What national debt means to you

The level of national debt has always been an important controversial topic in US domestic policy. Given the massive fiscal stimulus that has been injected into the US economy in the past few years, it is not difficult to understand why many people have begun to pay close attention to this issue. Unfortunately, the way in which debt levels are communicated to the public is often very vague. Combine this issue with the fact that many people do not understand how the level of national debt affects their daily lives, and you have a core of the discussion.

Key points

  • The level of US national debt is a measure of how much the government owes creditors.
  • Since government expenditures almost always exceed revenues obtained through taxes and other revenues, the national debt continues to rise.
  • Most government bonds are issued in the form of government bonds, called government bonds.
  • Some people worry that excessively high levels of government debt will affect economic stability, thereby affecting the strength of the currency in terms of trade, economic growth, and unemployment.
  • Others say that national debt is controllable and people should stop worrying.

National debt and budget deficit

Before addressing how national debt affects people, it is important to understand the difference between the federal government’s annual budget deficit and national debt. To explain briefly, as long as the federal government spends more money than income-generating activities such as taxes, it will create a budget deficit. In order to operate in this way, the Ministry of Finance must issue treasury bills, treasury bills and treasury bonds to make up for the difference. By issuing these types of securities, the federal government can obtain the cash needed to provide government services.

The national debt is simply the net accumulation of the federal government’s annual budget deficit.

What national debt means to you

A brief history of U.S. debt

Since the founding of the economy, debt has been part of the country’s operations. However, during Ronald Reagan’s presidency, the level of national debt rose sharply, and subsequent presidents also continued this upward trend. It was only during the heyday of the economic market in the late 1990s that the debt level of the United States experienced a substantial decline.

From the perspective of public policy, as long as the proceeds from the issuance of bonds are used to stimulate economic growth, thereby promoting the country’s long-term prosperity, it will usually be accepted by the public. However, when debt is only used to fund public consumption, such as income from medical insurance, social security, and medical assistance, the use of debt will lose a lot of support. When debt is used to fund economic expansion, present and future generations will be rewarded. However, debt for fuel consumption will only benefit the current generation.

Assess national debt

Because debt plays an indispensable role in economic development, it must be properly measured to convey its long-term impact. Unfortunately, assessing the country’s national debt based on gross domestic product (GDP) is not the best method. Here are three reasons why debt should not be assessed in this way.

US$28.1 trillion

U.S. Treasury Bond Amount, As of April 8, 2021.

GDP growth and national debt

In theory, GDP represents the total market value of all final products and services produced by a country in a particular year. According to this definition, one must calculate the total expenditure incurred in the economy to estimate the country’s GDP. One method is to use the expenditure method to define GDP as the sum of all personal consumption of durable goods, non-durable goods and services; add total private investment, including fixed investment and inventory; add government consumption and total investment, including Expenditures for services such as education and transportation in the public sector minus transfer payments for services such as social security; plus net exports, that is, the country’s exports minus imports.

Given this broad definition, one should realize that the components that make up GDP are difficult to conceptualize in a way that facilitates a meaningful assessment of appropriate national debt levels. Therefore, the debt-to-GDP ratio may not fully indicate the degree of national debt risk.

Therefore, an easier to explain method is to simply compare the interest expenditure on outstanding national debt with the expenditure on certain government services such as education, defense, and transportation. When comparing debts in this way, citizens can determine the relative extent of the burden of debt on the national budget.

GDP is difficult to accurately measure

Although the Ministry of Finance can accurately measure national debt, economists have different views on how to actually measure GDP. The first problem in measuring GDP is that it ignores the production of services such as household cleaning and food preparation. As a country develops and becomes more modern, people tend to outsource traditional housework to third parties. In view of this change in lifestyle, comparing a country’s GDP today with its historical GDP is very flawed, because people’s lifestyles today naturally increase GDP by outsourcing personal services.

In addition, economists usually use GDP as an indicator to measure the level of debt among countries. However, this process is also flawed, because people in developed countries tend to outsource more housekeeping services than people in less developed countries. Therefore, historical or cross-border comparisons of any type of debt to GDP are completely misleading.

The second problem with GDP as a measurement tool is that it ignores the negative effects of various business externalities. For example, when a company pollutes the environment, violates labor laws, or places employees in an unsafe working environment, nothing is subtracted from GDP to explain these activities. However, the capital, labor, and legal work related to solving these types of problems are included in the GDP calculation.

The third problem with using GDP as a measurement tool is that GDP is greatly affected by technological progress. Technology can not only increase GDP, but also improve the quality of life for everyone. Unfortunately, technological progress does not happen in a uniform way every year. Therefore, technology may tilt GDP upwards in some years, which in turn may make relative national debt levels seem acceptable when they are not. Most ratios must be compared based on their changes over time, but fluctuations in GDP can cause calculation errors.

Repay the national debt

National debt must be repaid with taxes, not GDP, although there is a correlation between the two. Using methods that focus on per capita national debt can provide a better understanding of the country’s debt levels. For example, if people are told that the per capita debt is close to $40,000, they are likely to understand the severity of the problem. However, if they are told that the national debt level is close to 70% of GDP, the severity of the problem will not be properly communicated.

Comparing the level of national debt to GDP is similar to comparing the amount of their personal debt with the value of the goods or services they produced for the employer in a particular year. Obviously, this is not a way to establish its own personal budget, nor is it a way for the federal government to evaluate its financial operations.

National debt affects everyone

Given that the national debt has recently grown faster than the size of the US population, we can’t help but wonder how this growing debt affects ordinary people. Although this may not be obvious, the level of national debt directly affects people in at least five areas.

First, as the per capita national debt increases, the possibility of the government defaulting on its debt service obligations increases. Therefore, the Ministry of Finance will have to increase the yield of newly issued national debt to attract new investors. This reduces the taxes available for other government services, because more taxes will have to be paid as interest on the national debt. Over time, this shift in spending will lead to a reduction in people’s living standards, as it becomes more difficult to borrow money for economic improvement projects.

Second, with the increase in interest rates on Treasury bonds, companies operating in the United States will be considered riskier, and therefore the yields of newly issued bonds need to be increased. In turn, this will require companies to increase the prices of their products and services to meet the increased costs of their debt service obligations. Over time, this will cause people to pay more for goods and services, leading to inflation.

Third, as the yield of Treasury bonds increases, the cost of borrowing to buy a house will increase because the cost of funds in the mortgage market is directly linked to the short-term interest rate and yield set by the Federal Reserve. Given this established interrelationship, rising interest rates will depress house prices because potential home buyers will no longer be eligible for such large mortgages because they will have to pay more money to cover the interest expenses of their loans. receive. The result will be greater downward pressure on home values, which in turn will reduce the net worth of all homeowners.

Fourth, since the US Treasury bond yields are currently considered risk-free yields, as the yields of these securities rise, venture capital such as corporate bonds and equity investments will lose their appeal. The direct result of this phenomenon is that it will be more difficult for companies to generate sufficient pre-tax income to provide a high enough risk premium for their bond and stock dividends to justify investing in their company. This dilemma is called the crowding-out effect, which often encourages the growth of the government and the simultaneous shrinking of the private sector.

Fifth, and perhaps the most important point, as the risk of a country defaulting on its debt service obligations increases, the country will lose its social, economic and political power. This in turn makes the level of national debt a national security issue.

Bottom line

The level of national debt is one of the most important public policy issues. If used properly, debt can be used to promote the long-term development and prosperity of a country. However, national debt must be evaluated in an appropriate way, such as comparing the amount of interest payments paid with other government expenditures or comparing the level of debt per capita.

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