America broke another record this week — when the nation’s debt crossed the. At about 80 percent of the country’s GDP, it’s the highest level of debt since World War II, making the U.S. an outlier among its peers.
The only countries with a higher debt load than the U.S. are Portugal, Italy, Greece and Japan. The first three have become synonymous with profligate spending and economic woes post-Great Recession, while Japan’s “lost decade” of economic stagnation is a mainstay of economic textbooks.
“Our long-term prognosis is significantly worse than most of the European countries,” said William Gale, co-director of the Tax Policy Center and a senior fellow at the Brookings Institution.
If the world’s largest economy accumulates its most significant debt ever, does it matter? Economists are divided. Many say because of the dollar’s role in the global finance system, the U.S. can essentially borrow as much as it wants at very low rates. But others say today’s debt could threaten the economy during future downturns — and the current expansion is the perfect time to get it under control.
Here are the many ways that the national debt could become problematic, according to that view.
It messes with spending priorities
The U.S. pays interest on its debt, and those payments increase as the debt grows — even if interest rates themselves stay steady. In the next few years, interest rate payments are projected to rise rapidly, reaching levels they haven’t seen since the early 1990s.
The U.S. will be spending more on interest than on agriculture, veterans’ programs or Medicaid, according to the Congressional Budget Office.
High debt during good times is asking for the worst
Consider a married couple that earns two six-figure salaries and routinely carries a credit card balance of $90,000. Households like this routinely face the ire of financial planners because they have no cushion for bad economic times. If one lost a job, for instance, the couple would be forced to borrow money at higher rates, sell their valuables or curtail their spending in entirely unpleasant ways, assuming they don’t have wealthy family members to ask for money.
Like this profligate household, the U.S. is limiting its own options for the next economic downturn, in the eyes of many economists. With a large portion of the federal budget earmarked for interest payments, that leaves less room for other spending.
No bang for those bucks
Interest payments may not be debilitating, economists say — but the U.S. won’t get anything for that money.
Whereas spending on infrastructure, for example, puts money into circulation that moves among businesses and fuels hiring and trade (or just puts money into some contractor’s pocket), spending on interest does no such thing. It’s simply covering the costs of decisions that were made a long time ago.
“The rise in the debt will impose burdens on future generations,” said Gale. “The millennials are catching on to that, and objecting.”
Not everyone agrees with that analysis. The only reason interest payments appear high is because U.S. social spending is stingy compared to that of many developed countries, said Mark Weisbrot, co-director of the Center for Economic and Policy Research. “You can’t make it big just by comparing it to things that are small,” he said.
It competes with private spending
The more money the government borrows, the more pressure it puts on private borrowing, economic theory goes. “Borrowing more increases the demand for loans, so the government is competing against business and students and everyone in the market for loans,” said Gale. “If the government wants to borrow more, that jacks up interest rates on everyone else and crowds out what other people might do.”
We can’t grow our way out of it
Since debt is most commonly measured relative to GDP, some pundits point out another way to make the debt smaller: get the economy to grow faster. That was the theory behind the 2017 tax cuts, which boosted economic growth but fell far short of paying for themselves. And as those cuts show, such an outcome is harder to plan for — because the U.S. economy depends just as much on global growth as on domestic policy.
The good news is, if we can grow our way out of the debt, we would be able to do that even while reducing it in other ways, said Gale.
“We don’t need to kill the government or starve it, We don’t need to get rid of Social Security,” he added. “There’s a range of options on the tax or spending side that are conventional.”