WASHINGTON — The United States’ national debt is nestled in a brick-laden underpass just a block away from Times Square. It ticks away, month after month, year after year, never getting smaller, never slowing down.
That national debt clock — the brainchild of the real estate tycoon Seymour Durst, who installed it on West 43rdStreet in Manhattan in 1989 — isn’t actually the national debt. It’s a representation of the national debt, a simple tally of how much money the federal government has borrowed from the public and has yet to pay back.
Durst said of the clock when it was installed that it was meant to strike anxiety — if not fear — into passersby. “If it bothers people,” he said, “then it’s working.”
When Durst died in 1995, the national debt totaled more than $4 trillion. In 2008, less than 20 years later, the debt clock ran out of digits, forcing the Durst Organization to add two more. The clock can now track our collective debt into the quadrillions.
The clock currently reads $28 trillion, give or take, and will grow rapidly in the coming years. The coronavirus pandemic has cost the U.S. economy $16 trillion, give or take, and Congress appropriated more than $3 trillion in aid in 2020.
Lawmakers have echoed Durst’s distaste for the national debt for decades, with varying degrees of sincerity. And we are hearing them again, as Congress debates a nearly $2 trillion relief package to respond to the pandemic and its economic fallout.
“What I’m concerned about is we seem to have no concern now about borrowing money in the short term,” Sen. John Thune, R-S.D., said during Treasury Secretary Janet Yellen’s nomination hearing. “The argument is that interest rates are low. It’s like free money. It’s not. It has to be paid back.”
It is the obligation of minority parties to view the majority’s agenda as wasteful, and by extension regard the money spent on those priorities as money better off not spent. The national debt, at least as far as politics is concerned, is a symbol — a representation of something else, just like Durst’s ticker on West 43rd Street.
That is not to say the national debt is imaginary — it is very real. In many respects it is the basis of the global financial system. But what the debt is and how it works are intrinsically intertwined with what it represents, and in recent years it hasn’t been behaving the way it’s supposed to, and no one knows precisely why. And away from the political arena, economists and wonks are deeply conflicted about what the national debt really is, and how afraid we need to be of it.
A blessing or a curse?
The United States has had an up-and-down relationship with debt. One of Congress’s first actions was to assume states’ Revolutionary War debt in exchange for moving the country’s permanent capital to Washington, D.C. Alexander Hamilton saw collective debt as a way to build the nation — and its international credit — and bind the several states together in common cause.
“A national debt, if it is not excessive, will be to us a national blessing,” he wrote in 1781. “It will be a powerful cement of our Union.”
President Andrew Jackson differed considerably in his opinion. He campaigned on the promise of eliminating the national debt, which he regarded as a tool empowering the federal government and thus centralizing power.
“I believe it a national curse,” Jackson said in 1824. “My vow shall be to pay the national debt, to prevent a monied aristocracy from growing up around our administration that must bend it to its views, and ultimately destroy the liberty of our country.”
Jackson followed through on his promise, vetoing virtually every spending bill and using federal funds to pay down the debt until it was fully paid off in 1837 — right before a six-year economic depression that pumped it back up again.
World War II ballooned the debt as the nation ratcheted up defense spending to finance the war, causing the country’s debt to rise to more than 100% of gross domestic product. (Debt is usually measured as a percentage of GDP to make it comparable across different periods of time.)
The debt went back down in the postwar years, then up again starting with Ronald Reagan, only to taper off in the early 2000s.
Starting in 2008, however, the national debt skyrocketed and never looked back. The financial crisis and ensuing bailouts added to the debt, as did tax cuts in 2017. Almost half of government spending today is allocated to Social Security, Medicare and Medicaid, and that is only expected to increase as the population ages.
“The debt continued to grow by even more than the economy was growing post-crisis, and that’s troubling because that’s exactly the time when you should be scaling back on your debt trajectory after you’ve used borrowing at the appropriate time,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
The financial crisis “was the appropriate time to borrow, just like it is now,” she added.
“It was right that we did it then,” MacGuineas said. “What was wrong is that we didn’t stop.”
All told, the Committee for a Responsible Federal Budget estimates that in a slow economic recovery from the pandemic, U.S. debt would increase to 117% of GDP by 2025, and that the country is on pace to surpass the debt record set after World War II by 2023.
