In 2010, I published an opinion piece in the Standard-Examiner on certain myths about the national (federal) public debt. It seems that during national election times, parties — especially the Republican Party — tend to revive concern and myths about the current national debt, despite the fact that Republican administrations have incurred huge debt. Trump’s campaign is concerned about the current national debt, even though the national deficit and therefore the debt increased in his administration (2016-2020) and is expected to increase more under his proposed tax proposal in the current presidential campaign. In addition, perhaps due to the rhetoric, most Americans are also confused and do not have a clear idea why debt occurs and what its effect is on government obligations in carrying out its regular functions and its effect on the economy.

Simply, federal government debt obligations in the form of Treasury securities are owned by the public, including foreigners and public and private institutions. Budget deficit, the difference between government revenues and expenditures, adds to the national debt. 

National debt mainly consists of two parts: marketable debt (public debt) owned by the public and non-marketable debt owned by intergovernmental agencies. To finance the debt, the Treasury Department issues securities. In Fiscal Year 2024, the total debt was $35.47 trillion with agency debt of $7.16 trillion and public debt of $28.31 trillion, 137.5 % of the GDP (Gross Domestic Product of the economy) — an increase of 11.5% since 2020. Private sector also runs a large debt that includes non-financial corporations, non-profit institutions serving households and individual households. In June, it was 146.2% of GDP, much higher than public debt.

National debt serves a useful purpose in recessions and emergencies. For example, in the Great Recession (2007-2010) that President Obama’s administration faced, federal government ended up accumulating debt. Debt-to-GDP percentage from January 2007 to January 2010 increased from 22.1% to 65.1% (see Penn Wharton Budget Model, Oct. 6, 2023). Similarly, there was an increase in debt during the COVID crisis that happened during President Trump’s term, which started in 2016. Debt went from 86.1% of GDP to 101.1% at the end of 2021.

Many in this election cycle have the misunderstanding that public debt always leads to inflation. They do not somehow connect that it is the unbalance in demand (consumption expenditure as well as investment demand) and supply that results in increasing the price level and inflation rate. When consumers’ demand for products and services is in excess of supply, prices increase. When the interest rate increases due to the Federal Reserve’s policy, investment in capital stock decreases, and hence shortages of private capital increase prices. That is what happened when the Biden administration took over and faced the COVID crisis and the Ukraine war. 

To deal with COVID, the Biden administration had to respond by increasing federal expenditures to boost the economy and provide financial assistance to Americans who faced dire economic circumstances. The Ukraine war created energy shortages, and the administration faced a security threat to allies who are part of NATO. Again, Biden had to respond by increasing federal expenditures. All these emergencies added to federal debt and inflation. Later on, the economy’s supply chain problem was resolved in most sectors, and therefore, the inflation rate now is close to 2.5%, a very low rate.

Penn Wharton Budget Model projects that inflation has two opposite effects. First, inflation reduces the real obligation (in inflation adjusted dollars) of the Treasury to meet its obligation for debt. Second, the income tax code is indexed to inflation, and capital gains tax is not fully indexed to inflation. Therefore, this may discourage investment in capital stock that affects economic growth. However, U.S. Treasury data show that despite high public debt during Biden’s administration, the growth rate of fixed investment is 3.4% in 2024 (in intellectual property, equipment and manufacturing structures). It has been much higher than Blue Chip forecasts.

Data show that on the whole, despite the increase in public debt due to certain policies that require more expenditures in the economy, Biden’s economy has grown very robustly (forecast for average growth is 2.7%) and inflation has substantially decreased. Hence, under normal state of the economy, debt does not cause inflation. Hopefully political leaders understand that and do not engage in unnecessarily alarming Americans.

National public debt serves the basic human needs of millions of Americans such as food for the needy, school lunches, healthcare, education, infrastructure funding for roads and bridges, domestic and international security services and expenditures to assist in natural disasters that provide benefits to current and future generations. Both public and private debts are essential parts of market-based developed and prosperous societies. 

Mathur is former chair and professor in the Economics Department and now professor emeritus at Cleveland State University, Cleveland, Ohio.  He lives in Ogden.