The Washington PostDemocracy Dies in Darkness

No, China does not hold more than 50 percent of U.S. debt

President Obama shakes hands with Chinese President Xi Jinping  after a joint news conference at the Great Hall of People on Nov. 12, 2014 in Beijing. (Feng Li/Getty Images)

At a recent gathering of fact checkers sponsored by the American Press Institute, George Washington University assistant professor Emily Thorson presented some interesting data concerning policy misperceptions held by the American public — perceptions which are common among both liberals and conservatives.

Among the incorrect beliefs held with conviction, no matter the party: China holds more than 50 percent of the U.S. debt; there is no time limit for benefits under the Temporary Assistance for Needy Families, commonly known as welfare; salaries for all members of Congress is a bigger part of the federal budget than salaries for all members of the military. In other words, these were beliefs not colored by partisanship. (The welfare answer is fascinating given that President Bill Clinton in 1996 signed a bipartisan bill that cut off benefits at 60 months.) 

Thorson and her colleagues first used a series of interviews to elicit the factual beliefs that people use to justify their policy attitudes. They recruited interview candidates through Craigslist, which yielded about 200 responses. Then, after selecting candidates based on level of political interest and various demographic characteristics, they conducted 25 interviews lasting between 10 and 25 minutes.

(The breakdown was 68 percent female and 32 percent male, and 76 percent white, 12 percent black, 11 percent Asian and 8 percent mixed race. The party breakdown was 32 percent Republican, 32 percent Democrat, 28 percent independent, and 8 percent no preference, with various areas of the country represented.)

A key part of the interview was to encourage factual assertions, such as asking how the person would explain a topic to a kindergartner or someone with a different ideological point of view. Then, to verify the patterns of beliefs found in the interviews, the researchers conducted surveys using a representative sample from Google Consumer Surveys.

One major concern that emerged from the interviews was the level of the national debt. But interestingly, the researchers came to believe that the policy views were based on a mistaken metaphor — comparing the national debt to household debt. “I don’t spend money that I don’t have; we don’t spend above our means,” said “Amy,” one person who was interviewed. It is little surprise that Amy would believe this, as The Fact Checker has frequently heard politicians make the same analogy.

But as Thorson notes, this is misplaced. When a household owes debt, it is generally to a bank or credit card company, as opposed to another person to the household. But a good chunk of the federal debt is owed from one part of the government to another, such as the Social Security trust funds. (For more information on this, read The Fact Checker’s Guide to Social Security.) Unlike a household, the government also can tax and print money–and also in theory uses its borrowing to invest in projects with a long-term payoff, such as research and education.

But that’s not what came up in the conversations; instead it was the debt owed to China. As “Mary” put it: “I told my daughter she needs to learn Chinese rather than Spanish.”

Moreover, because of that household analogy, people wrongly assumed that just as a bank can repossess a person’s property, so, too, could China. “Arianne” said: “We owe China our backside because they’ve lended [sic] to us.” And “Holly” said: “I wouldn’t want them to come here and be like, ‘we’re taking over your country because you owe us so much money.’”

So, as part of the survey research, Thorson and her colleagues asked 250 randomly selected people whether China holds more than half of the U.S. debt or whether it holds less than half. When a “not sure” option was offered, 50.7 percent of respondents said they thought China owned at least half the U.S. debt, 16.8 percent said less than half, and 32.5 percent said they were not sure. Thus more than half were confident in their answer — and got it completely wrong.

Where would Americans get such a wrongheaded answer? Again, the blame must largely rest with political rhetoric. Here’s a bipartisan pair of misleading statements regarding China’s holdings of Treasury securities:

“Our free stuff [government programs] today is being paid for by taking money from our children and borrowing from China. When that note comes due — and this isn’t racist … but it’s going to be like slavery when that note is due, right? We are going to be beholden to a foreign master.”

– Former Alaska governor Sarah Palin (R), Nov. 9, 2013

“The way [President] Bush has done it over the last eight years is to take out a credit card from the Bank of China in the name of our children….  That’s irresponsible. It’s unpatriotic.”

–Then-Sen. Barack Obama (D-Ill.), July 3, 2008

As a reader service, here’s the truth.

Yes, China is a biggest single holder of Treasury debt, owning $1.252 trillion as of October of 2014,  but that amounts to less than 10 percent of all U.S. debt held by the public, which was about $12.8 trillion at the end of October.

Moreover, Japan is close behind China, holding $1.222 trillion in U.S. Treasury securities, and yet for some reason its holdings generate much less attention. Next on the list is tiny Belgium — and one rarely considers Belgium as among the United States’s “foreign masters.” (Update: Some astute readers pointed out that there are signs that Belgium is actually acting as an agent for China, disguising the true size of China’s holdings, which suggests China is highly conscious of the political consequences of the perception that it holds a huge chunk of U.S. debt.)

Foreign holdings of U.S. debt actually amount to less than 50 percent of the total U.S. debt, but as a percentage of privately held debt, foreign holdings is a bit higher than 50 percent because about $2 trillion in publicly traded debt is held by Federal Reserve banks.

As of early 2003, foreign holdings of privately held debt were about 41 percent of the total, so the percentage has certainly crept up in the past decade. But it’s stalled at about 47 percent in recent years.

But there is a further wrinkle. Nearly one-third of the debt held overseas is not held by governments, but by private investors, according to the Treasury Department. Put another way, only about one-third of publicly-traded debt is held by foreign governments — and China barely is in first place among many.

This nifty chart by The Washington Post’s graphics department illustrates the distribution of holdings well. Note that China’s holdings have barely budged, and even declined, since 2012.

Readers who want to know more about the possible policy implications of foreign holdings of debt may find this Congressional Research Service report of interest. But in meantime, readers should stop listening to politicians who suggest China is as bad as Mr. Potter, the greedy banker in “It’s a Wonderful Life.”

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