That fact would worry any deficit hawk, but the exigency of the pandemic has led many of them to conclude that more federal spending is a preferable alternative to too little. Federal Reserve Chairman Jerome Powell, who has maintained for years that the U.S. debt is on an unsustainable path, said in April that for now the debt is a secondary concern.
“This is not the time to act on those concerns,” Powell said. “This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible.”
“It’s sort of like if a patient comes into the hospital and their appendix is burst and they’re overweight,” said William Gale, a senior fellow in economic studies at the Brookings Institution. “What do you do? Do you put them on a diet? Or do you fix the appendix?”
The ‘beauty pageant’ of money
While there is a diversity of opinion on how to think about the national debt, there is broad agreement that comparing it to household debt — credit cards, mortgages or student loans, for example — is the wrong way to think about it.
The important difference is that if you or I run out of dollars, we lack the ability to generate new ones. The government has no such encumbrance, and when it makes new dollars, people all over the world respect their value.
“One perspective here is, we call it the national debt, but it’s not really debt,” said David Andolfatto, senior vice president in the research division at the Federal Reserve Bank of St. Louis. “It’s actually part of the money supply that people find useful, the same way you and I find using money useful.”
The government acquires more debt by issuing Treasury securities — which come in the form of bills, notes or bonds — which have different maturities and have a seemingly infinite market for buyers because they are regarded as the safest of assets. Investments go up or down in value; T-bills do too, but they’re never worthless.
Because Treasuries are stable, retain value and are eminently marketable, banks are now required to hold some quantity of them at all times as a provision against the kind of market collapse that the banking system experienced in 2008.
“There’s a financial stability aspect, wherein Treasuries can make market players much safer,” said Steven Kelly, a research associate at the Yale Program on Financial Stability.
Treasuries are no less popular abroad. The dollar’s status as the world’s reserve currency — a status achieved, ironically, in the wake of the U.S. spending binge during the Second World War — makes Treasuries an everyday investment for banks around the world. Today, more than 60% of foreign bank reserves are in dollars. Foreign investors own about half of publicly held U.S. debt, and chief among them, China, which owns about $1.1 trillion in Treasuries.
That’s the good news. The bad news is there may be — should be — a point when the world changes its mind about the dollar and the value it represents. The national debt could be the thing that changes the world’s mind about the dollar, or it might be something else. But if or when the dollar stops being the global reserve currency, the United States will have a harder time covering the interest it already owes, much less borrowing more.
“Investors rate countries on a curve,” said Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University. “What is serving us well right now is that we’re not the ugliest at the beauty pageant. In fact, we look pretty good. The problem is the moment the U.S. becomes less appealing as a place to invest.”
If investors decided to sell off their Treasuries en masse and there wasn’t enough demand for other investors to purchase them, it could inflate interest rates and increase borrowing costs.
“We have so many benefits afforded to us because of our role in the global economy and it’s like we’re trying to create an economic design plan to waste all of them, to fritter them away,” said MacGuineas.
The United States is not experiencing that pressure today — far from it. China sold about $180 billion in Treasuries in 2015, and the market largely shrugged it off.
But how would the U.S. respond to a mass sell-off? Some argue that the Federal Reserve would simply step in and buy Treasuries itself in order to keep costs down.
“The Fed is always going to come through as far as acting on its mandates,” said Kelly. “It requires no new legislation or anything like that, and if we’re in a situation, and there’s low inflation, and all of a sudden the Treasury market blows up, the Fed knows that that’s its job.”
There is some precedent for the Fed buying Treasuries when no one else would — that was partly how the U.S. financed World War II. The Fed agreed to purchase Treasuries in an effort to keep interest rates low, and thus keep borrowing costs low for the federal government. The public did likewise — war bonds were aggressively marketed to civilians primarily to keep inflation in check while interest rates were kept artificially low to finance the war.
“The question of what happens if the bond vigilantes come back and they don’t want to buy the government debt, sending interest rates higher?” said Andolfatto. “Well, the answer to that is the Fed can step in and buy it. The Fed is always in a position to step in and buy it and keep the interest rates low.”
