Legislation enacted in response to the pandemic has been critical to combatting this crisis, but has added trillions of dollars to the debt. In addition, the significant slowdown of the economy has reduced federal revenues, which has further increased deficits.
Addressing our fiscal challenges and putting our debt on a sustainable path would allow our government to better plan, prepare and create a more secure and inclusive economic future. High and rising federal debt matters because it reduces our flexibility to plan for and respond to urgent crises. Debt matters because growing interest costs make it harder for us to invest in our future — to build and sustain infrastructure, enhance education and support an economy that creates job growth and rising wages.
Debt matters because it threatens the safety net — critical programs like Social Security, Medicaid, Medicare, SNAP and Unemployment Compensation are essential lifelines for our most vulnerable populations.
Debt matters because America faces emerging and ongoing challenges that will require resources to keep our country safe and strong — challenges like climate change, affordable health care, international conflicts and an increasingly complex and competitive global economy.
Debt matters because we care about our children and grandchildren. Borrowing more and more today reduces the opportunities and prosperity of the next generation. Preparedness includes determining national priorities — and finding ways to pay for them. It means making smart investments that benefit our economy over time.
It means investing in our national security so that we can address new global threats, like cyber attacks. It means having stockpiles of essential supplies, so we are prepared for the unexpected. Bush, slowly at first, and then sharply. As the financial crisis hit with the worst recession since the Great Depression, government revenues plummeted and stimulus spending surged to stabilize the economy from total ruin.
This economic catastrophe, combined with an enormous reduction in revenue from the Bush tax cuts and the continued expenses of the Afghanistan and Iraq Wars, caused the debt to balloon. Under the two terms of the Obama administration, federal debt held by the public rose from While Trump further slashed federal revenue with his Tax Cuts and Jobs Act , the national debt didn't expand sharply as the economy had largely recovered from the financial crisis.
The virus forced widespread quarantines, shutdowns, enormous stimulus and relief expenditures, and drastically lowered government revenue. President Biden's term began at that level and since then dropped to Political disagreements about the impact of the national debt and methods of debt reduction have historically led to many gridlocks in Congress and delays in the proposal, approval, and appropriation of the budget.
Whenever the debt limit is maxed out by spending and interest obligations, the president must ask Congress to increase it. More recently, on Sept. From a public policy standpoint, the issuance of debt is typically accepted by the public, so long as the proceeds are used to stimulate the growth of the economy in a manner that will lead to the country's long-term prosperity.
However, when debt is raised simply to fund public consumption, the use of debt loses a significant amount of support. When debt is used to fund economic expansion , current and future generations stand to reap the rewards. However, debt used to fuel consumption only presents advantages to the current generation. Because debt plays such an integral part in economic progress, it must be measured appropriately to convey the long-term impact it presents.
Unfortunately, evaluating the country's national debt in relation to the country's gross domestic product GDP , though common, is not the best approach, for several reasons. For one thing, GDP is very difficult to measure accurately.
It's also too complex. Finally, the national debt is not paid back with GDP, but with tax revenues although there is a correlation between the two.
Comparing the national debt level to GDP is akin to a person comparing the amount of their personal debt in relation to the value of the goods or services that they produce for their employer in a given year. Using an approach that focuses on the national debt on a per capita basis gives a much better sense of where the country's debt level stands. Another approach that is easier to interpret is simply to compare the interest expense paid on the national debt outstanding in relation to the expenditures that are made for specific governmental services, such as education, defense, and transportation.
Economists and policy analysts disagree about the consequences of carrying federal debt. Certain aspects are agreed upon, however. Governments that run fiscal deficits have to make up the difference by borrowing money, which can crowd out capital investment in private markets. Debt securities issued by governments to service their debts have an effect on interest rates.
This is one of the key relationships that is manipulated through the Federal Reserve's monetary policy tools. Proponents of the Modern Monetary Theory MMT believe that not only is a long-term budget deficit sustainable, but it is also preferable to a government surplus; however, this view is not held by the majority of economists.
