Debt Threat: The National Debt and You

The U.S. national debt is at post-war record highs, both in dollars and as a  share of the economy. And not only has it grown from 35 percent of GDP  in 2007—about the post-war average—to 78 percent today, it is projected to exceed the entire economy in 12 years or less.


Ever-growing levels of debt threaten citizens’ and families’ economic well-being in a number of ways. A large debt:


  • Hurts wages and jobs
  • Makes borrowing more expensive for important investments
  • Harms our children
  • Threatens the safety net
  • Risks a real crisis
  • Prevents us from growing the economy

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Lower Income and Fewer Job Opportunities

As the government continues to issue more and more debt, the debt “crowds out” productive investments in people, machinery, technology, and new  ventures. This diminished private investment results in fewer job opportunities and lower income. 


According to the Congressional Budget Office, average income will grow more  slowly over the next 30 years than if Congress put debt on a downward path.[1] In  today’s dollars, that’s $6,000 less income per person. Over 30 years of  working starting today, it represents $60,000 in lost income. 

Bar chart showing that average income rises as national debt falls.
Bar chart showing that average income rises as national debt falls.

Increased Costs of Home, Auto, Student and Credit Card Loans

Growing national debt can drive up interest rates throughout the economy, leading to higher interest payments on mortgages, car loans, student  oans, and credit card debt.


Although rates are currently low – due mainly to the weak economy and temporary efforts by the Federal Reserve to keep them down – they will most certainly rise as the economy recovers, and they will rise much higher if debt continues to grow.


Reducing the debt will help lower costs for middle-class families. Growing debt levels, on the other hand, will increase interest costs, squeeze family budgets, and put important family investments out of reach. In 30 years, interest rates would be about three-quarters of a point higher because  of debt.[2] Put another way, a family with a $300,000 mortgage can expect to pay at least $45,000 more over the course of the mortgage.

#FixtheDebt

Less Room for Investment in Infrastructure, Research, and the Next Generation

Growing national debt means that the government must pay higher interest payments to service that debt. Interest will represent the fastest growing part of the federal budget. The nonpartisan Congressional Budget Office projects interest costs will nearly triple from $325 billion in 2018 to $928 billion in 2029. By 2031, 100 percent of the revenue we collect will go toward interest payments and mandatory spending. That  leaves little room for important priorities and investments such as national defense, education, infrastructure, low-income support, and basic research. As more of our budget goes to financing today’s spending  and yesterday’s promises, spending targeted toward the next generation  will continue to dwindle. 

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A Threatened Social Safety Net

The trustees who oversee Social Security and Medicare estimate both are on a road to insolvency. Social Security’s Disability Insurance trust fund will become exhausted in 2032, and Medicare’s Hospital Insurance trust fund will be exhausted in 2026. By 2034, the combined Social Security trust funds are expected to run out of money, at which point all  beneficiaries – regardless of age, income, or ability to work – will  receive an immediate 21 percent cut in benefits. For a typical 40-year  old today, failure to act will mean more than $120,000 in reduced  lifetime Social Security benefits, in today’s dollars.[3] 

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An Increased Likelihood of a Fiscal Crisis

Failure to get the national debt under control could precipitate a crisis where investors are no longer willing to loan money to the government at affordable rates. Although no one knows when such a crisis would come and exactly what it would look like, international examples suggest there could be large investment losses, tanking markets, sharply rising interest rates, mass unemployment, rapid inflation, and/or devastating  austerity causing sharp drops in public investment. 

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A Missed Opportunity to Grow the Economy

Deficit reduction legislation presents an opportunity to enact pro-growth tax reform, improve government programs to reward work and savings, re-orient spending to important investments, and capture the economic benefits of putting the debt on a sustainable path. The Congressional Budget Office estimates debt reduction alone could increase the size of the economy by nearly 6 percent by 2047.[4] Tax reform has the potential to generate up to another 3.5 percent over the long run, and a few modest entitlement reforms could add an additional 2 percent by 2035.[5] Putting in place a credible, smart plan now would allow us to implement changes gradually in a way that actually accelerates the recovery through increased certainty and confidence. A comprehensive debt plan  represents the best opportunity to enhance long-term economic growth. 