But those interventions could only be effective in the short term. Most experts agree that, barring renewed demand for U.S. debt, inflation would eventually spiral out of control, leading to an outcome that has many cautionary examples. Germany in the 1920s. Yugoslavia in the 1990s. Zimbabwe in the 2000s. In each case, borrowing costs go up, employment goes down and desperation sets in.
Former Treasury Secretary Larry Summers expressed concern in an op-ed for The Washington Post in February that President Biden’s stimulus proposal could send the country over the edge.
“While there are enormous uncertainties, there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability,” Summers wrote.
But fears of inflation are regarded by economists much the way fears of scurvy are regarded by doctors — it’s a retro problem with known effective remedies. Concerns about the government’s response to the 2008 financial crisis aroused similar fears, but they never came to pass. In fact, something closer to the opposite is true — the Fed has had to deal with persistently low inflation since 2008.
“There are reasons to think that public borrowing is less harmful than it used to be, or than many people think,” said Michael Strain, director of economic policy studies at the American Enterprise Institute.
The world since 2008 has shifted so much that inflation is probably not the same concept we knew it as during the financial crisis, MacGuineas said.
“I think the economy is so massively different because of globalization and the fact that you can move in and out of goods and sectors and countries for purchasing that inflation plays a much different role than it used to, and so it’s hard to look back and draw any conclusions,” she said.
The central bank this summer even announced that it would look to let inflation run a little hot for a period in order to make up for years of tirelessly low inflation, suggesting that interventions by the Fed in the Treasury market would have to be almost excessive to the extreme in order to impact inflation.
“At some point, inflation is too high,” said Kelly. “At some limit, it does matter, but we’re so far. I mean, nothing that could possibly be negotiated into a stimulus bill right now would flip that switch.”
No one is quite sure “how long and how big the global demand for U.S. Treasury debt is going to grow,” said Andolfatto, or what the immediate effects of slowing demand might be.
“If we don’t tailor our supply response to the changing demand circumstances, that’s when the proverbial stuff is going to hit the fan,” he said. “At that point, you’ll see the classic spike in interest rates, depreciating currency, inflation — you get all those things. And then the question at that point is, do these things happen all of a sudden? Or do they creep up on you?”
‘So far, so good’
In ascertaining when government debt leads to these kinds of unenviable outcomes, many experts have zeroed in on not the absolute total of national debt, but rather what portion of the debt is addition, the more money that goes to servicing the debt, I think that does crowd out other priorities.”
About a quarter of the publicly held U.S. debt is issued through short-term securities that have to be regularly refinanced, subjecting them to changes in interest rates. While rates are near zero now and the Fed is expected to keep interest rates at or near zero, according to the central bank’s own expectations, for at least a few years, an increase in rates down the road would also increase the amount of money the U.S. government owes to investors.
“Even if the debt doesn’t shoot up super high, when you have so much, even a small increase in interest rates leads to a big increase in interest payments,” de Rugy of the Mercatus Center said. “You know the saying about the guy who jumps out of a building, and you ask him on the fifth floor, ‘How’s it going?’ And he says, ‘So far, so good.’ It’s the exact same thing.”
But there are other economists — proponents of the much-hyped modern monetary theory — who argue that the U.S. can’t run out of money to pay investors, because the U.S. controls its own currency. So, unlike countries that don’t have a central bank, the U.S. government is self-financing.
“It’s true that when a particular security matures, Treasury has to find the money to honor the Treasury security as it matures,” said Andolfatto. “But what it can simply do is go to auction and re-auction off a new security to raise the necessary money. So in this way, the government actually never has to pay back the debt, and in fact, it can actually let the debt grow forever.”
But that line of reasoning has its detractors. Besides inflation, the debt can have other effects on the economy, and those other effects could render the pace at which the U.S. is accruing debt unsustainable. If the government accumulates enough debt, de Rugy argues, eventually money that could have been used for investment in economic growth will have to be used to make interest payments to investors instead.
“The more we’re in debt, the harder it is to actually face all sorts of emergencies. That’s one thing,” de Rugy said. “But then the other thing that is really overlooked is the fact that there’s a big literature that shows that actually, higher deficit and debt have an impact on growth and it tempers growth going forward.”
Although the U.S. is not close yet to that point, Strain agreed that a colossal national debt could increase the cost of capital for businesses, potentially stifling innovation.
