The United States, from its beginning in 1790 to the present, has been free of a national debt for only two years, 1834 and 1835. The national debt has grown from $75.5 million in 1790 to $5.8 trillion in 2008. The history of the U.S. national debt as a percent of gross domestic product (GDP) since 1940 is shown in Figure 1 . The national debt reached a high of 108.6% of GDP in 1946. It then began a long decline, reaching a low of 32.5% in 1981. The large budget deficits of the 1980s and 1990s reversed this trend and pushed the percentage to another high of 49.5% in 1993. The federal budget surpluses from FY1998 to FY2001 were used to retire a portion of the publicly held national debt. Between FY1997 and FY2001, the publicly held portion of the debt declined by more than $400 billion. Since FY2002, a return to budget deficits has caused the debt to grow again. When evaluating the burden of the national debt, the gross debt must first be divided into two parts: debt held by the public (including the Federal Reserve), shown in Figure 1 , and the amount held in accounts called federal trust funds, the principal one being for social security. Because trust fund debt is owed to one part of the government to another, it has no effect on the economy, and does not impose any burden. Thus, it will be neglected in the discussion below. The publicly held debt is often subdivided into that portion that is domestically owned and that portion owned by foreigners. U.S. Treasury securities have become increasingly popular among foreigners. At the end of FY2009, more than half of the privately held federal debt (which excludes debt held in government trust funds and by the Federal Reserve) was owned by foreigners. The need to finance wars has been the major reason for the growth of a national debt. In common with other major countries, the United States has rarely financed the surge in wartime expenditures exclusively by raising taxes. A large part of wartime expenditures have been bond financed. During the Civil War, from mid-1861 to mid-1865, the national debt grew from about $65 million to $2.7 billion. Between mid-1916 and mid-1919, the increased debt associated with World War I, grew from $1.2 billion to $25.5 billion. And from mid-1941 to mid-1946, the debt associated with World War II, rose from $49 billion to $269 billion. Thus, it has been a common practice of American public finance to increase the national debt during wartime and then reduce the debt, at least as a percentage of GDP, during times of peace. This pattern was broken during the 1980s and early 1990s when the national debt grew both absolutely and relative to GDP. Recently debt has again grown in wartime; however, the recent increase in the debt has greatly exceeded the cost of the war. Growth of the national debt has also occurred during periods of economic contraction. Is a national debt a burden on a country? If it is, what is the nature of the burden? Who bears this burden? Questions such as these have perplexed economists at least since the days of Adam Smith. Great Britain in his day had accumulated a large national debt fighting the Seven Years War (the French and Indian War) and was about to add a further considerable sum suppressing the rebellion in its American colonies. Interestingly, mainstream macroeconomics views the burden of a national debt, not in terms of the debt per se, but in terms of government budget deficits that are the cause of the debt and its growth. Thus, the burden that a national debt imposes on a country is due to the government's budget deficits. To see clearly the nature of this burden and who bears it, assume that the country's resources are fully employed and that capital (or saving) cannot flow internationally between countries. Also assume that this country now engages in a war with a neighbor and that the increased expenditures associated with the war lead to a budget deficit that is financed by issuing bonds. The increase in government expenditures increases aggregate demand. In a fully employed economy, in addition to raising prices, the increase in demand will lead to a rise in interest rates. The increase in interest rates is the means by which the government obtains the additional resources to fight the war for the increase will discourage interest-sensitive spending by the private sector. This is primarily business spending for capital goods such as plant, equipment, and structures and spending by households for homes, automobiles, appliances and the like. Thus, the budget deficit "crowds out" private capital and the burden of the growing national debt represented by the bonds issued to finance the war, is the decrease in the private capital stock of the country. The level of output is determined by the capital stock, labor force, and productivity levels. Since the private capital stock inherited by future generations will be smaller, it implies that the level of output enjoyed by them will be lower. The lower level of output is thus the ultimate burden of the debt and it is a burden that is largely shifted forwarded to future generations. It might be thought that a high degree of international capital mobility could moderate the burden of the debt because foreign saving could supplement domestic resources such that the private capital stock need not diminish. Suppose, for example, that as interest rates tended to rise in response to the increased expenditures, foreign capital (or foreign saving) was attracted in sufficient