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Your View by a Lehigh professor: Why we shouldn’t overly fret the national debt
By ANTHONY O’BRIEN
THE MORNING CALL|
FEB 19, 2020 |9:30 AM
Among non-economists, views on the national debt tend to split into two camps. The first knows almost nothing about the debt and couldn’t care less. The second believes that the national debt will eventually result in a catastrophe that will overtake our grandchildren.
The national debt is a problem but not a calamitous one. It resembles climate change in being a problem we can and should do something about, but, no, the end of the world isn’t nigh.
First, remember what the national debt is. When the federal government runs a budget deficit because its spending exceeds its revenue, the U.S. Treasury makes up the difference by borrowing.
The Treasury borrows by selling securities. The total value of the securities is the national debt, currently about $17 trillion. When is that staggering sum due? All the time.
To fund the debt, the Treasury issues bills with maturities of four to 26 weeks, notes with maturities for two to 10 years, and bonds with maturities of 30 years.
If you buy a four-week T-bill, the Treasury will pay you off when it matures, thereby extinguishing that tiny part of the national debt (yay). Where does the Treasury get the money to pay off your T-bill? By selling another T-bill, thereby raising the national debt (boo).
So, in that sense, the national debt is continually coming due and continually being rolled over through new Treasury debt issues. But when will it really, truly be due in the sense of being paid off? Never. Just as you and I never had to pay off the national debt run up by our grandparents, our grandchildren won’t have to pay off our debt.
The U.S. incurred a huge debt in fighting the American Revolution. Those bonds were eventually paid off and the national debt declined to zero. The last year the U.S. had no national debt? 1840.
Since then, the size of the debt has ebbed and flowed depending on whether Congress and the president have been willing to raise enough revenue to pay for their spending (rarely) or whether they spend more than they take in (almost every year).
If the national debt has been around for 180 years, should we worry about it? You might think not given that it never comes up in the Democratic presidential debates and President Trump didn’t mention it in his State of the Union address.
It used to be that Republicans railed against the debt (at least when a Democrat was president) and Democrats sheepishly admitted piling up debt was bad but argued that it was necessary to help fund needed social programs. But now most politicians just ignore it.
They shouldn’t because the debt is on a very bad trajectory. Normally, we run big deficits during recessions as tax revenues decline and small deficits during good times as tax revenues recover. As a result, we add to the national debt over time, but at a sustainable rate.
As dismal as those forecasts are, they assume that interest rates will remain at their current low levels, no recession will happen over the next 30 years, and Congress will enact no significant new spending programs. That’s all pretty iffy.
This month the President Trump proposed a budget that administration officials said would eliminate the deficit by 2035. But the budget relies on spending cuts that Congress is unlikely to enact and assumes that economic growth will be 50% higher than the CBO and most private economists forecast, making the administration’s predicted tax collections far too high.
So, what will actually happen? First, given the federal government’s taxing power and the Fed’s ability to create money, the government won’t default. If the shrewd operators on Wall Street thought there were any chance of default, they wouldn’t be buying 30-year Treasury bonds at the low interest rate of 2.4%
Congress currently has little stomach for either significant spending cuts or for tax increases. So unless we see a political upheaval at the polls this November, we’ll likely muddle through for a while with something like the status quo.
Eventually we’ll need to bite the bullet by raising taxes and reining in some popular spending programs. Painful, but not a catastrophe.
Anthony O’Brien is a professor emeritus of economics at Lehigh University.