• Your Share of U.S. Government Debt: One Year of Work

    A reader wrote me,

    In trying to explain to some teenagers what the importance of the national debt is to them, I decided to try and figure out how many years an 18 year old would have to work if he contributed every penny he made to pay off his current portion of the national debt.  I am NOT an economist, and found relevant information confusing. I realize that the resulting figure would have some guesstimates in it (like how much an 18 year old would make in a year), but I’m stumped.  Can you give me any ideas or direction?

    I’m not an expert on the national debt, but I know enough to tell that this is a potentially loaded question (even if it wasn’t intended to be). What makes it loaded is that the extent and timing of concern over the debt are politically charged. That is, there is a strong temptation by some to use debt figures and projections to argue against spending and borrowing for things that might reasonably be viewed by others as good investments. For instance, a time of high unemployment is not an especially good time to tighten the fiscal belt even if it might someday require some tightening. Having said that, there is no harm in understanding the debt a little better. I could use some education in it myself. So here is what I can say about it. I will rely on readers to chime in with supplemental information. (Factual corrections, elaborations, and URLs to sober analysis and discourse welcome. Rants are not.)

    The national debt is customarily broken down into two components, debt held by government accounts and debt held by the public. The former includes U.S. government securities held in the Social Security trust fund. According to Wikipedia,

    As of 2008, Social Security Federal Old-Age and Survivors Insurance Trust Fund holds about half of the government held portion of the debt … with other large holders including the Federal Housing Administration, the Federal Savings and Loan Corporation’s Resolution Fund and the Federal Hospital Insurance Trust Fund.

    Note that the official government held debt figures exclude Fannie Mae and Freddie Mac obligations ($5 trillion), as well as other loan guarantees made during the liquidity crisis of 2008-2009. Officially, the 2010 estimates for the size of the debt are $14.5 trillion in total, $4.6 trillion in government accounts and $9.9 trillion held by the public. The ordinary way of understanding the debt is to put these figures in terms of GDP: 98%, 33%, and 67%, respectively. Note that Paul Krugman is not alarmed by this or a substantially higher debt level, but James Hamilton is.

    Putting the debt in terms of GDP already begins to address the reader’s question. In what follows I am implicitly assuming that the rate of growth of incomes and GDP equals the interest rate on the debt and that we do not incur any additional debt. Neither are good assumptions. (For historical and projected GDP growth see the Congressional Budget Office. For average interest rates on U.S. government debt see Treasury Direct. For potential debt growth see the Center on Budget and Policy Priorities.)

    Ignoring a few details of the income method of GDP calculation, a total debt level of 98% of GDP (the 2010 estimate) could be paid off in one year if all but 2% of income and business profit was devoted to it (*). There are about 130 million workers in the U.S. So it would take about 130 million worker-years to pay off the debt.

    But that way of looking at it assigns business profit to workers and also imagines that workers could spend their non-wage compensation on the debt. That’s not what the reader had in mind. So, another approach would be to consider the average lifetime earnings of a college graduate. It’s about $2.1 million. To pay down a debt of $14.5 trillion (the 2010 estimate) it would take the lifetimes of 7 million such individuals, or 7 million times the lifetime of one such individual, assuming that one individual would earn $2.1 million over each of his 7 million lifetimes of work. Of course the figure is higher if we only consider high school graduates, who earn one million dollars less. (I don’t know what the average lifetime earnings are for the mix of education levels that currently exist in the workforce.)

    One works perhaps about 40 years in a lifetime, and 40 x 7 million years is 280 million years. (By way of reference, dinosaurs emerged about 230 million years ago.) That 280 million figure is higher than the 130 million years calculated above because it imagines using only worker income, not business profits or non-wage compensation, to pay off the debt. (Also, this is all very back-of-the-envelope so one should not be so picky.) But one individual isn’t responsible for the whole debt. If we assign an equal amount of it to each of the 312 million individuals in the U.S. as of this writing then we get back to something pretty close to one year to pay off one individual’s share of the U.S. debt burden (280/312 = 0.90).

    So, to the reader who posed the question, go tell your teenagers to work a solid year and put every penny of earnings toward the debt. They’ll have to forgo all other consumption (food, shelter, clothing, transportation, etc.). Also, they won’t really be able to pay down the debt even if they wanted to. There’s no way for a citizen to do that. It’s a government decision. What I’d really tell them is to pay attention to the issues (it seems they’re off to a good start), read widely, think deeply, not to be fooled by populism, and to vote.

    (*) National income is $12.5 trillion which is nearly 90% of GDP.

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    • Can we cover current and anticipated debt costs? Yes. Is there any doubt?

      Would reducing the debt now make things better? No. They’d be worse

      What can we do to reduce the long term debt? (1) Fix healthcare. If we could reduce our spending to the level of spending in the civilized world, we wouldn’t have a debt problem; (2) Rescind the Bush tax cuts. They are incredibly expensive; (3) Reduce defense spending, including our current wars. It’s very expensive and there’s a lot of needless waste (although one person’s waste is another’s dividend payment).

      Is there anything else that would have such a large effect?