Podcast Summary
U.S. National Debt: The U.S. national debt, approaching $35 trillion, has surpassed defense spending and is second only to Social Security and Medicare. Neither Trump nor Biden have made significant comments on the issue during the election.
The U.S. national debt, currently approaching $35 trillion, is a significant concern for the country's future. The federal government has run a deficit every year since 2001, leading to interest payments that now surpass defense spending and are second only to Social Security and Medicare. This trend is reviving longstanding worries on Wall Street about potential economic consequences. Despite this, neither former President Trump nor President Biden have made significant comments on the issue during the ongoing presidential race. A listener, Kevin Dowling, asked about the implications of this debt for the country and the election. To help answer these questions, we've invited Jerry Saib, former executive Washington editor at The Wall Street Journal. Stay tuned as we delve deeper into the good, the bad, and the ugly of the U.S. national debt.
National Debt Impact: The national debt impacts the economy negatively by crowding out investments and pushing up interest rates, potentially hindering economic growth and development
The deficit is the annual gap between the federal government's spending and revenues, leading to the accumulation of debt. The Treasury finances this deficit by issuing bonds and bills, with the Federal Reserve potentially buying some of these bonds and printing money. However, from a broader perspective, the national debt is a concern due to its size and impact on the economy. It crowds out other investments that could contribute more usefully, as the government spends money on debt interest instead. Moreover, the debt pushes up interest rates for everyone, as the government's borrowing demands increase the overall supply of bonds in the market. This can negatively affect both consumers and businesses seeking loans. The historical context of the essay "Will Debt Sync the American Empire?" emphasizes that the size of the debt matters because it has the potential to hinder economic growth and development.
US National Debt Impact on Economic Growth: The US national debt, estimated to suppress growth by 12-13 percentage points over the next decade, could lead to higher interest rates, a weaker dollar, and a loss of faith in the US currency if not repaid, with about a third owned by foreign countries
The growing national debt in the United States is causing concern for economic growth. The financial marketplace is seeking money to finance its debt, leading to higher interest rates and suppressing economic expansion. The Congressional Budget Office estimates that the debt could suppress growth by 12-13 percentage points over the next decade. In the long run, if the US cannot repay its debt or make interest payments, there could be a crisis of confidence, leading to a weaker dollar and potential loss of faith in the US currency. About a third of US debt is owned by foreign countries, primarily China, Japan, and the United Kingdom. The larger part is held by US citizens, including individuals, mutual funds, banks, pension funds, and state and local governments. If the US fails to pay its debt to both foreign and domestic creditors, it could lead to serious consequences.
US debt and currency: While MMT allows the US to finance its deficit, potential negative consequences include weakening the currency, contributing to inflation, and increasing borrowing impact on interest rates and foreign debt holders' decisions.
While Modern Monetary Theory suggests the US government's ability to print money allows it to finance its deficit and debt without crisis, it also has potential negative consequences such as weakening the currency and contributing to inflation. Immediate concerns include the impact of increasing borrowing on interest rates and potential foreign debt holders' decisions to stop buying US debt, which could lead to a crisis. While this scenario is not likely due to the global economic repercussions, it's essential to keep an eye on these risks as the national debt continues to grow.
COVID-19 deficit spending: During the crisis, deficit spending was necessary to support the economy and healthcare system, but paying off the national debt is not currently a realistic goal
During the COVID-19 crisis, the political system agreed to increase spending and run larger deficits to support the economy and healthcare system. This deficit spending was justified as it helped the country get through the crisis and potentially saved thousands of lives. However, paying off the national debt is currently not a realistic goal due to its large accumulation, as seen during the surplus years in the late 1990s. This is a complex issue with ongoing debate, and more discussion on the topic can be found after the break. In a different context, dedication was described as creating an environment for others to learn and grow, as in the example of teaching children to ride a bike.
Political climate and federal debt: Bipartisan effort is needed to address the federal debt, but the current political climate lacks incentive for both parties to prioritize this issue, resulting in continued borrowing and growing debt
The current political climate does not seem conducive to addressing the growing federal debt. During a previous period of economic growth, there was bipartisan agreement to raise taxes and cut spending, but that combination of forces is not present now. The Republican Party wants to cut taxes further, while the Democratic Party under the Biden administration has ruled out raising taxes on individuals earning less than $400,000. With only modest growth and increasing borrowing, the federal government is not on track to accumulate budget surpluses or pay down the debt. The political incentive to address this issue is lacking, as neither party considers it a priority when defining their tax or spending plans. Historically, it has taken bipartisan effort to reduce the debt, but with the current direction of the political system adding trillions to the debt in recent years, it remains a long-term challenge.
National debt political will: The current political climate makes it difficult for bipartisan efforts to address the national debt, but signs of hope include the economic downturn slowing debt growth and growing concerns about the debt.
Despite the growing concern over the national debt, there is currently a lack of political will to address the issue in a meaningful way. This was different during the 1980s and 1990s when both Republicans and Democrats came together to reduce deficits and debt. However, the current political climate makes it difficult for bipartisan efforts to succeed. The only way to tackle the issue is if both parties agree to make unpopular decisions together. There are some signs of hope, however. The first is that the recent economic downturn caused by COVID-19 has led to a rapid increase in debt. Once the economy recovers, the debt growth rate may slow down. The second is that there are voices raising concerns about the debt. However, without bipartisan support, it is uncertain how effective these efforts will be. The current political environment makes it challenging to implement the tough decisions necessary to address the debt issue.
US debt interest payments: The US spends as much on debt interest as on defense, highlighting the urgency for policymakers to address the growing debt burden, while potential economic growth and a future political shift offer reasons for hope.
The United States is currently spending a significant amount on interest payments for its accumulated debt, which is equal to its defense spending. This alarming fact, as discussed with Jerry Seib, former executive Washington editor of The Wall Street Journal, may prompt action from policymakers if people become more aware of it. Another reason for hope is the potential for economic growth, which could sustain more government spending and reduce concerns about the country's economic path. Lastly, there is still time to address the issue before a crisis arises, and a new president and Congress in 2024 could provide an opportunity for meaningful change. In summary, the growing debt burden, coupled with the potential for economic growth and a future political shift, offers reasons for hope that the US can address its debt situation before it becomes a crisis.