If you laid a trillion dollar bills end to end, it would stretch past the sun. Now imagine 27 times that length and you might be able to conceptualize the size of the total U.S. national debt.
According to the Peter G. Peterson Foundation, our federal government owes over $27 trillion and counting. On average, it spends several trillion more than it receives in revenue each year. This creates a deficit, which occurs when the government spends more than what it takes in. In fiscal year 2020, filled with stimulus packages and economic relief programs, our deficit was a whopping $3.1 trillion. That is 15.2% of last year’s gross domestic product (GDP)—a measure of the monetary value of the total goods and services produced in a given country.
The debt-to-GDP ratio is a helpful way to measure the national debt. By expressing the debt as a percentage, it becomes more comparable to previous years. Additionally, a country’s GDP in large part determines how much money the government can borrow, as well as how easily it can pay that debt off.
The total debt represents approximately 120% of last year’s GDP, according to some estimates. In other words, our national debt is larger than the size of our entire economy.
The deficit-to-GDP ratio in 2020 broke the previous record set in 1945 when America was embroiled in WWII. However, though the deficit reached abnormally high levels last year, the pattern of massive overspending is consistent. According to the Bureau of Economic Analysis, the national debt reached 106% of GDP, with similar figures throughout the 2010s. At its current pace, that percentage will nearly double over the course of the next 30 years per Congressional Budget Office estimates.
These are huge numbers, but how serious is the national debt? Some claim it poses a significant threat to our economy; others dismiss it. Even politicians are divided on the national debt’s potential effects: disagreements within Congress about budget proposals have often led to congressional delays and government shutdowns.
So, why does our country owe so much money? What are the possible ramifications? Most importantly, is there a solution?
First, we must understand how the U.S. allocates, spends, and borrows money.
“The budget has to go through a legislative process,” Dr. Mark Kelly, an assistant professor of economics at Baylor University said. “Congress votes on it and approves certain amounts of money [to be spent].”
This annual budget resolution also details how the money will be allocated, as well as how much revenue the federal government expects to bring in that year.
Congress always assumes a deficit will occur and integrates it into its budget resolution. However, the details of the resolution are really educated guesses. In years like 2020, when unforeseen incidents and national emergencies arise, the deficit can exceed its limit by a large margin.
When the government borrows money, it most commonly does so by issuing treasury bills, or T-bills. These are bonds—a type of financial security—that individuals, firms, or foreign governments can buy from the U.S. Treasury, which the Treasury will then pay back with interest at the time of the bill’s expiration, or maturity. T-bills often have maturity lengths of 10, 15, or even 30 years.
“Historically in the U.S., citizens would buy them as part of an overall savings package,” Kelly said. “That might be part of a mutual fund, or they could go buy them individually.”
This means that, perhaps contrary to popular belief, most of the U.S. national debt is held by the American public, not foreign governments. The Congressional Budget Office placed that number at almost $17 trillion, or 79% of GDP, for 2019. However, the U.S. can and does accept loans from foreign governments.
What are the biggest drivers of federal spending? “Right now, it’s COVID, but the biggest concerns are still Medicare and Social Security,” said Kelly. “Those two combined are almost half of the federal budget.”
Kelly explained that Social Security was put in place at a time when life expectancy was much lower than today. With today’s increases in longevity, people are spending much more time in retirement, thus requiring more Social Security payments than originally envisioned.
“The trust fund is set to run out in 2034,” Kelly said. Social Security payments are drawn from a massive government trust fund which is funded by payroll taxes. “They’re going to have to make changes to it,” he said. “The most immediate solution is changing retirement age…moving it back to 67 or 70, potentially.”
Kelly said he was more positive about the high levels of Medicare spending.
“A lot of the macroeconomic research around the growth of healthcare expenditures would say that it’s actually an optimal thing. There are good justifications for it,” he said.
Rising household income increases demand for healthcare, which results in more government-funded Medicare payments. This explains why higher levels of Medicare spending reflect positive economic growth.
“The flip side of that is: just because it’s good to spend more doesn’t mean we’re spending it efficiently,” Kelly said. “There’s potentially a lot of waste in the U.S. healthcare system, and so there is that question: how do we afford this?”
Kelly said that the size and upward trend of the national debt is indeed a problem for the American economy. “If borrowing all this money has translated into a GDP growth rate that is exceeding the rate at which we have to pay off debt, then it was worth it,” he said. “The problem is, that’s not happening.” In other words, if the money the government has borrowed and spent has resulted in greater overall economic performance, then it could be justified, but that is not currently the case.
Instead, the growing debt threatens to harm economic prosperity. By 2049, interest payments will be the single biggest item on the federal budget. That money could otherwise be spent on more essential items or help bolster economic expansion.
The possible consequences of our national debt do not stop there. The levels we are reaching can result in a lowered standard of living, increased costs to borrow money, and greater instability in investment markets.
There are a few courses of action that could help decrease the national debt. “Your options are basically some combination of raising taxes and cutting discretionary government spending,” Kelly said.
However, higher tax rates harm the economy in the long term by reducing savings, investments, and labor supply. The most sustainable solution, then, will probably require cuts to less essential government programs, as well as cuts to Social Security and Medicare.
Economists may disagree about the proper solutions to the national debt, but they are mostly united in acknowledging its dangers. America must face this issue head on—the sooner the better.