The public’s debt to the federal government increased dramatically in the 1980s and 1990s, peaked in 1997, and then began to drop in 1998. The amount of public debt held by the US Treasury is a better indicator of the extent of the national debt than gross debt. Debt owing by one federal government entity to another federal government agency or trust fund is included in gross debt.
What is the national debt history?
The United States has been in debt since its existence. Debts accumulated during the American Revolutionary War totaled $75,463,476.52 by January 1, 1791, according to our records. The debt escalated over the next 45 years. Under President Andrew Jackson, the public debt was reduced to zero by January 1835.
How does raising the national debt stimulate the economy?
However, if we do nothing, the converse is also true. Our economic environment will deteriorate if our long-term fiscal challenges are not addressed, as confidence will erode, access to capital will be limited, interest costs will crowd out key investments in our future, growth conditions will deteriorate, and our country will be at greater risk of economic crisis. Our future economy will be harmed if our long-term fiscal imbalance is not addressed, with fewer economic possibilities for individuals and families and less budgetary flexibility to respond to future crises.
Public investment is being reduced. As the federal debt grows, the government will devote a larger portion of its budget to interest payments, squeezing out public investments. Under existing law, interest expenses are expected to total $5.4 trillion over the next ten years, according to the Congressional Budget Office (CBO). The United States currently spends more over $900 million each day on interest payments.
As more federal funds are diverted to interest payments, fewer resources will be available to invest in areas critical to economic growth. Although interest rates are now low to aid the economy’s recovery from the pandemic, this condition will not persist indefinitely. The federal government’s borrowing expenses will skyrocket as interest rates climb. Interest payments are expected to be the highest federal spending item in 30 years, according to the CBO “More than three times what the federal government has spent on R&D, non-defense infrastructure, and education combined in the past.
Private investment is down. Because federal borrowing competes for cash in the nation’s capital markets, interest rates rise and new investment in company equipment and structures is stifled. Entrepreneurs confront greater capital costs, which could stifle innovation and hinder the development of new innovations that could enhance our lives. Investors may come to distrust the government’s ability to repay debt at some point, causing interest rates to rise even higher, increasing the cost of borrowing for businesses and people. Lower confidence and investment would limit the rise of American workers’ productivity and salaries over time.
Americans have less economic opportunities. Growing debt has a direct impact on everyone’s economic chances in the United States. Workers would have less to use in their occupations if large levels of debt force out private investments in capital goods, resulting in poorer productivity and, as a result, lower earnings. Reduced federal borrowing, on the other hand, would mitigate these effects; according to the CBO, income per person might grow by as much as $6,300 by 2050 if our debt was reduced to 79 percent of the economy by that year.
Furthermore, excessive debt levels will have an impact on many other elements of the economy in the future. Higher interest rates, for example, as a result of increasing federal borrowing, would make it more difficult for families to purchase homes, finance vehicle payments, or pay for college. Workers would lack the skills to keep up with the demands of an increasingly technology-based, global economy if there were fewer education and training possibilities as a result of decreasing investment. Lack of support for R&D would make it more difficult for American enterprises to stay on the cutting edge of innovation, and would stifle wage growth in the US. Furthermore, slower economic development would exacerbate our budgetary woes, as lower earnings result in reduced tax collections, further destabilizing the government budget. Budget cuts would put even more strain on vital safety net programs, jeopardizing help for those who need it the most.
There is a greater chance of a fiscal crisis. Interest rates on government borrowing could climb if investors lose faith in the country’s fiscal position, as greater yields are sought to buy such instruments. A rapid increase in Treasury rates could lead to higher inflation, reducing the value of outstanding government securities and resulting in losses for holders of those securities, such as mutual funds, pension funds, insurance companies, and banks, further destabilizing the US economy and eroding international confidence in the US currency.
National Security Challenges Our budgetary stability is intertwined with our national security and ability to retain a global leadership position. As former Chairman of the Joint Chiefs of Staff Admiral Mullen put it: “Our debt is the most serious danger to our national security.” As the national debt grows, we are not only increasingly reliant on creditors throughout the world, but we also have fewer resources to invest in domestic strength.
The Safety Net is in jeopardy. The safety net and the most vulnerable in our society are jeopardized by America’s huge debt. Those critical programs, as well as the people who need them the most, are jeopardized if our government lacks the resources and stability of a sustainable budget.
When was the last time America was debt free?
