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Blog Post | March 10, 2023

Wait, So Do We Need To Worry About The Debt?

Ethics in GovernmentHack WatchLarry SummersTreasury Department
Wait, So Do We Need To Worry About The Debt?

The national debt is perhaps the number one topic that invites hackish economic analysis from well-paid pundits and “experts.” Bad actors have used this topic to trick Americans into believing myths and lies, and leaders of both major parties who act against the people’s best interests will often cloak their cynical politicking in talk of the debt.

There’s no denying that government debt is a highly technical topic, and it can be counter-intuitive if you don’t follow macroeconomic debate very closely (and why would you, you’re a busy person!) 

It’s also a topic which necessarily invites a much deeper, underlying question: On what should the federal government spend money? Plenty of excellent writers and economists have debunked the worst talking points from bad actors in the so-called “debt debate,” but can be hesitant to address some of the attendant questions head-on, since that might require committing to certain perspectives on legitimately complex questions. That’s a fair decision on their part, but it can leave open the door for those bad actors to again reassert their myths to fill in the blanks.

We want to try to address the most common questions and anxieties which average people have about the national debt. Doing that requires both explaining uncontested facts and offering some of our own opinions. The opinionated parts of the following are only the Revolving Door Project’s subjective views, and plenty of people we respect may disagree with some or all of those views. 

With that said, let’s start with the big one…

Do we need to worry about the state of the national debt?

In our personal opinion: Eh, not really. The debt in and of itself is not a major problem.

Why not?

There’s no pressing need for the U.S. to balance its budget, but there are a bunch of very pressing needs that require greater government spending. Fighting the climate crisis, providing better healthcare, building new infrastructure, and offering universal social benefits like leisure time, social insurance, and retirement funds…all of these things cost money, and the government should borrow money as needed to accomplish those tasks.

Can’t we raise that money through higher taxes?

In theory, yes. The US should have higher taxes on the ultra-rich both to raise revenue and to penalize antisocial behavior like wealth-hoarding. But government borrowing isn’t a worse, secondary option to balancing the budget, including through taxes. It’s perfectly legitimate for a government to both tax and borrow money, and in an economic crisis, borrowing might actually be better. The US’ long-term low taxes and high borrowing are certainly interrelated facts (we borrow because there’s a shortfall in tax revenue), but the flaws in our tax code do not inherently mean that government borrowing is wrong.

What about fiscal responsibility?

Who says balancing the budget is “fiscally responsible?” Whether a federal budget is “responsible” or not depends on your priorities. Whether that’s healthcare, military spending, infrastructure, environmental protection, or anything else. No one can determine that a federal budget is “responsible” in a vacuum. It always requires a value judgment.

You know what I mean. Wouldn’t it technically be better if we had a balanced budget?

Well, there are few intrinsic benefits to an unbalanced budget, although even Alexander Hamilton said there were benefits to at least some government debt. But in a country like the United States, there are also no major drawbacks to government debt. Plus, the sacrifices needed to balance the budget, such as reduced social spending and higher taxes across the board, are tradeoffs themselves. For example, if the economy is running too cool — people aren’t employed, can’t afford to spend much money, and so on — then raising taxes and cutting spending are going to make life worse for most citizens. There’s no one “correct” way to write a government budget; it all depends on your priorities. If borrowing is the most immediately expedient way to meet those priorities, there’s no inherent reason the federal government shouldn’t borrow.

What do you mean “in a country like the United States?”

The U.S. government — unlike a household, business, or other less powerful governments — prints the currency that it borrows in. That significantly increases the government’s borrowing capacity, though economists argue about how much. In addition, most global financial transactions are done in American dollars or through American institutions. And the US itself is a bedrock of the global trade and financial systems: American consumers buy a lot of the things that the rest of the world produces, and American companies employ a lot of people worldwide. All of this means that global investors have little reason to want to plunge the United States into a massive economic crisis, since it would dramatically worsen their own countries and portfolios in the process. 

Now, if the millions of investors in U.S. government debt all individually decided it was in their short-term interest to dump their investments, you could still have a cascading effect that would destabilize our borrowing capacity. But there’s no reason to think that’s likely at all in the foreseeable future, and even then, the government would have plenty of options to handle its short-term debts, as we’ll discuss later in this FAQ.

If we just keep borrowing money, won’t people eventually stop lending to us, because they assume the government is never going to pay them back?

That’s the theory of how government spending could trigger an economic crisis, and it has happened to other nations in the past. But over many decades of the U.S. running deficits, investors have always considered U.S. Treasury bonds (the things investors purchase to lend the government money) to be the single least risky investment choice in all of international finance. They still do! That doesn’t mean that investors couldn’t eventually change their minds, but every time that spending scolds have warned that a crisis is right around the corner, the crisis hasn’t materialized, and Treasuries have remained stable, desirable assets. There’s a good reason for this confidence. The United States has always paid its debt, which has resulted in a constant AAA credit rating (kind of like the institutional version of a personal credit score in the 720+ range.) 

Plus, some of our peer nations have much higher debt-to-GDP ratios and things have turned out fine for them. Japan, for instance, has had a debt above 250 percent of its GDP for many years. Our debt-to-GDP ratio is only slightly above 100 percent. Not only has Japan’s economy not collapsed, it actually enjoys lower interest rates than the US government does on that debt. Plus, that government spending has helped promote a higher standard of living. Particularly since Japan has a larger elderly and retired community than the United States, they should be an example that government spending to provide for the aged isn’t going to bankrupt anyone.

Wait, but if people ever did stop buying Treasuries and Congress refused to raise taxes, wouldn’t we be screwed?

