Economists in the past have said over and over that we shouldn’t worry about the national debt because we owe it ourselves. Economists like Stephanie Kelton claimed that the government could print as much money as it wants to fulfill its operations without any repercussions on the economy since money is a creature of the state; therefore; neutral.
These claims have attempted to royally ignore economic reality, and today, economic reality is catching up whether we like it or not. And the U.S. consumer is the one to pay the price of this ignorance as the outcome of a debt crisis is looming. The economic reality is that having a debt national debt is problematic to the macroeconomy for a bunch of reasons.
First, the US national debt is currently over $33 trillion, with a debt-to-GDP ratio (debt as a percentage of Gross Domestic Product) exceeding 120%. This ratio has been steadily increasing over the past decades and is projected to continue rising under current policies. It is expected to surpass 150% of GDP within the next 30 years. This rapid growth raises concerns about the future burden of servicing the debt, potentially crowding out spending for critical areas like infrastructure and education.
Second, as the debt burden grows, so does the cost of servicing it. Interest payments on the debt are already a significant expense for the federal government and are projected to take up an even larger share of the budget in the future.
Third, future economic slowdowns, crises, or geopolitical risks could exacerbate the debt problem. This is because a high debt burden makes the economy more vulnerable to economic shocks and crises. In severe circumstances, a financial crisis could trigger a domino effect, where rising interest rates make it harder to service the debt, leading to further instability.
The national debt creates a bunch of issues for the growth of the economy, which is currently catching up with us. the national debt has been spurring the crowd-out effect on the economy, which diverts productive investments. When the government borrows to finance its spending, it competes with private businesses and individuals for the same pool of savings and investment funds. This competition can drive up interest rates, making it more expensive for businesses to borrow and invest in productive activities.
As interest payments on the national debt consume a larger portion of the federal budget, less money is available for other priorities, including public investments in infrastructure, education, research, and development. These areas are crucial for long-term economic growth and productivity.
Government borrowing distorts the allocation of capital away from sectors with higher potential returns and towards those that primarily benefit from government contracts or subsidies. This leads to inefficient use of resources and hinders overall economic productivity.
The national debt has increased the cost of living. Today the cost of goods and services has increased while their inherent or intrinsic value has not. This has been making life unaffordable. And the worst part is that the national debt is making life unaffordable for future generations. Thus, economists who have been saying that we should not be worried about the national debt are partially responsible for the financial turmoil that most consumers are facing. For example, higher education now costs a fortune because of student loans, which are part of the national debt. The cost of housing has also increased significantly because of the rising demand for mortgages.
So what can the United States do to avoid defaulting on its national debt? The most obvious and immediate take would be to reduce its budget deficit. This involves decreasing government spending through program cuts and reducing government’s size. Programs like Social Security and Medicare are major drivers of future debt. Solutions might involve raising the retirement age, adjusting benefit formulas, or finding sustainable alternative funding sources.