As we approach America’s 245th year of independence, it’s a good moment to consider how debt is knit into the fabric of our society. Especially now that we’re weaving it quicker than Betsy Ross could ever weave the first American flag.
According to the Congressional Budget Office, the government debt reached $28.2 trillion in 2021 as a result of a slew of economic relief laws sparked by the COVID-19 crisis. That’s an almost $7 trillion gain in only two years.
Consider that the total national debt of the United States did not reach $7 trillion until 2004. In other words, the United States has racked up as much debt in the last two years as it did in the previous 228.
If the debt were a car, and America had to pay it off right now, every man, woman, and child would have to come up with $85,200 in a hurry. Either that, or the country would be taken away from them.
Our forefathers were well aware that debt would be a part of the game, despite the fact that their calculators lacked the 13 digits required to represent a trillion dollars.
The public debt reached more than $75 million shortly after the American Revolutionary War (1775-1783), and it continued to rise steadily over the next four decades, reaching about $120 million. In 1835, however, President Andrew Jackson reduced the debt to zero.
After more than 200 years, several wars, stock market crashes, powerful companies suffering from failed investments, rising unemployment rates, the well-known bursting of a tech bubble, the bursting of a housing bubble, and pandemic relief bills, the federal debt is on the verge of reaching $30 trillion.
When did the US start accumulating debt?
Deflationary periods may reduce the size of the debt officially, but they enhance the debt’s real value. During deflationary eras, money is valued more highly because the money supply is tightened. Borrowers are paying more even if their loan payments stay unchanged.
By the end of 2021, the public debt owned by the federal government is expected to be 102 percent of GDP, according to the Congressional Budget Office.
Does national debt matter?
One of the most critical public policy challenges is the national debt level. Debt can be utilized to promote a country’s long-term growth and prosperity when used properly. The national debt, on the other hand, must be assessed properly, such as by comparing the amount of interest expense paid to other governmental expenses or by comparing debt levels per capita.
How will the national debt affect future generations?
According to this illustrative metric, the US currently has 28 percent of GDP in fiscal space, which will drop to only 13 percent by 2029 under present law. Fiscal space would almost vanish by the end of the decade if current policy continues until debt reaches new highs. Because of the shrinking fiscal space, it will be more difficult to respond effectively to future crises.
Importantly, a reduction in fiscal freedom may make it more difficult for the government to respond to new challenges and possibilities. When debt is so high and potential financing sources are already needed to bring the current fiscal situation under control, updating the country’s social contract, developing a Green New Deal, or removing bottlenecks to capital growth is extremely difficult.
Rising Debt Places an Increased Burden on Future Generations
The national debt is a generational issue at its core. Continued borrowing to pay for tax cuts or consumer expenditure now places an additional strain on young and future Americans.
A child born today in the United States will inherit nearly $50,000 in national debt. While the debt will never have to be paid in full, it will incur fees.
For one thing, younger and future generations will bear the brunt of debt’s economic implications. Income stagnation, rising interest rates, and shrinking budgetary space all add up over time. When compared to reducing debt, the CBO estimates that rising debt will cut GNP by 1% after ten years, 2% after twenty years, and 6% after thirty years.
Furthermore, because of the debt’s unsustainable trajectory, today’s low taxes or excessive expenditure will need to be partially offset in the future. By borrowing more now, politicians are almost guaranteeing future taxpayers and government recipients more taxes and lesser spending. At the very least, younger and future generations will be burdened with higher interest rates, and debt payments will continue to rise.
In fact, higher interest rates may already be having a negative impact on future generations. The federal government is expected to spend more on debt service next year than it does on all other programs and assistance for children. In other words, the government will spend more on subsidizing the consumption of the previous generation than on future investment.
With so many unmet needs and new problems and opportunities on the horizon, the United States does not need to spend the remainder of the twenty-first century trying to make up for the past.
Rising Debt Increases the Risk of a Fiscal Crisis
The United States is unlikely to experience a fiscal crisis anytime soon, but if debt continues to rise and it becomes evident that this pattern will continue, the likelihood of a crisis will increase.
Because the US borrows in its own currency, default or insolvency are extremely unlikely. The country’s strong economy, stable monetary policy, stable political system, and complete confidence and credit in paying our sovereign debt have all but eliminated any fears that the US will default. This, however, may not last indefinitely. Investors will eventually doubt our creditworthiness as a result of our endless deficit spending, tax cuts, and inability to make difficult decisions about what to prioritize.
