Five Ways the Growing National Debt Can Hurt UsFeb 10, 2011
The U.S. national debt has soared over the last decade, and it’s expected to get worse. All the projections show that the federal government is going to keep spending more than it takes in, which means it’s going to have to keep borrowing to make up the difference. The national debt, the total amount the government has borrowed to cover its deficits, is now past $14 trillion, and in a little more than a decade, it could be as large as our total economy. But the whole thing is still abstract for most people: a huge national debt doesn’t sound good, certainly, but how exactly could the national debt actually hurt us? Here are five things you need to know:
- The debt could crowd out other investment. It’s essentially supply and demand: if too much money is going into Treasury bonds to keep the government running, then there’s less money for investment in new businesses, stock, real estate, and everything else. That could mean a more sluggish economy, higher interest rates and lower incomes in the long run.
- Interest payments will start to squeeze other priorities for the government. In 2009, the federal government spent $187 billion on interest – essentially the equivalent of the minimum balance on your credit card. That’s projected to more than triple to $676 billion by 2019. The more the government borrows, the more it pays in interest, and that’s money that’s not available for other things. That means higher taxes or spending cuts, just to keep borrowing.
- We won’t have the ability to respond to emergencies. Our current economic troubles are a good example. When the Great Recession hit, we had room to maneuver. We could still afford to spend more to shore up the financial system and stimulate the economy with government spending and tax cuts. But if our debt levels soar even higher, we might not be able to do that.
- We might have trouble borrowing the money. This is what happened to Greece and Ireland last year, and threatens countries like Spain and Portugal: lenders simply stop thinking a government is a good risk, and either refuse to lend or demand much higher interest rates. When that happens, a government has to either raise taxes or cut spending to close its budget gap and persuade lenders it means business. Argentina, which defaulted on its debts in 2001, still has trouble borrowing money on the international markets.
- None of these things are going to happen in the next couple years, but they’re not all that far off. We’re not Greece or Ireland – our economy is much bigger and healthier, our debt load is still much lower, and investors worldwide still believe U.S. Treasury bonds are one of the safest places to park their money. On the other hand, we’re going to start slowly but surely feeling the pressure of bigger interest payments in less than 10 years. These are longer-term risks, not immediate ones, but if we don’t do anything to get on a better fiscal track, they can become all too real.
So if this is a long-term problem, why worry about it now, particularly when the economy is bad enough right now? Because as the global financial crisis in 2008 showed us, you can’t wait until the last minute to solve a debt problem. Debt builds up slowly over time, and the longer you wait to deal with it, the more painful the solutions become. If we start phasing in tax increases or spending cuts over the next few years, they’ll be less dramatic than if we wait until a crisis actually hits.
Fortunately, we do have options, lots of them, that can bring the debt under control and still let us get what we need from the government. To find out more, visit OurFiscalFuture.org or PublicAgenda.org.
Source: Congressional Budget Office, “Federal Debt and the Risk of A Fiscal Crisis,” July 27, 2010