Ideally, the federal government would spend as much money as it takes in, creating a balanced budget. Unfortunately, this is far from reality, as evidenced by the U.S. national debt breaking 30 trillion dollars on Feb. 1, 2022.
Debt is meant to be paid back. Yet, the government is continuously growing the debt. So what consequences will this have?
Since the 1930s, the federal government has pursued Keynesian economics, racking up deficits to fund social programs. Yet, Keynesian economics is imperfect. Congress annually undergoes the tortuous process of raising the debt ceiling to prevent a default on the debt.
Some propose a “trillion-dollar platinum coin,” a hypothetical coin minted by the U.S. Treasury that could pay off the national debt. This is based on the principle that money’s value is what we decide it is.
Recently, the national debt further ballooned. Bill Clinton was the last president to pay down the national debt. When he left office, the national debt was $5.7 trillion. Two wars and a recession later, Barack Obama inherited $10.6 trillion in debt from his predecessor, George W. Bush. When Trump arrived in Washington, D.C., the national debt was roughly $19.9 trillion, and it stood at $27.7 trillion when Joe Biden was sworn in.
Now we are at $30 trillion. Inconceivable!
What caused this? David Mitchell is the director of government and external relations at the Washington Center for Equitable Growth. They are a nonprofit research institution tasked with determining what policies would lead to “strong, stable and broad-based economic growth.” Mitchell says Trump’s tax cuts and Job Act was responsible for “adding nearly $2 trillion to the debt,” in a statement provided to the Florida Political Review.
Mitchell stressed the bill’s larger flaw: “It’s wasteful and regressive use of the money.” The bill was unnecessary and “with all the pressing problems facing the country, prioritizing giving tax cuts to multinational corporations and the well-off was a huge mistake.” These “pressing problems” starkly revealed themselves “when the pandemic hit, revealing underlying economic fragility and under-funded public health, education and labor enforcement systems.”
The pandemic-induced emergency encouraged the federal government to pass the largest spending bills ever. However, there is a consensus that overspending occurred as states face record surpluses. Florida passed the largest budget ever with this extra money.
In a statement to the Florida Political Review, David Wessel weighed in.
“With the benefit of hindsight, the federal government overdid in 2020 and 2021, contributing (though not exclusively) to the current inflation problem,” Wessel said.
Wessel is a respected two-time Pulitzer Prize winner. He is currently director of the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution.
Even without these bills, the national debt would rise, since most spending is mandatory.
As more baby boomers age, many fear entitlements will fall into crisis if the U.S. runs out of money.
Florida is especially vulnerable. Its senior population is proportionally the largest of any state. Many are dependent on Medicare, veterans benefits and/or Social Security checks. Frighteningly, by 2035 — around the time when Social Security is forecasted to run out — seniors are projected to make up over one in four Floridians.
Luckily, that crisis is imaginary.
“The $30 trillion number is not meaningful; it includes the money one arm of the federal government owes to another arm (the Social Security trust fund),” says Wessel.
In the long term, Wessel says “It’s best to use the ratio of the debt to GDP.” The higher the ratio, the worse the situation. Our debt-to-GDP ratio decreased from almost 136% in 2020 to roughly 123% today. In the short term, “It’s better to use the debt held by the public.”
The state of Florida holds no debt. The state legislature must pass a balanced budget every year. Thanks to the American Rescue Plan, Florida’s rainy day fund grew, insulating the state from future economic downturns. Only a federal bailout of a debt-ridden Florida could impact the national debt. With a balanced budget, this shall not occur.
Some are concerned about foreign-owned U.S. debt. However, the U.S. Treasury’s bonds prop up the dollar-centered world economy. A downgrade in the U.S. credit rating from AAA (outstanding) to AA+ (excellent) in 2011 caused the “Black Monday” market plunge. It would be suicide for foreign countries to call in their debt.
Mitchell said, “The inflation we’re seeing is largely a function of supply chain breakdown,” and this inflation also has an important role to play. To counter inflation, government spending is needed; combined with low-interest rates and the money multiplier effect, this lowers the real amount of debt by decreasing its value and, by extension, the debt-to-GDP ratio. In the past year, inflation cut the debt by roughly 10%.
So, as Wessel says, “Inflation will reduce the deficit (which is the annual addition to the debt) only if interest rates don’t rise along with the increase in inflation.” This is done in tandem with official Treasury Department action. Wessel said, “Short-term debt is rolled over frequently and with more sustained inflation, short-term rates rise and the Treasury issues inflation-indexed debt as well.”
Debt ensures a brighter American future. Though some call for a balanced budget, Mitchell says that would “be penny-wise but would be pound-foolish.”
Wessel agreed. “To the extent that federal spending is an investment that will pay off [in] the future, … borrowing to pay for it today is OK.”
At the end of the day, the national debt is not a major issue. We should consider it when formulating policy but ultimately we shall continue to reap its benefits as long as we are responsible.
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Featured image: A pile of one dollar bills. Photo by Charles Horowitz.