A fiscal crisis could manifest itself in a variety of ways. CBO addresses the possibility of a debt-fueled financial collapse in a 2010 paper on the subject. In this case, rising debt levels could cause a market panic, prompting investors to demand higher interest rates. This increase in rates would diminish the value of U.S. debt held abroad (now roughly $14 trillion), causing a selloff of government bonds. The result might be a global financial crisis, given the structural significance that safe assets play in the financial system.
A fiscal crisis could also manifest itself as rapid inflation. The federal government may be forced to print fresh money to cover its debt if borrowing becomes too high or demand for US debt becomes too low. While countries can often engage in minor monetary growth or seigniorage without interruption, hyperinflation is a result of continuously extending the money supply to meet ever-increasing deficits. By weakening price stability, the deployment of new heterodox economic policies geared to promote such printing could cause inflation.
In order to prevent one of the following possibilities, the country’s high debt could require it to engage in austerity measures during a recession. This austerity may cause a crisis by increasing unemployment and keeping the economy much below its capacity for an extended period of time.
Importantly, while high and rising debt raises the chances of a fiscal crisis, it is impossible to foresee what will trigger one. One potential is a shift in foreign creditors’ attitudes, who may decide to drastically reduce their loan holdings for economic or geopolitical reasons. As has happened in the past with previous fiscal crises, a recession or financial crisis can bleed into a fiscal crisis. A fiscal crisis might also result from market concerns about the long-term viability of US fiscal policy and the trustworthiness of the country’s institutions, which could be harmed by the adoption of new fringe economic theories that put monetary policy in the hands of political people.
Fortunately, the likelihood of a US fiscal crisis remains low. However, there is no guarantee that this will continue to be the case. The larger the increase in debt and the faster it grows, the more likely a crisis will arise.
Conclusion
The federal government of the United States is heavily in debt. While calculating the country’s budgetary situation in trillions of dollars or percentage points of GDP may appear abstract, the repercussions of continuing on our current path are very real.
Rising debt slows income growth, raises government interest payments, pushes up interest rates, diminishes our ability to respond to the next recession or emergency, burdens younger and future generations, and increases the likelihood of fiscal disaster, all of which are discussed in this article.
We’ve also written a debt Question & Answer piece as a supplement to this study, replying to some of the assertions that debt doesn’t matter.
Other negative effects of large and rising debt will be discussed in future studies, including how it can harm smart policymaking, weaken democratic institutions, and harm the country’s geopolitical standing. Admiral Mike Mullen, the former Chairman of the Joint Chiefs of Staff, has frequently stated that “our debt is the most severe danger to our national security.”
Rather than jeopardizing our national and economic security and exacerbating the bad effects of borrowing by adding to the debt, officials should fund fresh suggestions and collaborate on strategies to improve our fiscal condition. Without a solution, debt’s implications will deteriorate over time and become more difficult to reverse.
Is our national debt a problem?
The national debt of the United States has resurfaced as a source of concern. The budget deficit has reached levels not seen since World War II as a result of the significant spending in response to the COVID-19 outbreak. This growth comes after years of increasing debt—nearly $17 trillion in 2019—making debt reduction much more difficult. Raising the debt ceiling, which is the legal limit on government borrowing, has become a recurring battle in Congress.
What is the effect of debt on economic growth?
Academics and economists have been studying the relationship between government debt and economic development in the decade since the financial crisis of 2007–2008 and the ensuing European sovereign debt crisis, which began in late 2009. Carmen Reinhart and Kenneth Rogoff, for example, wrote a noteworthy study in 2010 “In the debate over austerity and fiscal policy in debt-burdened nations, “Growth in a Time of Debt” became extensively cited and influential among commentators, academics, and politicians.
We review the research on the debt-growth relationship since the publication of in this policy brief “To assess the argument that high government debt-to-GDP ratios have negative or significant (or both) consequences on an economy’s growth rate, see “Growth in a Time of Debt.” Furthermore, we examine the argument that debt has a nonlinear barrier, about 90% of GDP, past which it has a considerable negative influence on growth rates. Given that some European countries have successfully reduced their debt-to-GDP ratios in recent years, it is critical for Americans to gain a better grasp of the possible negative consequences of debt on growth potential, especially given America’s present fiscal trajectory.