volume to keep domestic interest rates from rising. This would keep the domestic capital stock unchanged. Would this mean that there was no burden from a national debt? Unfortunately, this is not the case. Although it is true that the private capital stock inherited by future generations will remain unchanged, a portion of it will now be owned by foreigners. And the rewards from that capital will not flow to Americans, but will have to be transferred abroad. Thus, having foreigners supply some or all of the resources for the war effort, as in this example, does not avoid the burden of the debt. Future generations will still have a lower level of income available to them. In the preceding discussion, the budget deficit was financed by issuing interest-bearing debt or bonds. The government, however, has available another means for financing its budget deficit. Rather than borrowing the wherewithal it could simply print money (currency) and pay its bills. Might not this method of finance reduce or eliminate the burden the national debt places on future generations? Although the simple answer is basically yes, the explanation is more complicated. Financing a budget deficit in a fully employed economy by issuing money is inflationary. And inflation is a form of taxation. It is tax on the existing stock of money held by the public in the sense that it reduces the purchasing power of that money. It is by reducing the wealth and purchasing power of the private sector that inflation enables the government to obtain the additional resources to finance the war. Inflation (taxation) thus crowds out private spending, some of which may be spending on capital goods. The majority of that spending, however, is likely to be on current consumption. Because it is, the burden of these additional government expenditures, used in the example above, are almost exclusively borne by the current generation. The private capital stock inherited by future generations is unlikely to be diminished and, hence, they will not suffer much of a decrease in their standard of living. Thus, financing a budget deficit by substituting non-interest-bearing debt (money) for interest-bearing debt (bonds) does not eliminate the burden of the debt; it largely shifts the main burden from future generations to the present generation. The preceding analysis is framed in terms of a fully employed economy that experiences an increase in aggregate demand due to an increase in government expenditures. This increase in demand requires an increase in real interest rates to decrease or crowd out private sector spending. Yet there are circumstances under which a government budget deficit can arise or increase with little or no crowding out. Suppose, for example, that the United States economy is, as it is now, in a recession and either expenditures are increased or taxes cut in an effort to "jump start" an expansion. It is possible in these circumstances for a budget deficit to grow without increasing interest rates. The reason being that the increase in income generated by the increase in demand generates additional saving for financing the deficit. The additional resources represented by the saving make it possible to maintain an undiminished private capital stock in the face of a rising budget deficit. Thus, debt issued during a recession imposes a smaller burden than an equivalent amount issued during an economic expansion; if the recession is serious enough the burden is negligible. The accumulation of a national debt means that the government budget will contain as an expenditure item the interest payable on that debt. Does this impose a burden on future generations whose taxes will be used for debt service? In the traditional view, the answer depends on whether the debt is internally or externally held. For an internally held debt, the payment of interest is an income transfer from taxpayer to bond holder. In the simple case, if they are the same person, they are left neither poorer nor richer. If they are not the same person, then while the taxpayer is left with less income, the bond owner has a larger income. As a group, however, they are neither richer nor poorer by the payment of interest. The payment of interest is not an additional burden of an internally held debt. That burden, as noted above, is the lower level of output (income) enjoyed by future generations who inherit a reduced private capital stock. When the national debt is externally held, the payment of interest abroad is a transfer of income from Americans to foreigners. This is not a separate burden from the national debt, however. As noted above, when a national debt is sold abroad, the private capital stock passed on to future generations need not be diminished. But a portion of that capital stock will be foreign owned and a portion of the income generated by that capital will accrue to foreigners. This is the interest or, more properly, debt service paid to them, and it reduces the level of income that accrues to Americans. Thus, the payment of interest to foreigners is how the burden of an externally held national debt is shifted forward to future generations of Americans. It might be thought that a large national debt would have an effect on market interest rates since if the debt is short term, the government must be in financial markets more or less continuously as the debt rolls over frequently. Such is not the case. The rate of interest that prevails in a country over time is determined by