“I think concerns about a debt crisis are wildly overstated,” he said. “There’s a lot of agreement about that, but I also think that the evidence still suggests that there’s private-sector crowd-out, and that there is a real kind of political constraint here.”
And already, the U.S. has been forced to put aside things like globalization and growing security threats because there simply isn’t room to spend money on “big, bold, sustainable policies,” said MacGuineas.
“There are many things we should be thinking about in our budget that are big, transformational things for government,” she said. “We are basically ignoring them and doing nothing with our budget to update it to reflect those new kinds of risks and changes.”
‘We can do too little and sputter’
That brings us to now. How should the government think about the debt at a moment with such an overwhelming public health and economic need for government intervention?
“Because of the current economic situation, we can do more for future generations by containing the virus and getting the economy going right now than we could by trying to restrain debt accumulation,” Gale of the Brookings Institution said.
Biden himself echoed that point in February.
“The one thing we learned is we can’t do too much here,” he said. “We can do too little. We can do too little and sputter.”
Most of what we hear about the debt we hear in the context of Biden’s stimulus spending bill. Democrats, committed to going it alone on the bill, are split on how targeted the bill should be — that is, which expenditures will best justify the expense.
“There’s money that we need to spend,” said Strain. “I think we need to spend the money on state and local governments. We need to spend money on public health considerations, and we need to spend money to reopen schools and I think it’s appropriate that that money be deficit-financed. But I don’t think it makes sense to just let it rip and pretend that there’s a money tree out there.”
De Rugy, by contrast, said the debt should be a “massive” consideration for policymakers in debating more fiscal stimulus. For the last generation, debt has only gone up, and at some point it has to go down, she said.
“The future is built today, and so politicians after politicians, and that includes Janet Yellen and Jerome Powell, they always say, Oh, we’ll worry about this in the future,” she said. “In the end, no one ends up ever really worrying about the future, and they spend their time kicking the can down the road, and accumulating debt to the point where fixing it is going to be very, very, very painful.”
“I think a lot of people don’t want to face the fact that pandemics are brutal, and there are actually limits to what government can do,” de Rugy added. “The truth of the matter is pandemics can bring a lot of pain.”
The thing about the national debt is that it isn’t just a hole we keep digging — it’s the government buying something on credit. And if that something helps the economy grow, it means more revenue for the government — it pays for itself. And if it doesn’t, it doesn’t.
“Imagine that you’re a company, for example. You should be focusing on where your expenditures and investments are going,” said Andolfatto.
For MacGuineas, many of the stimulus proposals seem aimed at broad rather than targeted relief, which helps those in need but also those who aren’t. That kind of approach, she says, could lead to larger hurdles down the road.
“Now we’re starting to talk about packages that are bigger than what the economy needs by any realistic economic perspective and are poorly targeted,” she said. “And you certainly don’t want to be adding to the debt needlessly, even in the time of crisis, because it causes lots of other problems.”
But the debt could also be just a number that gets bigger and bigger, just like on Durst’s debt clock. But what changes is the way we think about it, said Andolfatto.
“The reserves we call money and the Treasuries we call debt, but what’s the difference?” he said. “They’re both electronic digits sitting in a ledger that earn interest.”
And if you subscribe to that, there’s no limit to how much the government can spend to mitigate the effects of COVID-19, let alone on other priorities.
“They could borrow a bunch of money and stick it under a mattress and the Treasury market is going to hum,” said Kelly.
The government is going to continue to fund itself on credit for the foreseeable future, just as it has since 1837. The question is what we get for that debt, and how long the world keeps buying it depends in large part on what we do with that spending power.
Beyond COVID relief, the Biden administration has big plans for spending — on infrastructure, for example, or combating climate change — that could generate more economic activity and certainty in the future. The Trump administration, by contrast, championed tax reform, which can also spur capital investment and economic growth.
But the government can just as easily prioritize boondoggles as it can sound investments, and disentangling wise government investments from dead ends takes careful analysis and a common understanding of what works and what doesn’t.
Gale says policymakers need to choose what we spend our money with an eye not only to the debt, but to the future that debt will enable.
“We pass along to future generations more than just the debt,” he said. “If we use the money wisely, we can help people and the economy in the short run — and the long run.”
Reporter, American Banker
By Hannah LangMarch 03, 2021, 11:32 a.m. EST18 Min Read