Where All That Debt Came From

You can't go a minute these days without hearing about the size of our national debt problem and the impact it'll have on the economy. The Pew Trust has an interesting paper discussing a point often overlooked in this discussion: where all that debt came from.

It starts by noting how far we've come: "In January 2001, the Congressional Budget Office (CBO) projected under a current law baseline that the federal government would erase its debt in 2006 ... The reality, of course, has turned out to be far different: the U.S. will likely owe $10.4 trillion this year, its largest debt relative to the economy since 1950."

By comparing CBO's 2001 debt projections with 2011's reality, Pew shows exactly where the budget went off course over the last decade:

A few things should stick out:

  • The largest debt driver by far has been lost tax revenue because of a slow-growing economy.
  • Add in tax cuts, and fully 49% of the debt increase came from less-than-expected revenue.
  • Nondefense discretionary spending, the area that gets virtually all the attention from politicians, is responsible for a very small portion of the increase -- just 10%.
  • TARP, the 2008 bank bailout, contributes a number that rounds to zero. All the big banks, including, Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and Wells Fargo (NYSE: WFC  ) have repaid their bailouts in full. Even General Motors (NYSE: GM  ) is close.

Food for thought as whether to raise the debt ceiling becomes a critical story over the next few months.

What do you think?

Fool contributor Morgan Housel owns Bank of America preferred. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Wells Fargo. The Fool owns shares of Bank of America and also holds a short position in the stock in a different portfolio. Motley Fool newsletter services have recommended General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2011, at 3:30 PM, mtf00l wrote:

    So 51% came from...? and the difference from 2001 to 2011 is from...?

    How does one become a TMF Featured Columnist? Does it pay?

  • Report this Comment On May 18, 2011, at 3:32 PM, cmfhousel wrote:

    The chart makes it pretty clear where the other 51% came from. Labels and everything.

  • Report this Comment On May 18, 2011, at 3:55 PM, mdtopper wrote:

    Sorry, I am a numbers guy (financial planning) and your chart is (to be polite) somewhat less than clear. The 49% figure you sight is not easy to find. Three items labeled tax cuts total 21% so I assume the item labelled economic (revenue) is also tax cuts worth 28% so therefore 49%. Far from clear. I think you owe someone an apology.

  • Report this Comment On May 18, 2011, at 4:00 PM, cmfhousel wrote:


    Economic (revenue) = 28%

    '01-'03 tax cuts = 13%

    2010 tax cuts = 3%

    Other tax cuts = 5%

    Total = 49%

    The article never said the 49% figure represented tax cuts. "Add in tax cuts, and fully 49% of the debt increase came from less-than-expected revenue."

  • Report this Comment On May 18, 2011, at 4:50 PM, MstrClark wrote:

    I don't buy the argument that a "tax cut" represents debt.

    Think about it. If you don't get your expected 4% merit increase from your employer this year did you accumulate 4% of your salary in debt? NO!

    The fact is the nations "debt" is based mostly on projections (tax collection and planned spending). If you cut taxes by 3% you should have had a plan to reduce spending by at least the same amount.

    Also the chart is for a change in forecast but not the forecast. The fact is entitlements consume about 3/4 of the entire federal budget. The increased spending by the current administration has only accelerated a problem that has existed for decades.

    The authors analysis seems like he wants to point the finger at George W. Bush instead of really educating readers about what really going on with THEIR money.

  • Report this Comment On May 18, 2011, at 5:05 PM, Borbality wrote:

    I think Housel is just trying to say that we DO have a revenue problem. If congress chooses to only cut spending (they won't), then we'll have more people unemployed for 99 weeks adding to the debt and further increasing the revenue problems. I didn't say it was a good thing.

  • Report this Comment On May 18, 2011, at 5:42 PM, syhersch wrote:

    This chart seems pretty clear to me. Bush and his conservatives anticipated a lot of revenue (which didn't happen) so he signed into law tax cuts, started two wars which he thought were not going to cost much (another wrong guess) and to compliment such bad guesses a conservative Congress passed a lot of legislation resulting in lax regulation of our financial industry, resulting in the 2009 stimulus package and the 2010 tax cuts. We can not NOT SPEND our way out of this problem; we need more revenue. Coupled with greater taxation we should shut down the wars, stop tax welfare to both individuals and corporations and recognize that this is a workable solution.

    One other thing, the article mentioned that the last time we had anything similar to this debt was in 1950. Well if we could solve the problem in 1950 it seems to me that we can do it today.