The vast majority of studies on the debt-growth link indicate a debt-growth threshold of 75 to 100 percent of GDP. Furthermore, every study, with the exception of two, indicates a negative association between high government debt and economic development. This is true even if no common threshold is discovered in the investigations. The empirical evidence overwhelmingly supports the assumption that a substantial quantity of government debt has a negative influence on economic growth potential, and that this impact grows in many circumstances as debt grows. According to the United States’ present fiscal trajectory, the effects of a large and growing public debt ratio on economic development over the next 30 years might equal to a loss of $4 trillion to $5 trillion in real GDP, or as much as $13,000 per capita, by 2049.
Why Would a Large Federal Debt Have Negative Effects on the Economy?
Before looking into the existing literature on the relationship between government debt and economic development, it’s a good idea to review the economic reasons why the US economy’s growth potential could be harmed by a big and growing debt burden. Economists have long recognized a number of macroeconomic pathways via which debt might stifle medium- and long-term economic growth. Recent evidence suggests that massive debt-to-GDP ratio increases could result in much higher taxes, reduced future incomes, and intergenerational injustice.
More long-term interest rates, greater distortionary tax rates, inflation, and a general constraint on countercyclical fiscal policies can all have a detrimental impact on capital stock accumulation and economic growth, resulting in increased volatility and lower growth rates. When the debt-to-GDP ratio hits high levels, the private sector appears to start saving, according to studies on the mechanisms via which debt negatively effects growth. The Ricardian equivalence hypothesis states that households are forward-looking and increase their savings in response to increases in government borrowing.
In order to sustain its broad spending initiatives, the government needs increase borrowing as the federal debt load grows. Increased government borrowing puts pressure on the country’s capital markets, raising interest rates and crowding out private investment. Because private-sector entrepreneurs face greater capital costs, innovation and productivity are inhibited, limiting the economy’s development potential. If the government’s debt level continues to rise, investors may begin to doubt the government’s ability to repay the loan and demand even higher interest rates. This pattern of crowding out private investment, along with increased interest rates, will erode corporate confidence and investment over time, further reducing productivity and growth.
Another cost of higher government borrowing is the crowding out of public investment, as interest payments devour an ever-increasing share of the federal budget, leaving less money for research and development, infrastructure, and education. Indeed, according to the Congressional Budget Office (CBO), the expense of paying interest on the nation’s debt will be the third-largest budgetary item after Social Security and Medicare by 2049, accounting for nearly 6% of GDP. Americans will find it more difficult to buy a home, finance a car, or pay for college as a result of the combination of lower private investment and crowding out of governmental investment. The economy’s growth potential will continue to be stifled by lower investment, poorer productivity, and decreased social mobility.
How Might Debt Drag Affect Future US Economic Growth?
The CBO publishes annual and updated long-term growth forecasts for the United States. We use estimates from two of the studies in our literature analysis to project real GDP growth rates for 2019 to 2049 in order to predict the detrimental effects of high public debt levels on growth rates. Our prediction is based on studies by Caner, Grennes, and Koehler-Geib, as well as Alfonso and Jalles. The first study finds a lower debt barrier (77%) but a smaller debt drag effect on economic growth; the second study finds a higher debt threshold (90%) but a somewhat bigger debt drag effect on economic growth. Alfonso and Jalles’ calculations are likewise essentially compatible with Kumar and Woo’s anticipated debt drag findings.
The differences in real GDP from 2019 to 2049 are depicted in Figure 1. The black line is the CBO baseline estimate, the orange line is projected real GDP under debt drag effects calculated by Alfonso and Jalles, and the red line is projected real GDP under debt drag effects calculated by Caner, Grennes, and Koehler-Geib. The findings show that the effects of a significant and expanding public debt-to-GDP ratio on economic growth over the next 30 years could equal to a $4–$5 trillion loss in real GDP. This is the difference in real GDP per capita between a baseline of $95,339 and a debt-drag-affected real GDP per capita of $82,376–$86,021. This range is about $9,000–$13,000 per capita lower than the baseline, implying a significant drop in typical American living standards.
Does national debt cause inflation?
The vast majority of the federal government’s current debt is fixed in nominal terms. Only roughly 7.5 percent of the debt had been issued as inflation-linked bonds as of 2021. The longer the debt has been outstanding, the more it has been influenced by inflation.
Why is the national debt good?
The public national debt of the United States is good since it leverages economic growth and represents the country’s excellent creditworthiness. The cost of debt payment, interest on Treasurys, is revenue for the holders: millions of seniors, mutual and pension funds, and state and local governments.
