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National debt
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THE NATIONAL DEBT HIT A RECORD HIGH. DOES THAT AFFECT THE AVERAGE AMERICAN
WALLET?

Bailey Schulz
USA TODAY


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The U.S. government’s national debt recently topped $34 trillion, a new record.
But how worried should you be about the country’s borrowing?

The debt has been a source of tension among politicians, with lawmakers narrowly
avoiding a default last year through a debt ceiling deal. Neither side of the
aisle was completely happy with the agreement; conservative members had been
advocating for deeper cuts, while liberals objected to components like expanded
work requirements for food stamps and future spending caps.

Spending deals have continued to come under fire by ultraconservative lawmakers,
despite the risk of a government shutdown. Congressional leaders on Sunday
announced a deal on a short-term funding bill that will keep the government's
doors open into March. The deal follows an agreement made last week between
Senate Majority Leader Chuck Schumer, D-N.Y., and House Speaker Mike Johnson,
R-La., to set the overall government spending at $1.66 trillion for fiscal year
2024. Johnson said he doesn't plan to back out of the deal, despite calls from
right-wing lawmakers to make deeper spending cuts. 



Economists don’t agree on how worrisome the debt levels are today, but studies
show an increasing number of Americans believe it needs to be addressed as
federal spending consistently outpaces its revenue.

Over the past five decades, the country has typically run on a budget deficit,
in which the government spends more money in a given year than it takes in. This
leads to borrowing that contributes to the national debt. The U.S. has run a
deficit in all but four years since 1970, with the most recent budget surplus (a
year in which the government takes in more than it spends) in 2001.



A 2023 Pew Research Center survey found that 57% of Americans said reducing the
budget deficit should be a top priority for the president and Congress, up from
45% the year prior. 

Here’s what to know about the national debt and what the rising levels could
mean for you. 




WHAT IS THE NATIONAL DEBT?

The national debt is the total amount of money the U.S. owes its creditors,
which includes “the public” (individual investors, businesses, commercial banks,
pension funds, mutual funds, state and local governments, the Federal Reserve
System and foreign governments) as well as other parts of the federal
government, including Social Security, Medicare, and other specialized trust
funds. 



The U.S. has carried debt since its inception, but the number has spiked in
recent years thanks in part to costly events like the COVID-19 pandemic. Tax
cuts, stimulus programs, government spending and lower tax revenue also
contributed to the debt load.

The $34 trillion figure looms large, but experts say it’s important to put the
number in context. 



“People sort of overreact to the number. Because of inflation, that number is
always going to get bigger,” said Betsey Stevenson, a professor of economics and
public policy at the University of Michigan. “We usually want to try to make
some sense of the number by scaling it in a way that is a little bit easier to
understand.”

One method is calculating debt held by the public as a percent of GDP. This
figure stood at 97% at the end of 2022, down from nearly 100% in 2020. The U.S.
Office of Management and Budget expects this figure to continue to rise and, by
2027, surpass the previous record of 106.1% from 1946, right after World War
II. 

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There is “no doubt” that both in raw and proportionate terms, the U.S.
government carries a substantial debt load, according to Brett House, a
professor of economics at Columbia Business School. But he said that debt "might
be the price we need to pay" to ensure money keeps flowing to essential
programs. 



“We face a massive climate challenge (that needs funding). We also face the need
to keep increasing productivity, both in the public sector and in the private
sector,” House said.

That sort of fiscal spending, he argues, can raise the country's ability to pay
off its debt over time by boosting GDP and tax revenue, "thereby making
sustainable the debt incurred to finance that spending," he said.


HOW MUCH DEBT CAN THE US TAKE ON?

It’s unclear just how much debt is too much for the country to bear. 

“We don't know how high this thing can go,” said David Andolfatto, a professor
of economics at the University of Miami. “But we do know that there's likely a
limit.”

Research from the University of Pennsylvania’s Penn Wharton Budget Model
estimates that the U.S. debt held by the public cannot exceed roughly 200% of
the GDP, per findings published late last year.



They estimate that financial markets can sustain about 20 years of accumulated
deficits projected under current U.S. fiscal policy. After that, “no amount of
future tax increases or spending cuts" could prevent the government from
defaulting, or being unable to pay, its debt.

The Treasury Department says it's unclear exactly what sort of repercussions
would follow a default, but it "would likely have catastrophic repercussions in
the United States and in markets across the globe."




WHAT DOES THE NATIONAL DEBT MEAN FOR INTEREST RATES?

Some economists say the debt levels could lead to more challenges for Americans
down the road by hiking the cost of borrowing.  

“If the government starts pumping out a lot of debt, interest rates are going to
rise, and then your mortgage rate is going to rise as well,” Andolfatto said. 

Another concern is that as the debt and its interest keep growing, the
government will cut funding to programs like Social Security and Medicare.



Net interest costs reached $659 billion in fiscal 2023, up 39% from the previous
year, according to the Treasury Department.

“If we just have the debt keep growing, we have to pay interest on that,”
Stevenson of the University of Michigan said. “So we have to spend more ... just
to pay the interest on the debt, which means that more of our budget needs to go
towards the interest on the debt.”

But some experts (including Treasury Secretary Janet Yellen) say that interest
payments as a share of GDP remain at a reasonable level. The figure remained
under 2% in 2022, compared with more than 3% in the early 1990s.


WHAT ABOUT INFLATION?

Higher inflation is another concern among some economists. 

Higher levels of debt through cutting taxes or government spending could put
more money in consumers’ pockets, prompting them to spend more. This could cause
the inflation rates to swell, according to Andolfatto.



“Generally, economists think that when households feel wealthier, they're likely
to spend more,” he said. And that spending could drive up prices as demand for
goods soars.

However, some economists say it's not clear that the national debt is triggering
inflation or higher interest rates.

“So far, neither of those things have proven to be related to the level of
government spending that we've had over long periods of time that have led to
that accumulation of debt load," House said. "But that could change."

While the future remains uncertain, House added that hitting a record $34
trillion in debt “does not mean the sky is falling.”

“With any of these deficits and debt numbers, they have to be put in context,
given the size of the U.S. economy,” House told USA TODAY. “And the U.S. is
continuing to be amongst the growth leaders of the industrialized world.”



To default or not to default:What debt ceiling deal means for the economy and
your wallet


WHAT’S NEXT?

Americans could start to see the ramifications of the national debt as lawmakers
take steps to address it by raising taxes, cutting spending, or a combination of
both.

“We're going to have to make some hard choices about what we want to spend money
on, and what we're willing to pay for, and how we want to raise that money,”
Stevenson said. 

The record debt “is not a time to be alarmed, but it's a time to pause and say:
There is this disconnect between what we'd like our governments to provide – the
goods and services and the safety net, and support in retirement – and what
we've currently set up as a system for raising revenue. And we need to solve
that problem," she said.







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