  • Report this Comment On May 18, 2011, at 5:45 PM, skypilot2005 wrote:

    "On May 18, 2011, at 3:32 PM, TMFHousel wrote:

    The chart makes it pretty clear where the other 51% came from. Labels and everything. "

    I had a good laugh on this response. I especially enjoyed, "Labels and everything."


    Thanks, for putting together the information. It's important information for us to know when we talk to our fellow citizens about this problem.

    Sky Pilot

  • Report this Comment On May 18, 2011, at 8:27 PM, stubucks wrote:

    All this chart does is explain the difference between the debit in 2001 and the debt in 2011. So there is still the debt and it is money spent. The chart doesn't explain where the debt goes. Just how it arrived at this particular snapshot in time.

  • Report this Comment On May 18, 2011, at 9:03 PM, CincyBrian wrote:

    Two things mentioned in this article I grow tired of hearing. One is that the only way we are going to get out of this problem is to increase taxes and cut spending. I couldn't disagree more. There really is no need to increase taxes beyond their current point. The federal government is way too big and this crisis is what America needs to force it to downsize. The other is tax cuts are a major contributor to the debt. Again, if you know your revenue is going to decrease, then decrease your spending appropriately to prevent the deficit. If my company makes me take a pay cut, then I adjust my budget accordingly. I don't run to the bank and continue to take out loans. The federal government has clearly demonstrated that it is irresponsible with money. Collecting more in taxes will only lead to more spending and more debt.

    And lets give the Bush argument a rest. The federal government has been spending irresponsibly since the 1960s.

  • Report this Comment On May 18, 2011, at 9:04 PM, cmfhousel wrote:

    ^ This article never mentioned tax increases or Bush.

  • Report this Comment On May 18, 2011, at 9:41 PM, CincyBrian wrote:

    TMFHousel... Read the comments section.

  • Report this Comment On May 18, 2011, at 10:19 PM, DonkeyJunk wrote:

    @Cincy--It might be a good idea to substitute "comments section" for "article" in your next accusatory post in order to prevent confusion. Starting off with the phrase "Two things mentioned in this article [sic] I grow tired of hearing" tends to make one believe, logically, that your complaint is with the article, not the comments. We give words specific meanings to prevent confusion. Be sure to use the right ones.

  • Report this Comment On May 19, 2011, at 1:40 AM, smhikida wrote:

    Stubucks, it does NOT explain the difference. What is does is explain the difference from the projections the CBO made in 2001 with how the income and expenses for the federal government actually turned out.

    CinciBrian: The article did not state that the Federal Government needs to do anything. It states the cause of the current problem. Specifically, lower income (and politicians and economists did not expect the economic slowdown, increase in unemployment, etc). As I recall, Clinton had a capital surplus in his budget. Also, where would you cut spending? Education? The U.S. is already rapidly falling behind in math and science (not to mention reading comprehension and literacy). Infrastructure? The sewer systems, bridges, levies, etc all are falling apart as it is. How about mental health services? Veteran services?

    MstrClark: The article argues that the tax cut decreased expected income, which meant less debt coverage, thus greater debt. To use your example: Your salary is $100/wk and your expenses are $98/week. Suddenly, your income drops by 4% for the next 10 weeks while expenses stay the same. Thus your debt grows.

  • Report this Comment On May 19, 2011, at 9:32 AM, jasenj1 wrote:

    From some of the comments, I think the article is not very clear.

    In 2001 the CBO projected such and such would happen. e.g. Based on current tax rates we'll collect X number of dollars, assuming Y level of employment, and Z level of salaries.

    What actually happened is we collected a lot less than that. Maybe high level of unemployment is to be blamed. Maybe salaries did not grow as expected. Maybe everyone bought houses and took the mortgage deduction. Maybe people just plain lied and didn't pay the government what they should have. (Isn't there an article somewhere pointing out the huge amount of money not collected due to tax cheats?)

    Also, the tax-cut arguments are specious. The supply-siders say that if you cut taxes you encourage economic activity which results in more taxes ultimately being paid/collected. That position could be wrong, but it's the position.

    One problem I have with the supply-side theory is that people will often lock up capital in non-economically active assets, or depreciating assets. e.g. If they have an extra $100,000 they'll buy a home or boat or RV thus trapping that capital. Yes, the boat/RV builder will pay some workers, etc. But I think the capital trapped/absorbed may be greater than that released into the economy (and thus to the government in the form of taxes). I'm not an economist, just some guy with an internet connection, so I wouldn't put too much stock in that position.

  • Report this Comment On May 19, 2011, at 3:26 PM, mtf00l wrote:


    Thanks for half of the answer.

    What about the other half?

    "How does one become a TMF Featured Columnist? Does it pay?"

