Introduction
The United States is facing a severe religious crisis as the total amount owed by the federal government reached a new record last month when it hit $34 trillion on December 29, according to the Treasury Department. As Democrats and Republicans in Congress prepare for a budget standoff, leading economists are divided on whether this growing amount represents an urgent crisis or just a number.
National Debt and Debt Crisis
Among those who consider the national debt an urgent crisis are Dana M. Peterson, chief economist at the nonprofit research organization “The Conference Board,” and Lori Esposito Murray, chair of the Economic Development Committee at the board. Last September, when the national debt stood at $33.6 trillion, they claimed that the debt crisis had already occurred.
“This year’s congressional discussion around spending levels for 2024 contributed to a historic breakdown in governance in the U.S. Congress, a breakdown in the budgeting process, the threat of national default, the looming government shutdown, and the potential lowering of the U.S. credit rating,” they wrote. “American global leadership and national security are at risk.”
The main concern for Peterson and other economists regarding the national debt is the amount the government must pay in interest on the debt. By November, servicing the national debt consumed 16% of federal spending, the same amount that the government spends on defense. This proportion has increased since the Federal Reserve raised the benchmark interest rate to its highest level in 22 years to combat inflation.
The government essentially borrows money by issuing treasury securities, which are bought by investors and foreign governments as very low-risk assets. During the Federal Reserve’s rate-hiking campaign last year, the yields on 10-year treasury securities rose significantly, briefly surpassing 5% this fall, and still remain around 4%—more than double their pre-pandemic levels.
Others point to the same interest statistics as reassurance that government debt is not a cause for panic. As the national debt has increased, the total economic output of the United States, as measured by Gross Domestic Product (GDP), has also risen, enhancing the government’s ability to collect taxes and pay off what it owes in the future.
“The statistic or measure I look at most often to assess our financial trajectory is net interest as a percentage of GDP,” Treasury Secretary Janet Yellen said in an interview with CNBC in September. “And even with the rise we’ve seen in interest rates, this level remains quite reasonable at around 1%.”
Others consider the national debt more than just a short-term crisis; it is a long-term problem. Economists use another metric to analyze levels of government debt: the debt-to-GDP ratio, which measures national debt as a percentage of GDP. In the second quarter, this ratio reached 119%, although it would only be 95% if the debt owed by the treasury to the government through programs like Social Security and Medicare is not counted.
In October, economists at the Wharton School of Business at the University of Pennsylvania estimated that the national debt would become truly unsustainable if the latest ratio—also called debt owed to the public—reached 200% of GDP, which is expected to occur in about 20 years. After that, they estimated that no combination of tax increases or budget cuts could enable the government to pay off its debts.
If you are concerned on behalf of future generations, William D. Lastrapes, an economics professor at the University of Georgia, offered a simple solution in an article published in 2019 in The Conversation: Get a piece of the national debt for your children.
“Buy
“Treasury securities with the money saved from low current taxes are an inheritance of these securities for your children,” he wrote. “They can use the capital and interest to pay off future high taxes, without any final impact on their net worth or well-being.”
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