Who Owns The National Debt?

An interesting new analysis of the US national debt. Read carefully.
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

Treasury ownership marks wealth divide

By Gillian Tett

Who owns America’s ever-swelling pile of government debt? This is a question that has provoked considerable angst among US politicians recently; or at least it has in relation to national identity.

Little wonder. Half a century ago, the share of US public debt held by foreigners was less than 5 per cent; but in 2008 that ratio breached 50 per cent. And while it has since fallen back slightly (because the Federal Reserve has been gobbling up bonds) the shift in ownership is nevertheless stark – along with the new power of creditors such as China.

But there is a second important point about America’s debt that has hitherto received surprisingly little attention: the shifting nature of bond investors who hail from inside the US. In past decades, it has often been assumed that Treasury bonds were widely held by the public. Indeed, since the days of Alexander Hamilton, who founded a strong central US Treasury, many politicians have thought (or hoped) that a broad involvement in the bond market – be that among widows, orphans, middle-class citizens or oligarchs – would be a source of common civic identity and social glue.

However, Sandy Hager, a postdoctoral research fellow at the London School of Economics, has recently crunched through the historical data. This research suggests that if you look at the “publicly held” US government bond markets (ie the parts not held by another US government agency, such as the Fed), foreign ownership of federal bonds has risen from around 5 per cent in 1970 to 55 per cent today, at the expense of US households and business.

More specifically, the ratio of the bond market held by corporations during this period has declined from around 40 per cent to 30 per cent, while for households it has fallen from around 30 per cent to almost 15 per cent.

Concentrated ownership

But what is most interesting is the picture inside the “household” category. Contrary to the usual assumption that government debt is widely held, Mr Hager’s data suggests ownership has become far more concentrated recently, echoing a wider concentration of wealth in the US.

Back in the 1970s, for example, the richest 1 per cent of Americans “only” held 17 per cent of all the federal bonds that were in private sector hands. This was partly because during the second world war and in the immediate aftermath there was a strong attempt to distribute Treasuries widely. But since the 1980s, the proportion of debt owned by the top 1 per cent started to rise sharply, hitting 30 per cent in 2000 and 42 per cent in 2013. The last time it was this high was in 1922, when the ratio was 45 per cent.

Now, this picture may not be entirely complete. Mr Hager himself admits that the historical data are often patchy, and it could be argued that modern citizens are also indirect owners of government debt through public agencies and pension funds, in ways that do not show in the data. But, if nothing else, this pattern gives new significance to the questions that Hamilton and other historical figures first grappled with three centuries ago: namely, is public debt a potential source of civic cohesion? Or merely a subtle way for elites to entrench their power?

Skin in the game

Mr Hager, for his part, takes the latter perspective; after all, he points out, this pattern means the richest are collecting more and more interest income, but not paying a proportionate increase in taxes.

“Over the past three decades, and especially in the context of the current crisis, the ownership of federal bonds and federal interest has become rapidly concentrated in the hands of dominant owners, the top 1 per cent of households and the 2,500 largest corporations [while] the federal income tax system has done little to progressively redistribute the federal interest income received by dominant owners,” he writes.

“Public debt has come to reinforce and augment the power of those at the very top of the social hierarchy,” he adds, concluding that “[Karl] Marx’s notion of a powerful ‘aristocracy of finance’ at the heart of the public debt is . . . a very real feature of the contemporary US political economy.”

No doubt most bond investors would disagree; the name “Marx”, after all, is taboo on dealing floors. But even if you disagree with Mr Hager’s leftwing political bent, the data certainly casts a new light on the political dynamic in the current fiscal rows.

To the wealthy elites in the US who hold government bonds, it seems self-evident that the government needs to preserve the sanctity and value of Treasuries; this group has a strong incentive to ensure this happens via fiscal reform (particularly if this entails budget cuts, rather than higher taxes.) But what is rarely debated is that millions of poor Americans have far less (or no) skin in the Treasuries game. Little wonder, then, that the fiscal debate is so polarised, and unlikely to become any less so any time soon.

gillian.tett@ft.com

National Debt: Why Is It $16 Trillion ?