  • Report this Comment On May 19, 2011, at 3:35 PM, brewvestor wrote:

    Saying that...

    "Nondefense discretionary spending, the area that gets virtually all the attention from politicians, is responsible for a very small portion of the increase -- just 10%. "

    ...seems to be a shortsighted view of these numbers.

    While that may be true from an interpretation of the pure numbers on your chart, what it doesn't say is whether the discretionary spending added anything to the "slow growing economy" you reference.

    I argue the tax cuts, stimulus packages, and the spending on iraq and other defense issues added to the economic growth we did have as opposed to take it away. Take away those measures and America's debt may be even higher because of severely decreased economic revenue.

    I argue the non-defense discretionary items don't add as much to grow an ecnonmy as those other items.

  • Report this Comment On May 19, 2011, at 4:31 PM, Turfscape wrote:

    brewvestor wrote: "I argue the tax cuts, stimulus packages, and the spending on iraq and other defense issues added to the economic growth we did have as opposed to take it away. "

    I suppose you can argue anything as much as you want, but the article is about from where our current debt actually came. Obviously, this debt level was not planned, and popular perception is that the debt grew from massive increases in discretionary spending. The data shown above prove that that perception is incorrect.

    I would like to hear, though, how dumping money into the Iraq war grows our economy?

  • Report this Comment On May 19, 2011, at 4:47 PM, mtf00l wrote:

    If anyone is interested;

    Increased Federal tax receipts and a decline

    in outlays resulted in a narrowing of the primarily cash-based U.S. budget deficit from $1.4 trillion to

    $1.3 trillion in FY 2010 while net operating cost increased significantly from $1.3 trillion to $2.1 trillion

    due in large part to increased estimated costs for federal employee and veteran benefits.

    Yep, lost revenue is the culprit.

  • Report this Comment On May 19, 2011, at 5:14 PM, mtf00l wrote:

    From your own reference material;


    The excess growth in publicly-held

    federal debt beyond 2001 expectations

    has been the result of a variety of factors.

    However, new legislation enacted since

    January 2001 has been responsible for

    two-thirds of the debt growth. In the

    new legislation, roughly three dollars of

    new spending has been enacted for every

    two dollars in tax cuts between 2001 and

    2011. No single policy or piece of

    legislation, however, is overwhelmingly

    responsible for the $12.7 trillion shift in

    CBO’s debt projections for 2011 that

    occurred between January 2001 and

    March 2011.

  • Report this Comment On May 20, 2011, at 10:32 AM, Turfscape wrote:


    I have to question your motives here...or, perhaps your reading comprehension. Morgan's article is pretty clear: The budgets from 2001 on have been based on an assumption of a certain level of revenue...we have missed that revenue target by a lot at every turn. This has resulted in deficits...and deficits much larger than would have otherwise been anticipated.

    You act as though this is a personal slight against you, for some reason. It's pretty clear that we can't go pointing fingers at single source budget items (like, oh relief) and expect cutting that unpopular item to somehow magically fix our fiscal problems. We spend too much AND take in too little.

  • Report this Comment On May 20, 2011, at 3:16 PM, mtf00l wrote:

    I'm only trying to bring spending to the table. Stuff happens, we're not always going to make bank in revenues. That doesn't slow us down from spending. Other than the platitudes of no one wants their welfare cut where is the discussion on spending. Morgan presents half of an issue. He may present it well and normally I don't have an issue. I do have issue with what I percieve as one sided views. Granted I may be wrong. Bring it all to the table and let's discuss it. To rip a single graph out of some one or some organizations research, build an argument around it or point out what is percieved as the poison pill and not link to the work cited..., well I guess Morgan counts on people not bothering to go check his references.

    Still, I'd like to know how one becomes a TMF Featured Columnist and if it pays.

    And Turfscape, thank you for being critical. We should all have someone keeping us in check.

  • Report this Comment On May 20, 2011, at 4:39 PM, TMFDiogenes wrote:
  • Report this Comment On May 20, 2011, at 4:52 PM, mtf00l wrote:


    Thank you sir!


  • Report this Comment On May 20, 2011, at 8:36 PM, Rjones769 wrote:

    I found the article perfectly clear. The problem is that folks who adhere to an ideology will inevitably interpret every input through that ideology's filter. This causes some people to see things that aren't there, and ignore things that are there. Facts become provocative when they threaten preconceived notions.

    This article advocates no course of action. It simply reports -- objectively -- certain data mining and charting published by the Pew Research Center. That's it. You're free to draw any conclusions you may care to infer from the data.

  • Report this Comment On May 21, 2011, at 1:21 PM, surfgeezer wrote:

    Rjones769- Could not agree more. It is amazing the out right hostility that it can provoke, but I will be book marking this page anyway.