saving and investment and these are what economists call flows. The national debt is what they call a stock. And it is the flows that govern the real rate of interest. The refinancing of the national debt when the budget is balanced should not alter the flows. Essentially, refinancing involves replacing maturing securities with ones that come due in the future. Since this makes no new net claim on the nation's saving, it should have no effect on interest rates. If this were not the case, we should observe real national interest rates fluctuating with the size of a nation's national debt. This pattern is not to be found consistently in the data. There are historical examples in which countries have had difficulties in rolling over their maturing interest-bearing debts. Often these episodes have been attributed to a lack of confidence in the governments in question. When these episodes have occurred, they have often resulted in the monetization of the maturing debt with the result being serious inflation and rising market interest rates as the market rates come to embody expectations of inflation. Thus, a very large debt could increase interest rates by threatening the government's solvency. The U.S. debt is not near this point. The budget surpluses from FY1998 through FY2001 were used to retire the national debt. By the end of 2001, debt held by the public was some $400 billion below its 1997 peak. What are the effects of debt retirement on the U.S. economy? In the traditional model, the effect on the economy from retiring an internally held debt is just the reverse of what would happen if the national debt were increased. The budget surpluses augment the national pool of saving, a pool contributed to by the business and household sectors. An increase in the fraction of GDP that is saved leads to lower interest rates. This encourages (or "crowds in") interest-sensitive spending. From the previous discussion, this is business and household spending on capital goods. Thus, the budget surpluses increase the capital stock of the country and, over time, this raises the level of real income and the material well-being of Americans. This, then, is the benefit that comes from reducing the national debt. It is a benefit that comes from budget surpluses and it largely benefits future generations. In a broader framework in which the U.S. economy is linked to foreign economies through trade and capital flows, the interaction of budget surpluses, retirement of the national debt, and its effect on the U.S. economy, is more complex. Retiring debt that is foreign owned relieves the United States from having to pay interest to foreigners. This raises the fraction of U.S. GDP that is available to Americans and this benefits the current generation as well as those alive in the future. In addition, since the higher saving rate leads to lower interest rates in the United States, some of that additional saving is likely to flow abroad augmenting the capital stock of foreign countries. This, in turn, increases the claims of Americans on foreign output (or decreases the net claim foreigners have on U.S. output) thereby enhancing their material well-being about the same as would have occurred if those resources had been used to augment the domestic capital stock. So far, this report has focused on explicit national debt, the issuance of U.S. Treasuries to the public. But the recent work of economists in the area of generational accounting has resulted in a better appreciation of the equivalence between explicit and implicit national debt. These economists argue that categories of government activity such as "expenditures," "revenues," and "deficits" are economically arbitrary. Instead, the focus should be on the economic incidence of any government policy over time, regardless of its label. They argue that today's explicit budget deficit is paltry compared with the large budget deficits that will accrue in the distant future as implied by current policy. And these implicit deficits currently impose the same burden on future generations as if they were made explicit today through the issuance of U.S. Treasuries. This can be illustrated by examining the Social Security system. The retirement of the baby boomers means that the current "pay as you go" system will become insolvent in the future under current policy—benefits promised will greatly exceed payroll tax revenues. If it is assumed that all legally promised benefits will be met in the future, then large payroll tax increases will be necessary. Thus, future generations would be forced to consume fewer goods and services because a larger part of their income would be taxed and transferred to Social Security recipients. Taxing working generations in the future to pay unfunded retirement benefits is not the only way to deal with this problem. There is an alternative that imposes the same burden on future working generations. Imagine that the present discounted value of those future unfunded social security benefits were included as an outlay in this year's budget. Each baby boomer would be given a one-time payment today in lieu of their future unfunded benefits. This added expenditure would increase the size of the present budget deficit, reduce the national saving rate, and would be financed by issuing additional Treasury securities. This would increase interest rates, lower private capital spending, and reduce the size of the economy in the future. As a result, the pre-tax income of future