For many, the year 2020 has been the worst year either in recent memory or in one's entire life. If the pandemic or recession were not enough, the United States government decided to accrue a ton of debt. Between March and October, the Treasury borrowed $3.5 trillion. Yes, that is trillion with a "t"! By the end of the calendar year, the debt-to-GDP ratio is expected to increase to 98 percent (Congressional Budget Office [CBO]).
Tangentially, a school of thought that has gained more traction over time is Modern Monetary Theory (MMT), which essentially says that because the government has a de facto monopolistic power to create currency and bond investors have been lending at lower rates, the debt does not matter. Aside from being a departure from mainstream macroeconomics (as is exhibited by a survey of economists conducted by the University of Chicago showing that MMT is bollocks), MMT would have serious policy implications, mainly that one could continue to print currency until the end of time. A less extreme, more convincing argument than MMT is that in spite of the rising debt-to-GDP ratio, it is less costly [as a percentage of GDP] to service debt.
Even if the debt servicing burden projects play out, there are still a number of reasons that we should still be worried about U.S. government debt:
1. Interest payments to go up from here. Part of what makes MMT so tenuous is that it assumes that interest rates (and by extension, the cost of burdening debt) stays low. According to the CBO's long-term projections, that is not expected to be the case. In the next decade, interest payments will increase from $376B in 2019 to $807B in 2029. In terms of percent of GDP, it is projected to be 2.2% in 2030 and 8.1% in 2050. There has been substantial academic literature to illustrate that there is a high correlation between rising debt and rising interest rates (Huntley, 2014).
2. Lower non-interest spending. If the government is spending more money servicing debt, that means less money on other public services (e.g., healthcare, education). Debt is the thing that holds back the ability to make better investments in the future. It also makes it more difficult to manage such future crises as wars, natural disasters, and recession (Romer and Romer, 2019).
3. Growing elderly population. As Baby Boomers retire, it will have an adverse effect on the debt, particularly when it comes to the worker-to-retiree ratio. This ratio is expected to decrease from 2.8 in 2020 to 2.2 in 2040. What happens when the elderly become a higher percentage of the population? For one, there will be fewer workers [as a percentage] contributing tax revenue dollars. This also means that there will be further strain on Medicare, Medicaid, and Social Security, which, by the way, are the largest drivers of the federal budget.
4. Increased U.S. public debt stymies economic growth. Based on 2019 projections, reducing debt would increase GNP per person by $5,500 in 30 years (CBO). Similarly, the International Monetary Fund [IMF] found that high debt hampers economic growth by "increasing uncertainty over future taxation, crowding out private investment, and weakening a country's resilience to shocks" (Gupta et al., 2015, p. 7).
5. Look at those trust funds! As a result of the pandemic, major trust funds are to go broke earlier than anticipated: Social Security in 2031, Medicare [Part A] in 2024, and the Social Security Disability Fund in 2026. This only serves to accelerate and exacerbate debt projections.
6. Increased debt means lower savings and investment. A 2014 CBO paper found that an increase of $1 in the budget deficit translates into a reduction of national savings by 57 cents, as well as domestic investment by 33 cents.
7. The U.S. debt trajectory. Shortly before the pandemic, the CBO predicted that debt-to-GDP ratio will be 180 percent by 2050. The United States was one of the few developed nations facing rising debt levels pre-pandemic. Thanks to pandemic fiscal spending, that ratio went up to 195 percent (CBO). There is no sign of it slowing down because unfunded liabilities, in this case, Medicare, Medicaid, and Social Security obligations that are not backed by assets. More to the point, economists at the Brookings Institution calculated that even if interest rates remain the same, the debt-to-GDP ratio would still increase to 156 percent (Auerbach et al., 2019).
Postscript: Is the federal debt something so urgent that if we don't deal with it right this second, we're all going to die? Nope. At the same time, the increasing national debt is like a foundation of house slowly rotting. With an aging population and no sign of federal deficits slowing, it is only getting worse and collapse without reform. To quote the Government Accountability Office (GAO) in its March 2020 report, "the longer action is delayed, the more drastic the changes will be needed to address the issue."
For more information, see analysis from the bipartisan Committee for a Responsible Fiscal Budget here and here.
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