    It IS important to confront ideology with reality and moderate the extremist discussion. It takes awhile and most people seem interested in "winning" an argument, but facts will percolate down into their perception eventually and hopefully a discussion instead of a sport.

  • Report this Comment On May 21, 2011, at 11:19 PM, CMFgdf wrote:

    @mtf00l: There are several levels of Motley Fool contributors. I'm a freelancer, for example. I do it mostly because I love it; I would not say it pays very well. There are contractors that write a larger quantity of articles on a regular basis. There are TMF employees who write for a living. I can't speak to how well the latter two categories pay.

    And I think it would help folks to reread the article footer where it says, "we Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors."

  • Report this Comment On May 21, 2011, at 11:39 PM, CMFgdf wrote:

    Now, I'm not a big fan of the tax cuts. I think the cuts themselves are just as important a part of the problem as the spending increases. I think if we were to map effective tax rate against federal debt, going all the way back to 1980, we'd see a pretty obvious trend in the enactment of cuts vs. changes in the rate of new debt.

    However, I think I can state the objection to the chart and the underlying message. It's that spending overruns result in debt, but it's harder to quantify missed revenue as a debt source. To put tax cuts and economic revenue losses on the same pie chart as defense spending and wars *feels like* a case of double-counting. There is some subtle math involved in creating a chart like that - accounting for all changes in revenue and spending and mapping it to the increase in debt.

    In my opinion, to investors the biggest single takeaway from the chart should be the impact of the recession on revenues. We need to get this economy moving.

  • Report this Comment On May 22, 2011, at 11:58 AM, LongTime108 wrote:

    The tax rate is not the problem, although changing it may be part of the solution in the short term. The ultimate problem is that government spending is growing faster than GDP. From 1790 to 1930 government spending was ~3% of GDP. It is now ~25% and is climbing rapidly. The real driver is entitlement programs. Congress knows this and can fix these problems, but won't until there is a broad consensus that the people understand the problem and will accept the solutions. The longer we wait, the more precarious our position becomes and the more painful the solutions will be.

    There is a direct correlation between government spending as a percent of GDP and unemployment. They go up and down in tandem. This is because most all government spending, and particularly entitlement spending, is consumptive; there is no new wealth created. We need new wealth to invest to make the economy grow.

    There is a very good analysis of the countries income statement and balance sheet by Mary Meeker that looks at the U.S. federal government (and its financials) as if it were a business. This is a must read for every citizen who wants to understand the situation we are in and the problems we face and the range of possible solutions we might employ to achieve positive cash flow for the government. It can be found at:

  • Report this Comment On May 23, 2011, at 10:28 AM, mtf00l wrote:


    Thank you for the information and your comments.


  • Report this Comment On May 25, 2011, at 1:04 PM, TnFlash2u wrote:

    Where did the debt come from? It came from politicians that like to give freebies while bragging about cutting taxes. Politically a correct thing to do, but not good for the country. It will not change until voters realize that anything the government gives is not free. We demand better accounting from our local officials so why do we not demand it of our Federal reps too?

  • Report this Comment On July 13, 2011, at 9:31 PM, Chgallos wrote:

    Reading this is kind of hillarious. Most of these replies are just changing the subject to what they want to talk about.

    Its kind of like putting up a photo of the Washington Monument with the comment "This is my favorite photo of my vacation to DC" and then having people argue that Washington DC is run by the Capitol Building and the White house and that this picture us bad because it misrepresents the government.

  • Report this Comment On July 17, 2011, at 8:27 PM, sgperformer wrote:

    Ya know, I'm no tax guy or financial planner, no mathmetician or engineer. So I didn't let myself get too bogged down in the numbers. I am, however, a very critical reader, and I always decide for myself what I'll take away from any article. From this article, which I found to be very enlightening, I simply took away the fact that we are losing tax revenue and that lost tax revenue is making up a relatively large portion of the deficit. I also understood that TARP and the bailout of GM make up a relatively insignificant portion of the deficit.

  • Report this Comment On July 19, 2011, at 2:00 AM, duelles wrote:

    I have not heard too much made of the Congressional stupidity of allowing baseline budgeting to continue. The dang budget is increased by some 6% no matter what and then Congress adds to that. If they drop it to a 5% increase the call goes out that old people and children will suffer.

    I have NO regard for our Congress as a whole, NONE.

    And Progressives !!! When do they run home with their paycheck and leverage into massive debt? They don't - they live seceret fiscally conservative lives. Only unlucky souls who have little economic sense got caught in the housing melt down.

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