“As President Joe Biden unveils his own ambitious spending plans, it is worth asking if the national debt is finally going to have its moment.”
n normal times, the national debt is something of a losers’ issue—a political cudgel used by the party currently out of power (or ardent libertarians, who are always out of power) to bludgeon their opponents. The other group that gets fired up about the national debt is economists, who contentiously debate its impact. Other than that, it mostly sits in the background, quietly accumulating.
These, however, are not normal times, and this permeating sense of exceptionalism extends to the national debt, as much as to anything else.
Since the 2008 financial crisis, the national debt has grown rapidly. As a percentage of U.S. gross domestic product, it has nearly tripled. One year ago, former President Donald Trump signed the $2.2 trillion CARES Act into law, bringing the 2020 deficit to a massive $3.1 trillion and reinvigorating discussion over the size of the national debt. As President Joe Biden unveils his own ambitious spending plans, it is worth asking if the national debt is finally going to have its moment.
National Debt 101
The national debt is the money the United States federal government owes—either to various agencies within the federal government or to “the public,” which in this case is composed of individuals; other governments, including foreign nations as well as states and municipalities; and private institutions, such as insurance companies, banks, businesses, and more.
The federal government has debt because its expenses typically exceed its revenue each year. In 2020, for example, federal government revenue was approximately $3.42 trillion, but total government expenses were nearly double that. To make up the difference, known as “the deficit,” the government borrows money from the aforementioned creditors. The national debt is more or less the sum of past deficits, less payments made thereon.
Presently, that figure comes to just over $28 trillion, according to the U.S. National Debt Clock, a new high as of this month—a phrase we should probably get used to hearing. A little over $21 trillion of that is held by the public. That equates to roughly 102% of 2020 GDP. This is the largest debt-GDP ratio since World War II, a massively expensive, protracted conflict that, one may recall, followed the Great Depression.
Why Does It Matter If the National Debt Gets Too Large?
An overly large national debt could have some really nasty, cascading effects on the economy and Americans’ quality of life. If the national debt gets so out of hand that creditors think the United States might not be able to repay it, they would then require a higher interest rate to lend money to the government to compensate for the increased risk. This would, in turn, raise interest rates across the board, slowing economic growth in the private sector and, thus, diminishing government revenues.
Higher interest rates would mean that debt financing becomes more expensive. Servicing the interest on loans would start to eat up a larger amount of the federal budget, thereby crowding out other forms of government spending and investment. Net outlays on interest were $345 billion in 2020, about 10% of federal revenue. But if interest rates rise, they could climb much higher.
Finally, there are ethical considerations regarding the size of the national debt. Since the money borrowed to finance today must be paid back down the road, when one generation takes on debt, it sticks future generations with the bill.
So, is it time to start freaking out about the national debt yet? I think the only realistic answer (aside from “no one knows”) is yes, kind of.
In the short-term, it is not obvious that there is any particular reason to worry. While both the current nominal national debt and debt-GDP ratio figures are alarming, it is more immediately important to keep track of the relative cost of servicing that debt. Last year, we spent about 1.6% of GDP doing so. Yes, that is serious money; however, historically, it is not particularly high. In the 1990s, we were spending about twice that.
In fact, given current conditions—a pandemic, a still-high (though improving!) unemployment rate, and persistently low interest rates—one could argue that this is an ideal time for our government to be deficit spending. But there are a few important caveats: First, we do not entirely know why interest rates have been so low, and we have no guarantee how long they will stay that way. Second, any debt taken on would ideally be used to invest in things that will contribute to our eventual economic expansion. Presently, I am not sure how we are faring on that front.
It is important to note, too, that no one really knows what constitutes too much debt. A 2010 World Bank study found countries that maintained a debt-GDP ratio in excess of 77% risked harming economic growth. In a paper authored the same year, economists Carmen M. Reinhart and Kenneth S. Rogoff suggested a 90% debt-GDP threshold. Obviously, we are way past either of those points, but things do not seem to be grinding to a halt. New thinking is emerging, and it may turn out to be the case that governments can handle much more debt than we previously believed.
In the long run, however, it seems clear that the United States is on an unsustainable fiscal path. The Congressional Budget Office (CBO) projects that the United States will run annual deficits averaging more than $1.2 trillion over the next ten years, even as annual federal revenues are expected to increase 44% over the same period (in dollar terms). By 2031, the CBO estimates debt interest payments will constitute 2.4% of GDP—and implicitly about 14% of federal revenue. By 2051, the national debt will be twice the size of the economy, and debt interest payments are projected to equal 8.2% of GDP.
Exacerbating our systemic revenue-expenditure mismatch are huge demographic shifts. Baby Boomers are quickly coming upon retirement age. 1o,ooo of them turn 65 every day, and once they do, they are expected to live nearly 20 years longer, during which they will consume an enormous amount of health care. Accordingly, the costs of Social Security and Medicare are expected to nearly double by 2031.
On the other end of the demographic spectrum, the United States is suffering from a declining birth rate. The total fertility rate is 1.7 children per woman, below the replacement rate of 2.1. This helps further to alter the age distribution of the nation and, ultimately, means there are fewer economically productive people to pay for the increasing number of retirees.
It stands to reason that the situation cannot continue in this fashion indefinitely. In other words, the government will, at some point, either have to start raising more money or spending less. Either will likely be painful, politically and economically. The more debt we have, the longer we carry it and the more risk we expose ourselves to. No one knows when this reckoning will come or exactly what it might look like. But if we do not do something, we risk finding ourselves in hot water.
So, while there is no urgent need to have a tag sale on the White House lawn or start selling national parks to real estate developers, now is probably a good time to start worrying about how we are going to grapple with our impending fiscal crunch.
Eddie Ferrara writes about policy from a data-driven perspective. He studied sociology at the University of Massachusetts Amherst. He blogs at eddiethoughts.com. He can be found on Twitter @EdwardFerrara_