The government debt, also referred to as the federal, public, or national debt, is the cumulated sum of outstanding IOUs that a government owes its creditors. In the United States, the government debt refers to indebtedness of the federal government. (State governments have balanced-budget laws limiting or prohibiting the state government from running persistent budget deficits and creating a state-owed debt.) The federal debt, approximately 6.3 trillion in the year 2003 is the result of past budget deficits. Historically the U.S. government ran budget deficits during periods of war and RECESSIONs. Government spending and deficits rose during the GREAT DEPRESSION and World War II but declined after each period. However, beginning in the mid-1970s, the federal government began running persistent and expanding deficits, averaging $50 billion during the Jimmy Carter administration, almost $200 billion per year during the second Ronald Reagan administration, $290 billion during the last year of the George H. W. Bush administration (1992), and approaching $450 billion per year in the George W. Bush administrations (2003). Each year the U.S. Treasury Department borrows additional funds to pay for the difference between government revenue and government spending (the deficit). These additional amounts are added to the federal debt. Unlike households and individuals, the federal government rarely pays off its debt but does have to pay interest on it; otherwise creditors, primarily U.S. citizens, would no longer lend money to the government. Interest payments on the debt are included in the FEDERAL BUDGET and are generally the third- or fourth-largest category of federal government spending. In 1998, for the first time in almost 30 years, the federal government began accumulating a budget surplus. Economic logic suggests it is normal for governments to run budget surpluses during periods of economic expansion, when government spending on programs for the poor tends to decline and revenues from progressive taxation tend to increase. If budget surpluses are used to pay off portions of the government debt, it can create what economists call a “virtuous circle.” Decreased government borrowing reduces market INTEREST RATES, which in turn reduces government spending on interest payments. This increases budget surpluses, which then can be used to pay off more of the debt. In recent years budget surpluses have been replaced by deficits. When the government increases its borrowing to fund deficit spending it can lead to higher interest rates, reducing business borrowing and investment. This is called the crowding-out effect and is a hotly debated topic among business economists. There are several ways to consider and measure government debt. While the gross public debt was approximately $6.3 trillion in 2003, much of it was interagency borrowing—for example, the FEDERAL RESERVE SYSTEM lending surplus funds to the U.S. Treasury and accumulating Treasury securities in return for the funds loaned to the government. Another way to look at the government debt is as a percentage of GROSS DOMESTIC PRODUCT (GDP). Like a growing business, it is normal and logical for government borrowing to increase as the economy grows. When compared to the size of the economy, the national debt peaked at the end of World War II at approximately 115 percent of GDP, declined to about 30 percent of GDP during the 1970s, and rose to about 60 percent in 1994 before beginning to decline. A third way to look at the debt is consider to whom is it owed. One common myth is that foreign governments control much of the U.S. debt, which could lead to political “blackmail” and international lenders dictating policies to the U.S. government. The overwhelming majority of the national debt (80 percent) is owed to Americans. Of the remaining 20 percent, most of it is held by foreign individuals, investors who decided the U.S. government was a good credit risk. Another common question is: Why would people lend money to a government that already owed over $6 trillion? The U.S. economy is the largest and, by many measures, the most productive in the world. When private individuals borrow money, they are often required to provide collateral, ASSETS the lender could take title to and sell if the borrower defaulted on the loan. The federal government has the authority to tax its citizens, so in effect the collateral of the U.S. government is the assets and productive capacity of its citizens. This leads to the question of whether the government debt is a transfer of indebtedness from present citizens to future generations. The Congressional Budget Office has developed “generational accounts” estimating the netpayment burden on future generations if the government debt is eventually paid off. This analysis showed that current retirees are, in fact, receiving benefits in excess of tax payments they have made, while younger workers’ lifetime tax payments will likely exceed the present value of the benefits will receive.