The vortex of debt

By Peter Coy

PHOTOGRAPHS Bloomberg (1); Getty Images (5)

In 2000 the Congressional Budget Office projected that by 2011 the federal government would be a net lender to the rest of the world, to the tune of more than $2 trillion. Instead, it finished fiscal 2011 with a net debt of more than $10 trillion. The biggest contributors to this stunning reversal may surprise you.

WEAKER ECONOMY AND NEW ESTIMATES OF PROGRAM COSTS $3.58T

2001/03 TAX CUTS $1.71T

The Bush tax cuts were conceived when the U.S. was running a surplus. They have drained $1.7 trillion in revenue.

HIGHER INTEREST PAYMENTS $1.39T

OTHER NONDEFENSE SPENDING $1.33T

What peace dividend? Military spending has been far greater than the CBO projected.

OPERATIONS IN IRAQ AND AFGHANISTAN $1.26T

RECOVERY ACT $719B

Spending in the 2009 stimulus package, for all the publicity it got, accounted for less than 6 percent of the reversal.

LOANS AND LOAN GUARANTEES $707B

OTHER TAX CUTS $678B

NONWAR DEFENSE SPENDING $663B

DECEMBER 2010 TAX LEGISLATION $391B

MEDICARE PRESCRIPTION BENEFIT $272B

TARP $16B

Government is us

One reason Americans may be feeling more anxious is that the federal debt held by the public has grown by $5 trillion during the Obama administration, to $11.3 trillion. Including money owed by parts of the government to each other, federal debt stands at $16.2 trillion. Ultimately, taxpayers are liable for all of it.

Saving didn’t help

Americans didn’t save enough during the 2000s debt bubble, counting instead on rising home prices to finance retirement. When the bubble burst, they tried to save more. But families that cut dining out generate less income for restaurants. The federal government took up the slack by spending more. With its sterling credit rating and low-interest rates, it could afford to.

We’re all on the hook

America’s overall debt burden has not increased much during Obama’s term because swelling federal debt has been partially offset by shrinking private debt. The national savings rate remains negative, but that deficit equals less than 1 percent of GDP.

Households are richer

Households’ net worth rose 17 percent from the end of 2008, right before Obama took office, through the middle of 2012. The catch: Most of that wealth is concentrated in a few hands. And the “household” measure includes nonprofit organizations, hedge funds, private equity funds, and personal trusts.

SOURCES Pew Charitable Trusts, Federal Reserve, Bureau of Economic Analysis, U.S. Department of the Treasury

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