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Why the $22 trillion national debt doesn’t matter – here’s what you should worry about instead


Why the $22 trillion national debt doesn't matter – here's what you should worry about instead

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Does a few more trillion make a difference? AP Photo/Manuel Balce Ceneta

Courtesy of William D. Lastrapes, University of Georgia

The U.S. federal government’s debt load hit another milestone this month: It’s now a record US$22 trillion in nominal terms.

That’s $67,000 for every man, woman and child living in the U.S., and it’s up $2 trillion since President Donald Trump took office in 2017. For comparison, U.S. debt is more than the total size of the United States’ $20 trillion economy and equivalent to the gross domestic products of China, Japan and Germany combined.

This hefty sum is a reflection of the large annual budget deficits that the federal government has run, pretty much continuously, since 1931. Prior to that, surpluses were much more common, apart from the years following the Civil War.

With another round of anxiety-causing debt-ceiling debates likely to return in the coming months, like other economists, I believe it is worth asking whether we should even care about the size of government debt.

Default isn’t imminent

First of all, it’s important to note current U.S. debt levels do not indicate any risk of imminent default.

As long as the U.S. federal government remains an “ongoing concern” – fiscal institutions are strong and effective, taxing authority is maintained and the long-run productive capacity of the nation’s economy is secure – there is no economic reason to fear default on the nation’s debt. Political reasons, such as debt-ceiling mischief, are another matter.

To remain solvent and ultimately pay what it owes, the U.S. Treasury – which sells notes and bonds to investors to raise money to finance the budget deficit – needs only to balance its books over the long run, rather than over an arbitrary unit of time like a year.

Historically low interest rates on government debt suggest that bond market participants agree with this view and are not afraid of a sovereign debt default in the U.S. Indeed, with these low rates, sufficient economic growth can allow the government to borrow indefinitely.

Why it’s irrelevant

Although $22 trillion is a large number, it is essentially irrelevant to proper thinking about the economic role of the U.S. government or about responsible fiscal policy.

Government debt simply reflects the timing of taxes. Higher spending levels today require more borrowing – and a larger debt – as long as the taxes needed to pay for those expenditures are pushed into the future.

But regardless of when taxes are collected, what ultimately matters is the quantity of the economy’s scarce resources the federal government commands and controls, and how those resources are used, which essentially depend on the level and composition of government spending. To paraphrase Milton Friedman, spending is taxing.

In short, government debt can be a bad indicator of the stance of fiscal policy or its burden on the private sector. The government can be wildly intrusive in the economy and thus a hindrance to growth and welfare even if its debt is low. For example, Venezuela’s sovereign debt was only 23 percent of its GDP in 2017, yet its economy has been in turmoil for several years.

Or it can effectively manage spending to promote welfare even if its debt is high. In 1945, the U.S. debt-to-GDP ratio was 120 percent in 1945, immediately after the government mobilized the economy to win World War II.

High debt should not prevent the government from spending on worthwhile public endeavors. And low debt does not prove that the level or composition of government spending is appropriate.

Medicare makes up about a third of government liabilities considered ‘off balance sheet.’ AP Photo/Pablo Martinez Monsivais

The real burden to worry about

Yet, the $22 trillion “on-balance-sheet” debt is likely to woefully underestimate the federal government’s true liabilities and its potential demand on the economy’s resources.

The national debt is the government’s formal commitment to repay its creditors. But Uncle Sam has many other commitments for future spending that are not on the books, so-called “off-balance-sheet” liabilities. Such liabilities do not show up in standard debt measures.

While these commitments are different in nature from the promise to pay back previously borrowed funds, they are nonetheless a potentially large burden on taxpayers – and surely a governmental imposition on the economy.

These commitments arise from implicit and explicit federal loan guarantees that support housing and education policy, from deposit insurance and Federal Reserve actions that attempt to promote a stable financial system and from commitments to the elderly and poor through Social Security, pension guarantees and Medicare and Medicaid.

