US National Debt Is Not Always A Bad Thing1/2/24
Now that the political gamesmanship over the federal debt ceiling has abated, Republicans like our Representative Andy Harris have turned their fiscal indignation against the size of our $33 trillion national debt which is simply the sum of the federal budget deficits from George Washington to Joe Biden.
Is the national debt really our biggest economic concern? Here are some facts to help answer that question.
The national debt need not be paid off, only refinanced. The US government is, for financial purposes, immortal. It never has to repay its debt. As long as creditors are willing to buy government bonds, the national debt can be rolled over again and again.
The real burden of the national debt is when a politically manufactured debt ceiling crisis makes US bonds a less attractive investment, complicating debt refinancing. If we ever approach default on the national debt, creditors will demand much higher interest rates to lend to the US to compensate for the risk of default. That would significantly raise the cost of any new borrowing and the refinancing the existing national debt.
Debt can be either good or bad depending on how it is used. Good debt generates a stream of future benefits. For individuals, borrowing for a home, college, or a car is usually a good reason to go into debt.
For the federal government, if going into debt means more national security, better infrastructure, a cleaner environment, and a healthier and better educated population, few could argue that going into debt is necessarily bad.
On the other hand, giving tax cuts to billionaires and wealthy corporations is not a good reason to add to the national debt. Historically, few of those benefits ever “trickle down” to the rest of the economy.
The $33 billion national debt is indeed a liability for the federal government (and ultimately taxpayers) but the national debt is also a risk-free asset and source of wealth for many individuals (US savings bonds held in retirement accounts for example), corporations, governmental entities like the Federal Reserve and the Social Security Trust Fund, and all other holders of US government debt instruments. About 70% of our national debt is held domestically by American individuals, corporations, institutions, and governments, meaning we are basically paying that interest to ourselves, taking money from one pocket to put into another.
Long run projections of the national debt are often wrong. In the 1980s, the forecast was that the national debt would explode with budget deficits stretching “as far as the eye could see”. Yet the 1990s saw rapidly falling deficits and even a few budget surpluses that actually reduced the national debt.
Andy Harris likes to say we cannot afford to borrow against our children’s and grandchildren’s futures. But is it really mortgaging our future If we incur more debt to buy better education, improved health care, better infrastructure, cleaner energy, and enhanced economic growth? That would seem money well spent.
The one ongoing burden of the national debt is the interest payment needed to finance the national debt. The federal government spends about 7% of the federal budget financing the national debt. Many households on the Eastern Shore probably spend a greater percentage of their income to finance their debts.
Another warning sign often cited for the size of the national debt is ratio of the debt to national income. Some believe that when the size of the national debt becomes greater than the size of our national income, economic pain will surely ensue. Currently the debt/income ratio for the US government is about 120%. The ratio has been over 100% since about 2012 but during that same time (apart from the pandemic years) the US economy has experienced generally low inflation, impressive job creation, and a growing economy.
In general, the record of Republican management of the national debt is less than inspiring. They seem to worry about the national debt only when Democrats are in power. Yet every Democratic president in the last 40 years has left smaller budget deficits than the one they inherited from Republicans while every Republican president in that same period has left a bigger yearly deficit. The only President ever to pay off the entire national debt was a Democrat (Andrew Jackson). The last President to run a budget surplus and reduce the national debt was also a Democrat (Bill Clinton).
When it comes to the national debt, there is a lot to think about but not as much to worry about.
Rick Schiming is a board member of the Talbot County Democratic Forum and lives in Easton.