Should we be worried about the national debt?
The U.S. debt (currently surpassing $21 trillion) is a contentious talking point in American politics and has plenty of people worried. After 2007, with the Bush Administration’s $700 billion bank bailout, and later, the Obama Administration’s $787 billion economic stimulus package, the national debt spiked; leaders from outgoing Federal Reserve Chair Janet Yellen to Director of National Intelligence Dan Coats say it will become unsustainable.
But we’ve always had a high national debt, right? How much do we really need to worry about this? Let’s take a look.
How We Got Here
The national debt has increased by $1 trillion each year since 2007, and the country has come dangerously close to defaulting on its loans in the past 5 years or so. Attempts to curtail spending and to avoid fiscal cliffs have resulted in tense standoffs and looming shutdowns.
The National Debt is the accumulation of the government’s annual budget shortfalls. These shortfalls are generated by budget decifits, or in other words, when the government spends more than it takes in annually.
Major tax cuts stemming from the Reagan years onward; America’s wars in Afghanistan and Iraq; and the Great Recession of 2008 have all added tremendously to the nation’s debt, which is expected to rise with the cost of social security as more people age.
Owners Of The Debt
The U.S. Debt is owned primarily by investors via notes, bonds and other securities issued by the Treasury. The rest of the debt owed is generated from the government borrowing against trust funds like health care.
America’s biggest foreign creditors are China and Japan, which collectively hold about 30% or $6.3 trillion. As of late, with America’s credit rating high, this hasn’t posed an issue to other creditors.
How The Debt Affects You
The National Debt is in the interest of the average citizen, although you would be forgiven for not noticing why right away.
One scenario is, as the debt increases, the likelihood of the government defaulting does as well — in turn, the Treasury will raise the yield, or income investment potential, on securities it issues to attract new investors. This will affect tax revenue available to spend on government services as well as the quality of living for many Americans.
American corporations will raise the prices of their goods to meet the government’s debt service obligation, causing inflation. Even the cost of purchasing a home will increase, as the mortgage lending market is so closely affiliated with interest rates set by the Federal Reserve and the yield offered on treasury securities.
In other words, as a public policy issue, this is worth your attention.
Debt In Other Countries
The U.S. Debt is the largest in the world, but there’s some important context to that statement you have to know.
One of the strengths of the American economy is that it outpaces the National Debt; the same cannot be said for every country, like Japan; their National Debt is more than 240% the size of its economy, with Greece following behind carrying a debt load of 180%. These numbers are inflated by stagnant economic growth; in Japan, a 1990’s burst real estate and stock market bubble never fully recovered, but Japanese investors readily continue to buy their government’s bonds regardless.
Will It Ever Be Paid?
The answer is almost surely “no.”
The reasons are complicated, but many economists wonder whether the U.S. even needs to, so long as creditors feel assured that they will be repaid. The U.S. Debt is also made up of money it owes to itself, and creditors aren’t concerned about that aspect of American debt.
Should the government ever impose austerity measures on its people — a move that would only be productive during a time of economic expansion —progress could be made to tackle the debt. But few would ever remember such cuts favorably, much like no one enjoys paying taxes (just look at any candidate running for office trying to sell his or her tax position and platform).
For now we can hope to continue coasting along, in the hopes that the National Debt will be properly evaluated by our elected officials in due time.