The National Debt Explained

As we sit at the foot of what appears to be another transformative election cycle, pundits, politicians, and their constituents have once again started hyper analyzing the vast array of presidential policy platforms. As is par for the course, most issue prioritization varies considerably across party lines, but nationwide concern for the growing national debt has started to transcend partisanship.

Currently, the debt hovers just north of $22 trillion, but what does that really mean? What are the ramifications of being unable to recoup such an insurmountable debt and what, if anything, does the government need to do about it?

Intrinsically, debt isn’t indicative of an unhealthy national economy, but rather normal for any developed nation. Governments borrow money to help fund programs (i.e. social security and medicaid) and regularly inherit debt as a result. For points of reference, the U.S.’s primary foreign debtors, Japan and China, have more than $11 trillion and $5 trillion in debt respectively.

In the decade since the housing market collapsed, the domestic U.S. economy has actually seen consistent growth, currently boasting record unemployment lows and healthy government revenue despite the country’s climbing debt.

While not an immediate concern, the U.S. national debts’ growing percentage of the total GDP could become disastrous for the country’s credit in the coming decades.

With the national debt projected to reach a staggering 150% of the U.S. GDP by 2048, the value of the US dollar, and consequently the US economy, could collapse and send the global economy into a tailspin.

Although major consequences are still decades away, if annual government spending continues to surpass tax revenue the U.S. will have trouble keeping up with growing interest rates and lose the ability to fund necessary programs and projects (i.e. infrastructure, defense, entitlements, etc.).

Before evaluating the various approaches to address the national debt, we need to understand who the government owes money to and why. Contrary to much of the sensationalized media coverage about China and Japan’s vice grip on the U.S. economy, foreign investors only account for about 30% (roughly $6.3 trillion) of the national debt. While $6.3 trillion is nothing to scoff at, the vast majority (roughly 70%) of the debt is held by American investors, the federal reserve, and the U.S. government itself.

This internal debt has been able to grow exponentially for a multitude of reasons, largely stemming from irresponsible budget management by Congress (the government spends more than it collects in taxes). When Congress passes a spending bill that doesn’t offer adequate funding for a government program, the national treasury sells bonds with interest to an investor or central bank, and consequently is able to fund the program.

The obvious problem with this system is that the national treasury routinely cannot pay back interest on debt without taking money from heavily relied upon entitlement programs, like social security, in turn making these programs insolvent.

Financial mismanagement compounded with massive defense spending after 9/11 and bank bailouts/economic stimulus following the 2008 recession have helped increase debt twenty-fold in 20 years

To balance the budget and avoid a potentially crippling economic collapse, Congress simply needs to live within its means: spending only what is generated in tax revenue each year. While tax cuts can be useful in spurring economic growth during periods of decline or stagnation, the U.S. economy has seen steady growth and reduced unemployment for nine straight years.

Major spending reductions could expedite the end of heavily relied upon entitlements. Unfortunately, the recently passed Tax and Jobs Act of 2017 reduces taxes without reducing spending, thus increasing the annual deficit and worsening the overall national debt. With debt and interest rates steadily rising, expect to see budget management and debt relief become central components of prospective presidential platforms in the coming years.

-Andrew Gonzales


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