America’s National Debt: Is It Relevant?
The national debt of the United States is a topic that often comes up, both in economic and political circles. While the United States has overseen some level of national debt for many years, the problems were exacerbated by the policies enacted by the government post-2000, where spending on national infrastructure, wars and fiscal stimulus meant the debt ballooned to a level we had never seen before. And these large figures of debt naturally make Americans feel concerned, especially when they learn of how most the debt America owes is to China, a direct economic rival in many ways. We will attempt to look at the question of the national debt and explain whether such high levels of debt are something for ordinary Americans to be concerned about.
Debt vs. Deficits
It is very hard to have an accurate conversation about the national debt until we make a clear distinction between national debt and the nation’s budget deficit for a particular year. The annual budget deficit occurs when the United States government spends more money during a particular year than it is bringing in through tax revenue and other income streams. When there is a budget deficit, it is common for the Treasury Department to respond by issuing treasury bills, notes and bonds to make up the difference. These securities allow the government to have enough money on hand to satisfy the various government programs they are running in each year. And the national debt rises each time there is a year with a budget deficit, which means the United States’ total national debt is the addition of all their budget deficits over the years.
When Does the Public Support Debt Increases?
Given the various events that have shaped the history of the United States since its inception, it is not unusual that the national debt has also fluctuated a great deal during those years. The debt levels in the nation went up and down from the day George Washington came into power until 1958, when Dwight D. Eisenhower was President. Since 1958, the United States debt has grown every single year, with the percentage growth being anywhere from 0.6 percent to as high as 20.6 percent in 1983.
During those years, the American’s publics views of the debt have also shifted from a positive to a negative view, depending on the country’s situation at the time. History shows us that the citizens of the United States are more willing to accept a national debt spike when it is being used to stimulate the nation’s economy. However, they are not as enthused when the debt is increasing in a bid to keep up with the cost of government support programs, such as welfare, Social Security, Medicare and Medicaid. And these views are logical in some ways, because increasing spending to boost the economy is something that would help the public, both in the short and long-term.
How to Evaluate National Debt?
Some economists take the view of evaluating national debt in comparison to the nation’s current Gross Domestic Product (GDP). However, such attempts to justify the level of national debt may be a mistake. For one, the GDP of a nation is such a complex concept that makes it unhelpful to use the GDP as a comparison tool for the national debt. For instance, the GDP of a national is referred to as the total market value of all the final goods and services that are being produced in the nation in a year. To calculate GDP, we must assess the nation’s total spending, which leads to calculations of how much personal consumption is taking place on durable and nondurable goods, services and the level of gross private investment. Then we must subtract transfer payments for things such as Medicare and social security, along with net exports. As you can tell, these calculations can become broad and complicated.
And secondly, the United States is not going to pay their debt back through their GDP. It is paid back with money being brought in from taxes. It is why many experts believe that defining the nation’s debt on a per capita basis makes a lot more sense, because it accurately informs people about whether or not the level of debt is a real problem. For instance, you could tell someone the national debt is hypothetically 60 percent of the nation’s GDP and they would not know what that information means. But if you tell them the nation’s debt is estimated at $61,000 per capita, they may have a better understanding of the problem. It would effectively mean each citizen in the United States owes $61,000 as part of the nation’s debt.
Another useful tool for measuring the national debt is by comparing the interest payments on the debt for a given year to the amount of money being spent on other services, such as education, infrastructure, military and healthcare. By comparing how much of the national budget is going to those services, and what is being spent on the national debt, Americans can get a better sense for whether something needs to be done about their nation’s debt levels.
How Can the National Debt Impact Individuals?
In recent years, the United States debt has begun to grow faster than the size of population, which means the debt can have an impact on the lives of ordinary citizens. As we get a greater national debt per capita, there is more chance of the government defaulting on some of its debt service obligations. And if that happens, the Treasury would have to react by raising the yield on any treasury securities they issue, because investors are less likely to want those securities at the original yields. And that would lead to a situation where there is less tax revenue to spend on the various programs kept afloat by the government. And a shift in how much is being spent on these programs could impact everyone’s standard of living.
If the Treasury increases the yield levels on their securities, it means the interest rates associated with mortgages and business loans will rise, since the mortgage market is directly related to the short-term interest rates being put out by the United States Federal Reserve. And the interest rate increase would mean home prices decline, since there are less qualified individuals who could get a large, affordable mortgage loan. Businesses may also struggle to get competitive loans on the commercial and industrial properties they wish to purchase.
