With all the hype surrounding the current presidential candidates and what they can and cannot offer the American citizens, hardly a word has been said about the existing national debt. Standing at a walloping $19.3 trillion, the U.S. deficit is currently four times larger, adjusting for inflation, than when Ronald Reagan bemoaned its size in his 1989 farewell address.
America’s national debt now totals about 105% of GDP, roughly twice the size of the economy it has been any time in the past. It is easy for Americans to ignore any signals of a possible fiscal crisis which could call this debt into question and choose instead to overlook the fact that the government is still spending about $500 billion more each year than it takes in. As such, the debt continues to rise indefinitely and if Congress does nothing, the shortfall can, at some point, impede the government’s ability to finance Medicare, Social Security and other services the government pays for.
Why is this important and what exactly is the national debt?
The federal government has two significant deficits—the annual budget deficit and the country’s national debt. When the federal government spends more money than it brings in through income generating activities such as taxes it generates a budget deficit. Since the money to pay back this debt has to come from somewhere, the Treasury Department issues treasury bills, treasury notes and treasury bonds to compensate for the difference and to gather the cash that it needs to provide governmental services. The national debt is simply the net accumulation of the federal government's annual budget deficits.
Deficit Just Muddles Along
Americans don’t think much about the national debt. As long as the proceeds continue to stimulate economic growth in a way that it leads to the country’s long term prosperity, they are complacent about its continued accumulation. When it starts to effect public consumption such as Medicare, Medicaid and Social Security, however, they take notice. National debt reduction is most often a topic that is swept under the rug and only rears its head when talk of a recession or increased interest rates returns to center stage.
According to a spokeswoman at the Center for a Responsible Federal Budget, despite the fact that the actual deficit—i.e. the amount borrowed each year—has been coming down in the past few years mostly because the economy has improved, the chance of a crisis has not gone away. Instead, the country has waddled along without fixing the problem and has succeeded in keeping the debt at manageable levels that make the U.S. budget look better than that of most other countries.
However, an increase in interest rates, no matter how small, could create a fiscal crisis. And there is little doubt that barring sudden signs of inflation, the Federal Reserve will, within a short time, hike up rates, albeit slowly, which will increase borrowing costs for everyone. Right now, interest payments are the fastest growing part of the federal budget and even a 1 percent interest increase would add $1.3 trillion to the country’s interest costs.
This may or may not have a direct effect on the deficit and it could very well be that the huge national debt will just continue to muddle along with a budget plan of some sort submitted from time to time but which has very little chance of solving the problem. Still, it would certainly be admirable if our two presidential candidates at least hinted to the existence of this existing challenge and gave some indication of how their ideas for dealing with it.