generations would be smaller, but because they would not have to pay higher taxes to fund the additional social security benefits, their after tax income at that time would be the same as it would be in the situation above where the future unfunded benefits were paid for with higher taxes. Thus, an implicit debt imposes the same burden on future generations as an explicit debt because the two concepts are economically equivalent. The current consensus view among economists is that the source of the burden associated with a national debt is the government budget deficit that gives rise to the debt. In a fully employed economy, the deficit "crowds out" private sector spending, especially spending on capital goods. Thus, a smaller private capital stock and a lower level of output are passed along to future generations and it is this lower level of output that is the ultimate burden of the national debt. And, it is a burden that is largely shifted forwarded to future generations. Thus, according to the consensus view, the burden of a national debt is borne by future generations. Should the debt be sold abroad, there is still a burden since a portion of the output from the unchanged size of the private capital stock will accrue to foreigners. When the national debt is retired through budget surpluses, the effect on the economy is the reverse of debt increases. Future generations acquire a larger capital stock (or a larger American owned capital stock) and a higher level of output (or increased material well-being). Appendix A. Statistical Data Appendix B. Selective Views on the Burden of a National Debt Although economists have long recognized that a national debt imposes an inescapable burden on a nation, they have argued about who bears this burden. In particular, whether the burden is borne by the generation that incurred the debt or whether it is shifted forward to a future generation or, in the language of the time, whether it is a "burden or mortgage on our children." This issue acquired new urgency when the view (since discarded) took hold in the economics profession that mature market economies might be incapable of generating sustained periods of more or less full employment without a continuous government budget deficit. If this were the case, the national debt could be expected to grow continuously. And if that debt were a burden on future generations, it would mean that the present generation would enjoy employment only by shifting a burden to future generations. This appendix provides a flavor of the various arguments advanced by economists about the burden of the public debt, the nature of that burden, and who bears that burden. The arguments summarized in this appendix are all concerned with an internally held debt. It is recognized that an externally held debt must be treated differently. The "We Owe It To Ourselves" View As a result of the concern over whether the enjoyment of full employment by the current generation would shift a burden to the future, it became an accepted view during the 1930s, 40s, and 50s, that an internally held national debt would impose a burden only on the generation present when it was contracted and would impose no burden on future generations because we "owe the debt to ourselves." The words of Paul Samuelson best express the view that the current generation bears the burden of deficit finance. Drawing on wartime experience, he wrote: " To fight a war now, we must hurl present-day munitions at the enemy; not dollar bills, and not future goods and services ." Thus, the alternative use of these resources in the private sector constituted the burden of the national debt and it was a burden borne by the generation that, in this case, fought the war. That subsequent debt service imposed no burden on future generations can be clearly seen in the simple case where the owners of government bonds, the evidence of the national debt, were also taxpayers. Servicing the government debt would mean taking money from one pocket and putting it into the other. In other words, this is a mere income transfer. It is not a burden. Since future generations would inherit both the bonds and the tax liabilities needed to service the bonds, no burden would be shifted to the future. In a more complex case in which the bond owners and taxpayers were not the same people, the existence of a national debt would imply some income redistribution from the latter to the former. However, this would not be a burden for the society as a whole because there would be no loss of resources for the group as a whole to use. Thus, the burden of an internally held debt, according to this view, is borne by the generation alive when the debt is contracted. And the burden consists of the alternative private sector uses of the resources that are withdrawn for use by the public sector. Should the national debt be owned by foreigners, this view argued that it would constitute a burden primarily on future generations. The current generation, by borrowing resources from abroad, would have more goods and services to consume than it produced. It thereby gains by incurring a foreign debt. To service this debt a portion of future national output would have to be transferred abroad thereby reducing the income of future generations who, the argument states, would have fewer goods and services to use than it produced. Thus, in the case of an external debt, we would not "owe it to ourselves" but to foreigners. And this was the important distinction