issue guide: National Debt
Debt. We’re deep in it – and still digging. Some economists warn that our national debt is growing to dangerous levels and could end up hurting our economy in the short- and long-term. Others caution there’s no need for alarm; the debt is manageable and is even a necessary byproduct of policies designed to boost the economy in sluggish times.
What the Debate's About
The past decade saw our federal government slide from surpluses to deficits that are now quickly adding to our debt. While there’s nothing unusual about having a deficit or being in debt – indeed, surpluses are rare (CBO - pdf) and we haven’t been out of debt since the War of Independence - economists disagree over how much our current debt increases will get us into economic hot water. As the war in Iraq, Social Security reform and rising costs of Medicare all put the squeeze on the budget, the debate will continue on how much our debt will push us into dangerous economic territory, and what should be done to rein it in.
Most Americans reading this will be familiar with debt and know that it has its pluses and minuses. Debt can be your friend – helping to tide you over when income is low or letting you invest in your future by, say, taking out student loans. But it can also come back to bite you – with interest payments that soak up your income and, when things really get out of control, by hurting your credit.
Government debt has similar benefits and risks – but, it goes without saying, it’s a little more complicated than your personal finances. And not all economists agree on what those benefits and risks are. What economists do agree on is that having debt is not itself a problem but that, at some point, too much debt can hurt the economy. (The ultimate risk of high debt is that creditors will someday lose confidence that the government will pay them back, pushing the economy into a tail spin. While America’s economy is thought to be too strong for this to be possible in the near future, it’s the reason we even bother to care about keeping our debt manageable – in addition to wanting to keep payments on interest low.) What “too much” debt is, how harmful it is to continue to add to the debt by running deficits, and what policies work best to trim the debt are all points where economists don’t necessarily see eye-to-eye.
The debt hawks are in some ways simply more cautious about the long-term risks of carrying a growing debt. They also argue that raising the debt, by continuing to run deficits, slows down the economy (this is a big theoretical point economists differ on). Lastly, they don’t like the idea of shifting the costs of our overspending on to future generations.
Economists who are cool about debt point out that in times of relative slow economic growth – as we’ve had for much of the past four years – it is normal to add to our debt; less money from taxes is coming in, and governments do well to stimulate the economy by offering tax cuts, increasing spending and/or otherwise boosting the economy. They argue that America has a robust economy that will grow its way toward stronger growth, naturally creating more earnings to pay off the debt in future years (theorists differ on this point as well).
Where Things Stand Now
2006 saw improvements on the deficit - which slid down to $248 billion, from $412 billion in 2004. But deficit hawks are not breathing easy yet as war spending doesn't seem to be dying down and entitlement spending is set to keep growing. While the debate over our debt isn't raging in the media, it's always in the background whenever Congress considers any spending or tax measure.
Written by Sermin Womack, Seth Pinsky and Julia Kamin, with guidance from Steve Zimmer.
Updated November, 2006
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