And finally, if a nation is viewed as being in danger of completely defaulting on its debt, the standing it has in the world as an economic and political power would sharply decline. Despite its current levels of debt, there is no nation in the world that believes the United States would default on that debt. It is why the nation is still the world superpower in an economic and political sense. But that could change if the circumstances surrounding the nation’s debt change.
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Is the United States National Debt a Problem Right Now?
The per capita debt levels are what cause many economists, politicians and citizens concern about the nation’s current debt levels. If we look at the change in per capita national debt from 1990 to 2015, it is evident the debt levels have risen rather sharply over the past 15 years, with the bulk of the increase coming from 2007 onward. The gross federal debt stood at around $12,800 per capita in 1990, with the figure rising close to $20,000 per capita in 2000. An $8,000 per capita national debt increase is not great, but it is not something that would concern the nation either, especially as the economy was performing very strongly in those years.
However, the debt continued to rise at a greater rate from 2000 onward. From 2000 to 2007, we saw the debt go from $20,000 per capita to $30,000 per capita. In other words, the same increase that took ten years now happened in seven years. But where things get concerning is how the gross federal debt went from around $30,000 per capita in 2007 to $56,000 in 2015. Now we have a $26,000 increase per capita in eight years, which is a massive jump from what we were seeing in the 1990s or 2000s.
While much of the post-2007 increase is attributable to the 2008 Financial Crisis, these debt levels are something the United States would have to be concerned about. If the debt continues to rise at such an exponential level, we could get to a point where the debt begins to impact the nation’s spending capabilities on an annual basis, which would set off the unwanted chain reaction of events we mentioned earlier in the article.
For those who are very concerned about the national debt, there is some good news. The other way of assessing the debt we mentioned referred to the interest payments on the debt and how they compared to the rest of the nation’s annual spending. Figures for 2015 show the United States had a federal budget of $3.8 trillion. But where is all the money going? Roughly $2.45 trillion, or 64 percent, of the spending went towards Mandatory Spending, while a further $1.1 trillion, or 29 percent, went towards Discretionary Spending. Meanwhile, only 6 percent of the budget was set aside for keeping up with the interest payments on the nation’s federal debt.
Mandatory Spending refers to the amount of money that must be spent on programs as indicated by the law, while Discretionary Spending is the money Congress can adjust on an annual basis.
In 2015, more than half the Discretionary Spending went towards the military, with the rest being divided up in services such as transportation, energy, international affairs, housing, veterans’ benefits, education and government programs. If we look at the $2.45 trillion in Mandatory Spending for the 2015 budget, we can see that around $1.25 trillion go towards Social Security, while a further $900 billion go towards Medicare and health. The rest is divided up between other government services.
Six percent of the year’s budget going towards interest payments is something that should not concern Americans. It is a fraction of the money that is currently being allocated towards other programs. However, what should worry the nation is how 16 percent of the 2015 budget was made up by borrowing close to $600 billion. And while the levels of national debt are not causing a problem in how the country is being run right now, it could become more of an issue in the future if the nation does not find a way to either limit the amount of spending by the federal government, or to increase the amount of revenue being brought in from taxation.
But acknowledging the issue of spending vs. revenue is one thing, and resolving it is another matter. Raising taxes is one effective way for the nation to curb its debt problem, because it would mean more money coming into the Federal government, and it would eliminate the need for them to borrow as much as they are right now.
However, telling the nation it is time to raise taxes is something no politician wants to do, because it is a sure-fire way of getting booted out of office! It is why so many politicians don’t run on a platform of raising taxes. And while it is a noble idea to relieve the nation’s citizens of their tax burden, it often means needing to borrow more money to satisfy the many avenues where the United States government currently spends money on an annual basis.
Aside from raising taxes, the other option for the government would be to limit the amount of money they spend on services such as Social Security and Medicare. But again, cutting or gutting Social Security and Medicare are two proposals that may not get much support from the public in the long-run.
These are the reasons why the nation’s debt is unlikely to get any less in the coming decades. But that may not be such a bad thing. If the nation can find the right balance between borrowing money each year, paying interest on their existing debt obligations and supporting their various Federal programs and government institutions, there is no reason for the average American to become alarmed when they see the national debt rising by several trillion dollars!
If the politicians can’t keep the spending under control in the next few years, then the debt will continue to grow to alarming levels and have a very negative effect on all American’s. America is at economic cross-roads and must take measures to get the federal budget under control before it bankrupts the country.