as far as who bears the burden was concerned. The Buchanan View Prof. James Buchanan, a Nobel Prize winner in the 1980s, attacked the then orthodox view of burden of the debt in his popular text book on public finance first published in 1958. Buchanan's argument is that the burden of an internally held national debt is shifted forwarded to future generations. It is not borne by the generation who contracted the debt. His argument is that when individuals buy government interest-bearing debt, they are making a voluntary decision to give up the current use of resources for a larger future income (larger by the amount of interest they receive on their now larger asset holdings) . Since this is a voluntary decision, no burden is imposed on the purchaser (i.e., the generation present when the debt is contracted). In fact, since the purchase would not have been made had a superior alternative been available, the purchaser is actually better off than had an alternative use been made of that income. However, subsequent generations of taxpayers must surrender to the bond holders the wherewithal for debt service. And this necessity is forced on them. In this sense, it is the future generations who will bear the burden of an internally held debt and the burden is the taxes they must pay for debt service. This is not a voluntary decision, but one forced on them by the decisions of an earlier generation. Although Buchanan's view was subject to criticism by some economists, he was soon to get major support from others. The Bowen, Davis, and Kopf View Acknowledging that Buchanan's view had stimulated their collective thinking, Professors Bowen, Davis, and Kopf (hereafter BDK) came up with an argument for why an internally held debt imposes a burden on future generations. BDK define burden in terms of the lifetime consumption of a generation (as opposed to the resources that must be given up now to, let us say, fight a war). The generation whose lifetime consumption is reduced is, according to BDK, the generation burdened by a national debt. With this in mind, they argue that the generation that contracts the national debt need not be burdened by it so long as it does not pay the debt off. This is so, because while that generation must decrease its consumption to buy the debt (even if they are forced to do so), it can always sell it to the next generation before its members die and enjoy the added consumption it had to forego when it purchased the debt. This process can go on indefinitely until the debt is retired. The generation that retires the debt, however, has no additional consumption to offset the consumption it gave up when it purchased the debt from the generation before it. Thus, BDK share in common with Buchanan a belief that the national debt is a "burden on our children." It is they who must ultimately retire the debt and, with retirement, undergo a permanent reduction in their consumption. The Barro View The most recent, innovative, and serious challenge to the conventional view of the burden of a national debt comes from Prof. Robert Barro. As noted in the body of this report, crowding out would not occur and the burden would not be shifted forward to future generations if the current generation would only save an additional amount of resources to match the increased demand for resources represented by the additional government expenditures that are financed by issuing interest-bearing debt. Barro has an ingenious argument for why such behavior could be forthcoming. Suppose, he says, that individuals live forever and that they have as a goal the maximization of consumption over time. To attain this goal, they have to be concerned about the private capital stock for it is an important determinate of income and income governs consumption. As in the standard macroeconomic model, the saving behavior of the public governs the resources available for capital goods purposes. How much of their income they save, and, hence, private investment, will depend on how they value current as opposed to future consumption. If individuals live forever, Barro argues, they will be indifferent between the government using taxes or the sale of bonds to finance, let us say, additional expenditures related to war. If the additional expenditures are financed through an additional tax, the public, in an effort to keep the private capital stock (the key to its goal of maximizing consumption) unchanged, will reduce current consumption by the amount of the tax. As a result, the burden of the war-related expenditures will be felt when they are incurred. Alternatively, the government could have chosen to finance the additional expenditures through the sale of bonds or interest-bearing debt. Had this option been chosen, the public would have behaved in the same way. In order to keep the private capital stock at the optimum level over time, it would have to reduce its consumption and save a higher fraction of its income. This additional saving would then be used to buy the bonds and provide the resources to the government for the war. It might be thought that the necessity to pay interest on the bonds over time (and, perhaps, provide for their redemption) would, by requiring additional taxes, shift a burden forward. This is not the case, for the taxpayer and the bondholder are the same people. Money is simply taken from one pocket as taxes and put back into the other pocket as interest. This is no additional burden. To the extent that the taxpayer and