You have probably heard by now that the national debt is the biggest it has ever been and that it’s only growing, as each year sees a new record high. Many fiscal conservatives have repeatedly rung the doomsday alarm about the ocean of red ink swallowing the United States and potentially bankrupting the world’s largest economy in the next couple of decades. But what is the national debt? And why should we be worried?
Spending Out of Control
The national debt, also known as sovereign debt, is the debt owed by the federal government. It is separated into two parts: public and intragovernmental. The former is debt held by the public – citizens, global investors, and foreign governments – in the form of Treasurys (bonds). The latter is when the federal government owes other government departments.
To ensure spending keeps going, the Federal Reserve controls between 10% and 20% of the debt. The Fed does this by scooping up bonds and perpetually rolling it over (Treasury matures, and then the Fed buys more of the same thing). Federal politicians can get away with a lot of spending because of the Fed.
Every time the government spends more than it takes in, creating a budget deficit, it gets added to the national debt. However, if Congress reports a budget surplus, then it is subtracted from the national debt – the last time this happened was in Fiscal Year (FY) 2001.
Debt can indeed play a role in the economy – good and bad. Experts assert that modest increases in the debt can contribute to economic growth. Critics will make the case that the debt takes away capital (money) from the private sector to give it to the public sector, which is rife with waste and fraud.
Many fiscal conservatives fear that the U.S. will one day endure a sovereign debt crisis. This is when the nation can no longer pay its bills and inevitably defaults on the debt by declaring bankruptcy. While the country is far away from this, there are still many problems with America’s balance sheet. For instance, the U.S. spends about $400 billion in interest on the debt, and it is projected to top $900 billion by 2028, which would top defense spending and be comparable to entitlement outlays.
The U.S. national debt topped $23 trillion in 2019 as the federal deficit was close to climbing above $1 trillion. It is difficult to quantify, but perhaps it can be done with some frightening examples.
China and Japan, collectively, own approximately $3 trillion to $4 trillion in Treasurys. Every taxpayer in the U.S. owes roughly $183,000.
The debt-to-gross domestic product ratio, which compares the debt to the nation’s economic performance, is well above 100%. To put this into context, the debt-to-GDP ratio during the Second World War was 122%. It is estimated that just ten other countries maintain worse debt-to-GDP ratios.
It would take more than 700,000 years if the country repaid the debt $1 every second.
The Costs Are Adding Up
With nearly all the Democratic presidential candidates promising trillions in free stuff, you might be wondering how this will be paid for, aside from just higher taxes. Sen. Bernie Sanders’ (I-VT) plan is expected to add $18 trillion to the debt over a decade. But the U.S. cannot afford its current crop of spending, let alone trillions more.
To understand just how out of control spending and debt have become, consider this fact: The old New Deal cost Americans $50 billion between 1933 and 1940. The future cost of these same New Deal programs is in the ballpark of $50 trillion (and counting!) when you calculate their expansions, add-ons, and interest.
Can America afford to spend more? The answer depends on your position on the political spectrum.