The U.S. national debt has amounted to $29 trillion by running annual deficits, with the last surplus being 20 years ago in 2001. Reacting to the Covid-19 pandemic that has gripped the globe, the U.S. government has accelerated the buildup of debt in an effort to keep households and firms afloat. Shortly after the pandemic outbreak (November 2019), the Trump administration issued an emergency stimulus package of $6 trillion to help families, businesses, and struggling industries like airlines and restaurants. Since then, President Biden has unveiled more plans to aid households and firms through the pandemic (e.g., The American Jobs Plan, the Build Back Better Act). As detailed in this essay, the national debt is a cause for concern for two main reasons: (1) it raises the probability of default and (2) has stark implications for US leadership and national security. Moreover, heavy government spending that has driven up the debt has also stoked inflation to historic highs, threatening to make inflation far more than a “transitory” phenomenon.
Why the national debt is a matter of concern
The massive amount of borrowing by the U.S. government has led to fierce debate over the threat of default. The credit of the U.S. has been built on centuries of commitments with no defaults to date. However, the $29 trillion in national debt has raised the threat of default higher than ever, with total public debt as a percentage of GDP standing at an astonishing 122.5% as of Q3 2021. It has been shown that nations with ratios of public debt above 90% had lower economic growth compared to nations with public debt below 90%. It has also been suggested that high debt to GDP, combined with “liberal labor market administration,” leads to reduced long-term employment growth and quality of labor – both of which could lead to further negative knock-on effects on the economy in the future. Furthermore, many observers have noted that a failure to raise the debt ceiling could force the U.S. to reduce expenditures in sectors like healthcare or other public programs. Some observers may also argue that if the U.S. could not pay its debts due to its inability to issue more bonds, the nation could default. However, the U.S.’s likelihood of defaulting on its debt is very low. While US default is theoretically possible, a tiny minority of individuals believe that the U.S. would default.
The national debt undermines the status of the U.S. as a global leader through the crowding out of investment. This effect happens when the government’s large debts raise interest rates and reduce the amount of funds available for private investment. Furthermore, this crowding out effect can impact spending on military, diplomatic, and humanitarian projects around the world, including climate change initiatives. Columbia University Economist Edmund S. Phelps has noted that “huge public debt will understandably cause the government to hesitate to take the actions on the climate that are so urgent by now.” Moreover, the crowding out effect reduces investment for crucial areas like infrastructure, education, and research, which can create a considerable drag on the economy. Overall, the level of interest rates caused by the government’s large debts can impact the nation’s industries and overall economy, all of which undermine the status of the U.S. as a global leader.
The large national debt also has negative implications for national security. Higher debt servicing costs could lead to cuts in spending for defense and other national security concerns, drive up interest rates, result in higher taxes and retard economic growth. Lowered defense spending would decrease U.S. influence in international affairs, undermine confidence among its allies, and reduce the ability of the U.S. to respond to national security crises. Additionally, the impact of the burgeoning national debt on U.S. economic standing could lead to a rise in the influence of rivals, particularly China. Moreover, especially due to rising geopolitical tensions resulting from ongoing war in Ukraine, national security could be seen as a rising priority around the globe.
Government spending and inflation
Massive government spending has driven up the national debt to record levels, leading to inflation that has not been seen since 1982. Over the past 12 months, the consumer price index has risen 7.5% which is much higher than the Fed’s set target of 2%. The Chairman of the Federal Reserve, Jerome Powell, has previously called this sharp rise in consumer prices as “transitory.” However, post his re-election as Chairman, Powell revised his view on inflation in early December, claiming that inflation is not “transitory” and that the rise in prices could leave a “permanent mark in the form of higher inflation.” If inflation keeps rising, the purchasing power of American families will suffer as nominal wage rates have lagged inflation as of January 2022, leading to real disposable income falling. This will also undermine consumer confidence, decrease consumer expenditure, and hinder economic growth.
Fears of the debt ceiling breach, which would stop the issuance of bonds by the United States, have also risen as changes in the debt ceiling level have steadily increased as spending has increased. If the debt ceiling were to be breached, the Treasury Department would have to start to decrease spending public programs until the ceiling is raised again. However, the likelihood of the United States Congress not raising the nominal limit of the debt ceiling is quite unlikely, as it is normally raised without debate. Even if Congress were to not raise the ceiling (like they did in 2011), they inevitably raised the debt ceiling after. Therefore, both the possibility and the ramifications of a breach in the debt ceiling may be overstated, as Congress is likely to raise the debt ceiling to accommodate the issuance of more debt.
In conclusion, the national debt should be seen as a matter of concern. Although a default by the U.S. is widely considered unlikely by many observers, the huge national debt and the ratio of debt-to-GDP mean that the path that policymakers take going forward is more important than ever. Increased concerns about inflation have recently led to Chairman Powell’s dropping of the term “transitory” when discussing inflation, and the government’s delay of the “Build Back Better Act” shows the government’s increased concern. With the global debt reaching a historic high of $226 trillion through large amounts of government borrowing, debt should not only be a concern in the U.S., but in other countries around the globe.