bondholder are different people, some income redistribution could be expected. Thus, if individuals live forever, they would be indifferent between financing these added expenditures through a tax increase or the sale of bonds. And, the burden of the debt is felt in terms of reduced consumption. It is a burden borne at the time the additional expenditures are made. Barro must deal with the fact that individuals do not live forever. To address this problem, he asks: are there circumstances under which they would behave as if they had eternal life? He argues that this behavior would be forthcoming if individuals treat the well being of their children on a par with their own. Since their children would behave similarly, and so on, individuals in the current generation would behave as if they lived forever. If individuals behaved in the way Barro argues, the conventional argument about the burden of a national debt, is likely to be wrong. Debt financed government expenditures will not crowd out the private capital stock because it will be offset by an equal amount of private sector saving. This behavior is designed to ensure that future generations do not inherit a smaller private capital stock and, hence, a lower level of output and suboptimal consumption. Thus, the burden of the national debt is not shifted to them as the convention view argues. The attack on Barro's view has been both theoretical and empirical. On the theoretical side, it is argued that individuals for a number of reasons may be reluctant to equate the well-being of their children on a par with their own (this presumes that the individuals under scrutiny have children). On the empirical side, the saving behavior of the private sector does not correlated well with the saving/dis-saving behavior of the public sector. The Barro view implies that this behavior should be highly correlated: on a one-to-one basis. Only in this way is the private capital stock passed on to future generations rendered immune to the public finances of government. Appendix B. Conclusion This appendix has provided a flavor of the various arguments advanced by economists about the burden of the public debt, the nature of the burden, and who bears that burden. It has basically been a debate about who bears the burden. According to the various views, the burden, depending on how it is defined, can be borne by the generation that contracted the debt or shifted forward to future generations. The arguments summarized in this appendix are all concerned with an internally held debt. It is recognized that an externally held debt must be treated differently.

Summary: The United States has been free of a national debt for only two years, 1834 and 1835. In its first year, 1790, the country faced a debt of $75 million. From FY1998 to FY2001, the federal government ran budget surpluses. Since then, the budget has returned to deficit, and the debt had risen to $7.5 trillion by 2009. It rose to a high of 108.6% of gross domestic product (GDP) at the end of World War II; declined to a post-World War II low of 23.8% of GDP in 1974; and, then, rose to another high of 49.5% of GDP in 1993. The national debt results from borrowing to finance budget deficits. Historically, the major cause of debt accumulation has been war. The United States has financed the extraordinary expenditures associated with war by borrowing rather than by raising taxes or printing money. This pattern was broken by the large budget deficits of the 1980s, the first half of the 1990s, and the period subsequent to 2001, which caused the national debt to rise substantially as a fraction of GDP. Although economists have long recognized that a national debt imposes an inescapable burden on a nation, they have debated whether the burden is borne by the generation who contracts the debt or is shifted forward to future generations. There has also been some controversy over the nature of the burden. The current consensus among economists is that the burden of the national debt is largely shifted forward to future generations. However, the burden imposed by the national debt does not arise from debt per se, but from budget deficits that gives rise to a national debt. If an economy is fully employed and the government increases its expenditures, for example, the resultant increase in aggregate demand will cause interest rates to rise and this will reduce or "crowd out" interest-sensitive spending by the private sector. This type of spending is likely to be for capital purposes (e.g., business spending for plant and equipment and household spending for housing and durable goods including automobiles). As a result, the private capital stock inherited by future generations is likely to be smaller and their real income or output will likely be lower. It is the reduction in future output that constitutes the burden of the national debt and it is a burden borne largely by future generations. It is a burden that cannot be decreased by borrowing abroad even though foreign borrowing could leave unchanged the size of the private capital stock. Crucial to the consensus view (and other views) is the assumption that the economy is fully employed. And the burden discussed must be regarded as a gross burden in the sense that certain intangible gains must be set against it such as freedom from tyranny and domination by a foreign power that might have occurred had the United States lost such a contest as World War II. This report will be updated periodically.