Economist Jim Hamilton has recently estimated that such off-balance-sheet liabilities could exceed $70 trillion, more than three times the the current value of outstanding Treasury securities. The biggest share of that, or about a third, is Medicare.

So OK, worry about the debt, but pick the right measure to worry about.

Buying Treasury bonds to finance government debt spending once was considered an act of patriotism. AP Photo/Charles Kenneth Lucas

How to get a good night’s sleep

But if excessive government debt burdens on future generations keep you up at night, there’s a simple solution: buy Treasury securities with the money saved from low current taxes and bequeath those securities to your kids.

They can use the principal and interest to pay off high future taxes, with no ultimate effect on their net wealth or well-being.

In other words, taxpayers can use capital markets to offset transfers of their wealth – via taxes – to bondholders by becoming bondholders themselves. In aggregate, as long as private saving rises with government borrowing – and it is plausible to assume that it will if people feel the need to save to pay higher future taxes – the latter need not crowd out borrowing for productive activity by the private sector.

And then worrying about the federal debt won’t keep you from a good night’s sleep.

This is an updated version of an article originally published on March 19, 2015.The Conversation

William D. Lastrapes, Professor of Economics, University of Georgia

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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  1. Is this a joke?

  2. Another economist who ignores the negative impacts of indiscriminate increases in the money supplies while emphasizing the positives.

    First the positives:

    Assets increase in dollar denominated value because the dollar’s value shrinks due to dilution.

    With increasing numerical asset values banks can inject more debt into the system stimulating debt/growth.

    These debts are injected into the economy and heaped up top of the existing generation and in front of the next generation.

    These debts multiply the amount of money in circulation as they enter the economy by the nature of the banks’ balance sheet.


    Now the negative:

    Inflation is stimulated as an antidote to a cash flow/liquidity problems and turned loose on those that are the victims not the perpetrators of previous misdeeds.

    The existing monetary structure is stabilized to reward the miscreants who create the problems in the first place. (Moral hazard)

    The elderly, or those with a long enough perspective and those on fixed incomes watch helplessly as interest rates and their fixed incomes were mercilessly driven down by unceasing injections of monetary stimulus until long term rates became the short term rates that the monetary injections caused.  And, once again debt and debtors are rewarded at the expense of thrift and savings.  Fortunately, stress is a wonderful way to quietly kill people off prematurely, so most of those elderly people will be gone and won’t complain about what the negative implication of monetary policy does to them.

    Belief in thrift is again destroyed and with no good options, but debt funded consumption, it becomes the masses only logical option which perversely rewards those that created the problem/system/stresses to begin with. (Virtuous cycle or Moral hazard?)

    The masses sense of monetary values is disrupted and or destroyed as value in whatever savings they have accumulated or monetary goals are vaporized in a cloud of printed money.

    The fruit that once cost.25c/lb. mysteriously becomes .62c/lb. fruit.  Houses that once cost $750,000 start selling for $2.5 million.  Salaries for those in fields that can access all that printed money shoot to the moon while people left behind and out in the cold end up . . . . Out in the cold.   

    Debt is all good; until it isn’t

    Debt for productive purposes is fundamentally different than debt for consumptive purposes: Except to those selling debt.

    The practice of indentured servitude had by practice and end point where the servitude was ultimately eliminated.  When there is no endpoint, the practice is known as slavery.  I wonder how most people would respond to the term debt slave if they realize who is actually structuring the bondage.

    Social order may come to be questioned.  Dissent and populism are words that have become all too familiar.

    What will happen if it ever becomes plain to ordinary people that massive personal debts for consumptive purposes is a relatively new phenomenon that can be directly linked to monetary policies that are not of their making.

    What I am afraid of is not the unfunded liabilities the author proposes.

    What I am afraid of is the future of a society built on a debt structure that needs to be constantly stimulated and dynamically stabilized just to remain intact and all built on a measure of value that is in constant decay.

    Non so

  3. Servicing the debt always becomes a taxpayer liability…so while I do not lose sleep at night I will pay for the excessive debt through higher taxes (somewhere). The reduction of the Corporate tax rate will also create the need to raise taxes on individuals…