The National Debt Clock in New York on Dec. 31, 2012. (JUSTIN LANE/EPA - EPA)
“Our government has built up too much debt. …At $16 trillion and rising, our national debt is draining free enterprise and weakening the ship of state.”
— House Speaker John A. Boehner, Jan. 3, 2013
With a debt ceiling limit looming in the next two months, Congress and the Obama administration appear set to have another bruising battle over spending priorities.
 Before embarking on that course, lawmakers might want to re-read the Standard & Poor’s report on why it reduced the nation’s debt rating after the 2011 deal that ended the last conflict over the debt ceiling. The report offered two key reasons:
 

1) “The downgrade reflects our opinion that the fiscal consolidation plan  that Congress and the Administration recently agreed to falls short of  what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.”

 2) “More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.”

As part of its analysis, S&P assumed Republicans in Congress would never agree to raise taxes, but that actually happened as part of the “fiscal cliff’ negotiations. But S&P was also worried Congress would not fulfill the second half of promised spending cuts — and those have now been deferred for two months.
In any case, S&P was clearly looking for more signs of cooperation on restraining the debt — not confrontation.
As a refresher course, let’s look anew at the sources of this $16 trillion in debt.

The Facts

 While polls indicate that many Americans continue to believe that foreign aid is a large part of government spending, it actually constitutes less than 1 percent of the budget. And, no, the deficit can’t be eliminated by just cracking down on “waste, fraud and abuse.” We once awarded the American public Four Pinocchios for ignorance about the federal budget.
So where does the debt come from? This clever Washington Post interactive feature provides some clues — much of it comes from promises made to keep paying Social Security and Medicare. The programs annually funded by Congress generally have become a smaller share of the U.S. economy, even with funding two wars.
 (An aside: the national debt is made up of publicly held debt and money that the government owes to itself. Boehner’s $16 trillion number is this “gross debt” figure. About $11.5 trillion is public debt and the rest comes from bonds held by Social Security, Medicare and other trust funds. You can have an endless debate about whether these bonds are real or not — read our Social Security primer — but ultimately these are obligations that must be paid with either new debt or general government funds, thus taking away from other programs. There is also dispute over whether gross debt is really the best picture of the U.S. debt load, as economists often focus mostly on publicly traded debt.)
Using the White House’s historical budget tables, let’s look at what has happened to the growth of the debt under various presidents — both the overall debt and the debt that government owes to itself. The figures are for the end of each presidential term, except for Obama. The figure for Obama is as of Jan. 2, based on the Treasury’s debt-to-the-penny Web site.
                                           Size of gross debt           Federal account debt
Before Reagan                           $1 trillion                            $250 billion
Ronald Reagan                          $2.9 trillion                         $677 billion
George H.W. Bush                    $4 trillion                             $1 trillion
Bill Clinton                                 $5.6 trillion                          $2.2 trillion
George W. Bush                         $10.6 trillion                       $4.3 trillion
Barack Obama                          $16.4 trillion                       $4.9 trillion
 While raw numbers are interesting, the more telling statistic is when debt is expressed as a percentage of the overall economy (gross domestic product). We’ve rounded the numbers to keep it simple.
                                             Size of gross debt           Federal account debt
Before Reagan                           33 percent                          7 percent
Ronald Reagan                          53 percent                         12.5 percent
George H.W. Bush                    64 percent                          16 percent
Bill Clinton                                 56.5 percent                        24 percent
George W. Bush                        77 percent                          30 percent
Barack Obama                          105 percent                         31 percent

The Bottom Line

The data show that the growth of the debt in the last three decades certainly has been a bipartisan enterprise, with only Clinton reducing debt as a percentage of the U.S. economy. But even then, debt owed to Social Security, Medicare and the like kept climbing as a share of the U.S. economy.
Moreover, an increasingly large portion of the debt is money that the government owes to itself because of borrowing from large entitlement programs such as Social Security and the Medicare. That’s because the money spent on discretionary programs has generally declined, as a share of the economy, while spending on mandatory programs has soared — and will only consume a larger share of the economy as the Baby Boom generation heads into retirement.
In fact, the debt owed to entitlement programs is now almost as large a share of the economy as all U.S. government debt before Ronald Reagan became president.
Willie Sutton once supposedly said he robbed banks because “that’s where the money is.” By the numbers, some restraint on the growth of entitlements will be needed in order to control the growth of the national debt.