Keynesian macroeconomists believe it can be beneficial to run a current account deficit in order to boost aggregate demand in the economy. Most neo-Keynesians support fiscal policy tools like government deficit spending only after the monetary policy has proven ineffective and nominal interest rates have hit zero. Chicago and Austrian school economists argue that government deficits and debt hurt private investment, manipulate interest rates and the capital structure, suppress exports, and unfairly harm future generations either through higher taxes or inflation.
As indicated above, debt is the net accumulation of budget deficits. It is important to look at the top expenses, as they constitute the major factors of the national debt. The top expenses in the U. This represents the portion of the national budget that is allocated for military-related expenditures. Defense Budget in Transportation, veterans' benefits, international affairs , and public education are also government expenses.
Interestingly, the common public belief is that spending on international affairs consumes a lot of resources and expenses, but in truth, such expenditures lie within the lower rung in the list.
History tells us that the Social Security program, defense, and Medicare have been the primary expenses even when the national deficit levels are low, as they last were in the s. How did the situation worsen from then to where we are now?
There are various opinions. Overall, limited incoming and more outgoing cash flows are making Social Security a big component of the national debt. In part, this is due to the following:.
The disproportionate amount the U. Tax cuts introduced by multiple presidential administrations have continued to grow the national debt:. Primarily within the defense budget, continued involvement in these engagements cost the U. Given that the national debt has grown faster than the size of the American population, it is fair to wonder how this growing debt affects average individuals. While it may not be obvious, national debt levels may directly impact people in at least four direct ways.
As the national debt per capita increases, the likelihood of the government defaulting on its debt service obligation increases.
The situation means that the Treasury Department will have to raise the yield on newly issued Treasury securities in order to attract new investors. This reduces the amount of tax revenue available to spend on other governmental services because more tax revenue will have to be paid out as interest on the national debt.
Over time, this shift in expenditures will cause people to experience a lower standard of living , as borrowing for economic enhancement projects becomes more difficult. As the rate offered on Treasury securities increases, corporate operations in America will be viewed as riskier, also necessitating an increase in the yield on newly issued bonds.
This, in turn, will require corporations to raise the price of their products and services in order to meet the increased cost of their debt service obligation. Over time, this will cause people to pay more for goods and services, resulting in inflation.
As the yield offered on Treasury securities increases, the cost of borrowing money to purchase a home will also increase because the cost of money in the mortgage lending market is directly tied to the short-term interest rates set by the Federal Reserve and the yield offered on Treasury securities issued by the Treasury Department. Given this established interrelationship, an increase in interest rates will push home prices down because prospective homebuyers will no longer qualify for as large a mortgage loan.
The result will be more downward pressure on the value of homes, which in turn will reduce the net worth of all homeowners. Since the yield on U. Treasury securities is currently considered a risk-free rate of return and as the yield on these securities increases, investments such as corporate debt and equities, which carry some risk, will lose appeal.
America could too. In my opinion, having a debt ceiling is dysfunctional. It makes it harder for the Treasury to pay bills when they come due.
The best solution would be to just scrap the ceiling altogether. In cross-country travel was by rail, requiring days to get to Washington. This made some sense then.
Today, when Congress can vote online from home, not at all. This is an updated version of an article originally published on July 18, Festival of Social Science — Aberdeen, Aberdeenshire.
Edition: Available editions United Kingdom. Become an author Sign up as a reader Sign in. Steven Pressman , Monmouth University. Shortly after the Senate passed the bill, Mr McConnell wrote a letter to President Biden promising to "not provide such assistance again if your all-Democrat government drifts into another avoidable crisis". Separately, lawmakers also kicked the can down the road last week when they passed a separate short-term bill to keep the government funded until December - so there may be a new round of headaches with the holidays right around the corner.
Congress narrowly averts US government shutdown. What is a government shutdown? Image source, Getty Images. US lawmakers are running out the clock in a standoff over how much money the government can borrow. What is the debt ceiling? President Barack Obama negotiated intensely with Republicans to end a standoff over the debt ceiling in What would have happened without a raise?
What are Democrats saying? Treasury Secretary Janet Yellen, seen here with the top Democrats in Congress, has warned of a "historic financial crisis" if the US defaults on its debts.
What are Republicans saying? How might this get resolved? Related Topics.
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