amount held by the public, which includes foreign governments, stood at about $22.6 trillion, while U.S. intragovernmental holdings amounted to roughly $6.3 trillion.
The last time the amount of debt held by the public shrank was back in 2001, according to Wendy Edelberg, a senior fellow in economic studies at the Brookings Institution and director of the Hamilton Project, an economic policy initiative.
Edelberg said from 1998 to 2001, that amount was reduced each year. In the second quarter of 2001, the federal debt held by the public was roughly $3.3 trillion, compared to $3.5 trillion during the same period the previous year. These were booming years for the U.S. economy, which helped reduce the government’s need to borrow.
David Primo, a political science and business administration professor at the University of Rochester, said the White House believed this era of fiscal responsibility would continue.
In a twist of irony, Primo noted that at the end of President Bill Clinton’s second term, his administration issued a press release touting that the U.S. “is on course to eliminate its public debt within the next decade.”
“Obviously that didn’t happen,” Primo said.
In fact, the last time the U.S. was able to completely pay off the national debt was about 186 years ago — back in 1835.
Since the early 2000s, the national debt has consistently increased. Edelberg and Primo said a series of events and decisions, including tax cuts, the U.S. wars in Iraq and Afghanistan and the 2007–2009 financial crisis, have all pushed the debt higher.
Primo said that in the early- to mid-2010s, in the wake of the financial crisis, the federal debt and deficit started to receive greater attention, but it then dissipated.
To bring down the national debt, Edelberg said we’d have to either raise taxes or cut spending, which would be “painful.”
While these trillion-dollar sums seem massive, Edelberg said, “there’s nothing particularly urgent about reducing the size of the total amount of debt outstanding.”
She explained that for starters, even if you kept the total nominal amount of debt constant, you would reduce its burden relative to the size of the economy each year.
“We’re a country that grows somewhat predictably year after year, and we’re a safe haven for people all over the world who really want to invest in the U.S. It makes perfect sense for us to have a stock of debt out there at any given time,” Edelberg said. “In fact, our financial system has organized itself in a way that it’s quite dependent on having a whole stock of Treasury securities to trade.”
In part, that’s because investors see buying government debt as a way to get a decent return with essentially no risk.
A better way to think about the national debt, experts say, is not the total headline amount, but the amount as a ratio to the country’s gross domestic product.
Edelberg said what’s worrying is that the total stock of debt is projected to get larger and larger relative to the overall economy. Both she and Primo said that should be stabilized.
When the share of debt grows too large, Primo said, it ends up stifling economic growth because too much money is flowing into government operations instead of private investment or consumption. He added that it also may become more difficult for the U.S. to borrow money if creditors start worrying about the swelling size of the debt.
“We don’t know how big is too big,” Primo said.
Correction (Dec. 2, 2021): An earlier version of this story misstated the years when the federal debt and the deficit started to receive greater attention.
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