Well, if no one was willing to invest in Treasuries at their current low interest rate, the Treasury Department would presumably just raise the interest rates to make them more attractive to investors. And the government could also print more money to help pay those higher rates, or to pay down the debt — much better to deal with a potential bout of inflation than total economic collapse.

Well, what if people just really, really don’t want to buy Treasuries at any interest rate?

Even then, in a real crisis, there are other things the government could do to raise money fast. The executive branch could sell other valuable assets it controls — think of it like selling spare junk at a yard sale to raise cash in an emergency. The federal government owns so much stuff that it would take a nearly unimaginable level of debt for it to actually owe more than its total assets are worth. In a real catastrophe, the government can lease many thousands of square miles of federal land to businesses; sell off vehicles, buildings, or equipment; or take other, more creative paths. For instance, the government could, as a hypothetical, offer a patent monopoly on some highly valuable medical research at an incredibly high price, then use the proceeds to pay down its debt. That would create problems for patients who need drugs produced through that research, but it would prevent a national (and global) economic crisis. As always, economics is about tradeoffs. Again, though, we don’t need to do any of this, and may never need to. The debt itself isn’t causing a crisis for anyone right now.

Do deficits lead to inflation?

No. Econ 101 tells us that inflation happens when there’s too much money chasing too few goods. But if the government is borrowing money from the public, then the money it spends is coming from its lenders. There hasn’t been a change in the total amount of money relative to the total amount of goods, in other words. Nobody is creating new money and adding it into the system — it’s just getting transferred from lenders, to the government, to the things the government spends it on. Borrowing could only cause inflation if a huge majority of the government’s lenders were from foreign countries whose economies have almost no connection to the United States, which just isn’t how Treasury bond markets or the global US economy work.

Well, no matter where the government gets the money, doesn’t government spending lead to inflation?

It can, but not always. Econ 101 tells us that inflation happens when there’s too much money chasing too few goods. That means that there’s two sides to the equation: if something causes the overall money supply to rise, or if something else causes the overall goods supply to drop, you get price hikes. Dramatically increased government spending could increase the total amount of money in circulation, causing inflation. That doesn’t necessarily mean that the rate of inflation will permanently rise, nor that the government couldn’t pursue other policies to lower the inflation rate without sacrificing the new spending program. 

Moreover, government spending can actually prevent inflation in the long run. The government invests in things for the public’s future, right? So if we invest in new technologies that prevent possible sources of inflation down the road, we can dodge potential inflationary bullets. For example, Americans spend the most money of any developed economy on healthcare, so if we invest in public provision of healthcare, we won’t have to spend as much on that sector in the long run. Likewise for energy: oil and gas shortfalls in the late 1970s due to OPEC’s embargo, and in 2022 due to the war in Ukraine, caused major inflation spikes. So if we invest in a renewable energy grid, then America’s economy won’t be as dependent on oil, eliminating one of our main inflation-causing chokepoints.

Finally, it’s worth noting that a lot of the discourse before the Covid-19 pandemic was about how America ought to try to inflate its economy more, not less. Economist Larry Summers, who became one of the leading critics of inflation in 2021-2022, spent years writing about what he calls “secular stagnation,” which is essentially when there’s very little spending in the economy for a long period of time.

But if spending could cause inflation, why risk it?

For one, inflation is a good thing if the economy is in a recession. If the public doesn’t have any money to spend, the government can step in and spend a ton of money to jumpstart the economy again. Borrowing is ideal for this purpose, since it gives the government a ton of cash to spend quickly, and it doesn’t require taking people’s limited funds away during a recession, in the form of taxes. But even if the economy isn’t in a recession, borrowing can still be a good decision, especially to spend on one-time investments like infrastructure improvements. They’ll generate far more economic value over time than their borrowing costs. Again, whether the risk of inflation is worth it or not in any given instance depends on your values and preferences, and whether inflation is even likely or not after a new spending program can depend on economic conditions. Inflation is one potential trade-off among many in any given economic situation.

Okay, but isn’t the number of the federal debt still really big?

Oh, absolutely. But, the thing about national governments is that everything about them is massive, especially when it comes to the American government. The debt is in the trillions of dollars, but so are the revenues the government brings in every year. The U.S. federal government employs millions of people, more than any other single institution in the world. Even the smallest federal agencies have budgets in the hundreds of millions. Most have budgets in the billions, and they really do use all of that money. (In fact, they could use a lot more of it.) The sheer scale of the debt feels intimidating in a vacuum, but it exists in a realm of giants, where its size is pretty par for the course. This is why the actual size of the debt itself isn’t a very useful number. Contextualizing the debt by comparing it to other relevant data points — the Debt-to-GDP ratio, interest payments on the debt as a percentage of government spending, and so on — help our brains to move past the unimaginable scale of all macroeconomic data, and to start asking questions that are more insightful and useful.

Where can I find out more about an honest conversation about the budget?

Check out the Center for Economic and Policy Research, the Groundwork Collaborative, the Economic Policy Institute, the Modern Money Network, the Center on Budget and Policy Priorities, the Institute for New Economic Thinking, the Institute on Taxation and Economic Policy, the Institute for Policy Studies, and the People’s Policy Project. These organizations all have different opinions about the budget, but they all actually engage with the evidence, respect one another’s views, and practice rigorous economics — they won’t use big numbers to try to scare you into accepting a worse standard of living.

PHOTO CREDIT: “Day 4 – Paying off debt” by quaziefoto is licensed under CC BY 2.0.

Ethics in GovernmentHack WatchLarry SummersTreasury Department
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