FEDERAL DEBT

The federal debt is the amount of money that the federal government has borrowed and not yet paid back. The government pays for most of its operations by raising money through taxes, but when tax revenues are not enough to cover everything the government wants to do, it borrows the rest. In that sense, it is like a family borrowing something extra each month to pay its bills. The government borrows by selling bonds, notes, and Treasury bills to investors. These debts pay a rate of interest to the lender. As may be expected, the federal debt rises in times of war and other calamities, when the government is borrowing heavily to accomplish its ends. The debt then tends to shrink back down after the crisis passes as the government gradually pays off what it borrowed. Intense public debate has raged in recent decades over how large the federal debt should be. Economists who favor an expansive government role argue that some federal debt is no problem. For example, in times of unemployment the government should borrow more and then spend the money on jobproducing programs. On the other hand, fiscal conservatives maintain that too high a federal debt is bad for the economy. When the government competes for dollars with all other borrowers, interest rates tend to rise dampening economic activity. In the recent history of the United States, the federal debt was very high during World War II (1939–1945); it fell in the years after that and rose again in the 1980s during the military build-up during the final stages of the Cold War; then it began to fall again during the economic boom of the 1990s.

See also: Keynesian Economic Theory