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Notes

  

[1] Debt on a “downward path” is measured by enough savings to bring debt down to its historical average over 30 years, as opposed to staying on the current path. Figures based on per-capita GNP, a measure of the country's income divided by the country's population.


[2] CBO, “2016 Long-Term Budget Outlook.”


[3] Calculated using Census and SSA data for the average wage, life expectancy, and benefit payment. See How Old Will You Be When Social Security's Funds Run Out? for your age.


[4] “The Deficit Reductions Necessary to Meet Various Targets for Federal Debt,” August 2018.  


[5] Tax reform: Joint Committee on Taxation; Entitlement reform: CRFB

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4 Reasons Fixing the Debt Should be a Priority for Democrats

No matter what your ideology or political affiliation, there are good reasons to fix the debt. Here are four reasons why fixing the debt should be a priority for Democrats. 

#FixtheDebt

1. A Better Deal for American Workers

Putting the national debt on a declining path will boost the economy  compared to growing debt. According to the nonpartisan Congressional  Budget Office (CBO), average income will grow more slowly over the next  30 years with debt on the current course compared to if debt is placed  on a downward path. In today’s dollars, that’s $6,000 less income per  person. And over 30 years of working, it represents $60,000 in lost  income. A sensible plan that brings the debt down as a share of the economy over time will help boost incomes. 

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2. Relief for American Families

Rising debt will cause interest rates to increase. This will make home,  auto, college, and credit card loans more expensive, squeezing family  budgets. For example, a typical family with a $300,000 mortgage can  expect to pay at least $45,000 more over the course of the mortgage due  to the growing debt.  Getting the debt under control will help keep interest rates at reasonable levels and lower the cost of living for families. 

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3. Effectively Tackle Our Challenges

Changing our current path will provide us more budgetary room to address  our needs or respond to any crisis that may arise. According to CBO, by  2031, 100 percent of the revenue we collect will go toward interest  payments and mandatory spending. This means that funding for important  initiatives like environmental protection, clean energy, and Head Start  will have to be borrowed. In addition, it will be more expensive to  borrow money to respond to disasters or an economic crisis with rising  debt. Fixing the debt will provide more flexibility to address our challenges. 

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4. Invest in Our Future

Growing debt means larger interest payments to pay that debt, which will  crowd out critical investments. We currently spend more on interest on  the debt than on the Departments of Education, Energy, Labor, and  Transportation combined. Addressing the debt responsibly will make it easier to invest in a better future. 

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4 Reasons Fixing Debt Should be a Priority for Republicans

No matter your ideology or political affiliation, there are good reasons to fix the debt.  Here are four reasons why fixing the debt should be a priority for Republicans. 

#FixtheDebt

1. A More Secure Nation

Former Joint Chiefs of Staff Chair Admiral (Ret.) Mike Mullen has said  the national debt is the single biggest threat to national security.  Already, the sequester is squeezing discretionary spending, including  spending on defense, and as the debt continues to rise, spending on  interest payments will crowd out funding for the military further. We  already spend more on interest than the Departments of Homeland Security  and Veterans Affairs combined. Getting the debt under control will help make us more secure. 

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2. A Stronger Economy

Higher debt levels can cause slower economic growth and ultimately,  could cause a fiscal crisis. Conversely, the nonpartisan Congressional  Budget Office says that reducing our debt can grow the economy, increase  wages for American workers, and greatly diminish the chances of a  fiscal crisis. Fiscal responsibility can help lead the way to more prosperity. 

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3. Continued Global Leadership

Nearly half of U.S. debt is foreign-owned. Rising debt and our  dependency on foreign lenders leaves us economically vulnerable during a  time of global conflict. No nation has ever lost control of its fiscal  situation and remained a global leader. Getting the nation’s finances in order will help the United States continue to be a global leader

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4. A Brighter Future

Fixing the debt will help us overcome some of our biggest challenges. A  sustainable debt situation is a central component of a comprehensive  growth strategy, which is necessary to increase jobs, wages, and the  standard of living for Americans. And confidence in our government will  increase as our representatives become better stewards of taxpayer  dollars. For example, interest on the debt is the fastest growing part  of the federal budget. Stopping this trend will help put the country on a better course. 

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