How Our National Debt Jeopardizes Families’ Futures

Contrary to what some on the right might believe, there are times when being in a red state is neither conservative nor positive. A recent Wall Street Journal column, titled “America Is in a Red State,” explains why. 

By the end of the last quarter, the federal debt topped 100 percent of GDP. And this rising debt, fueled by persistent deficits, will harm the country’s economic prospects for generations in ways that today’s politicians seem not to care much about.

Milestone Debt Growth

An article in the Journal noted, “As of March 31, the country’s publicly held debt was $31.265 trillion, while GDP over the preceding year was $31.216 trillion.” It isn’t the first time federal debt exceeded the size of the nation’s economy; our debt set a record (at least for now) of 106 percent of GDP in 1946, just after World War II. Federal debt also exceeded GDP for a short time in 2020 during the coronavirus panic, as the economy shrank under widespread lockdowns and Washington engaged in a gusher of “stimulus” spending.

Publicly held federal debt exceeding 100 percent of GDP won’t automatically trigger a financial cataclysm. After all, total federal debt has exceeded GDP for some time now and stands at nearly $39 trillion. (The roughly $7.7 trillion difference between the two represents intragovernmental holdings — the debt the federal government owes itself, most notably the Treasury bonds held in the Social Security and Medicare Trust Funds.)

But as I have written on many occasions previously, the federal government’s budgetary trajectory continues to worsen. It’s one thing to incur temporary debts to face off an existential threat and then immediately work to pay off said indebtedness, as the United States did during and after World War II. It’s quite another to run sizable deficits during relatively stable economic times and have neither a path to fiscal stability nor the political will to create such a path.

Real-Life Effects  

In the absence of a financial crisis like those the Greek government faced over a decade ago, many families might wonder why they should care about abstract concepts like federal deficits and debt. The Journal article lists some of the reasons why decades of fiscal profligacy will make current and future generations poorer.

For starters, interest rates will rise. The growing debt burden requires the Treasury to issue more notes and bonds; getting the market to soak up that demand will lead to higher interest rates. As it is, the past several years have seen mortgage rates rise as the Federal Reserve (finally) stopped its money-printing policies. 

As federal debt increases, this trend of higher interest rates will only continue. It likely will crimp housing affordability, keep people locked in their homes, and prevent younger generations from getting on the ladder to build wealth via real estate.

Higher interest rates will also make it more difficult for businesses, particularly smaller businesses, to attract capital to grow. After all, if investors can receive a high rate of “guaranteed” return by putting their money in the glut of bonds the Treasury will have to sell, then why should they take a risk by funding business loans or buying stock?

Recurrence of Inflation?

At its worst, rising federal debt would encourage the Federal Reserve to keep interest rates arbitrarily low, to keep the federal government’s cost of borrowing more manageable. As appealing as this strategy might sound — President Trump has already suggested it — it would only make matters worse.

At its most extreme, the Fed could attempt to print money to drive down the absolute value of federal obligations — that is, monetizing the debt. But doing so could trigger a bout of inflation that may make pandemic-era “Bidenflation” look tame. Even at their mildest, loose interest rate policies to ease Washington’s debt burden would impose a tax on thrift by devaluing the efforts of those who had worked hard over their lives to accumulate savings.

Political Time Horizons

Our federal debt problem in many ways stems from flawed political incentives. Lawmakers focused on their reelection in a few months or years care little about whether the United States faces economic stagnation decades from now.

The obvious solution lies in that time-honored self-help tool: the mirror. Americans need to understand the stakes and reward politicians who make tough choices now, even if it results in short-term painful consequences on the spending and taxation fronts. Otherwise, H.L. Mencken’s aphorism — “democracy is the theory that the common people know what they want, and deserve to get it good and hard” — will bite Americans for decades to come.

---