top of page

The debt limit drama is a distraction

The implications of a ballooning national debt deserve more attention from the public. Even as Congress adjourns for its Memorial Day recess with no deal in hand, Americans should ignore the media’s fearmongering tactics and recognize the proceedings as little more than acts of political theater.

In reality, despite the continued impasse, the likelihood of a national default remains low. First, some perspective: the current crisis marks the eleventh instance of a fiscal standoff since 2010. In each of the past ten occasions, Congress successfully raised, suspended, or revised the debt limit before the deadline. Recent history supports the notion that despite significant ideological differences, Democrats and Republicans are incentivized to negotiate and agree to a deal. After all, both parties have demonstrated a shared affinity for substantial public spending, albeit for different policy reasons.

Raising the debt ceiling would go a long way towards restoring confidence in the nation’s creditworthiness and calming anxious markets in the process. However, doing so would also harm the economy in the long run by green-lighting the continued expansion of a nearly unsustainable national debt.

According to the Treasury, the national debt stands at a staggering $31.46 trillion. In just the first two quarters of fiscal year 2023 alone, the government borrowed $925 billion; for the full year, the country is on pace to borrow nearly $2 trillion to cover its total projected budget deficit. Unfortunately, this is part of a larger historical pattern: the United States has produced annual deficits for 21 years straight, with the last surplus having occurred in 2001. Accumulated deficits and accrued interest go straight into the national debt, leading to an inevitable debt ceiling fight seemingly every few years.

The consequences of this profligate spending deserve more attention since the current norm of bold administrative agendas, accompanied by equally formidable budgets fueled by new debt, is unlikely to fall out of favor anytime soon.

Because the national debt is so large, even small changes in interest rates can have an outsized effect on servicing costs. As a result of the Fed’s rate hikes, the federal government now spends a record amount on interest payments. This matters, as higher interest payments force the government to choose between lowering spending, raising taxes, or issuing new debt to meet its obligations. These options are all economically unproductive and hamper growth by diverting resources away from investment opportunities.

Perpetual budget deficits also exert inflationary pressure. Public spending does not lead to increased economic output immediately; returns on investment take time to manifest. Meanwhile, the injection of public dollars increases competition for existing goods and services, leading to higher prices.

It should be no surprise then that Americans now face a difficult macro environment characterized by stubborn inflation, high borrowing costs, and a deteriorating labor market. Until the government is held accountable for its lack of fiscal prudence, these conditions are likely to persist for the foreseeable future.


Arvostelun tähtimäärä: 0/5
Ei vielä arvioita

Lisää arvio

Subscribe to The Lake Street Review!

Join our email list and get access to specials deals exclusive to our subscribers.

Thanks for submitting!

bottom of page