The U.S. national debt is sitting at nearly $33 trillion dollars.
Every year since 2001, the U.S. government has spent more money than it takes in, which means it has to borrow money to make up for the difference.
“Debt has many useful purposes,” said Kris Mitchener, professor of economics at the Leavey School of Business at Santa Clara University. “The public debt has always been used for emergencies. It’s easier to finance by borrowing than to burden the current generation with taxes.”
The national debt increased by more than 89% since the beginning of the pandemic, with many top economists in agreement that 2020 was not the time to worry about the debt.
But now that the worst of the public health emergency has passed, the focus is back on how the ever-expanding debt can be harmful to the economy.
“There are good uses of debt [and] there are bad uses of debt,” said William Gale, economist and senior fellow at the Brookings Institution.
“The concern we have at the Peterson Foundation is not whether the national debt should ever be used,” said Michael Peterson, chairman and CEO of the Peter G. Peterson Foundation. “It should be how it is used and how much it is used. And unfortunately, we’re using it for rainy days and sunny days right now.”
Economists measure the severity of a nation’s debt based on its debt-to-GDP ratio. The U.S. debt held by the public is nearly at 100%. The Committee for Economic Develop of the Conference Board says a responsible debt-to-GDP ratio for a country the size of the U.S. would be 70%.
“Debt helps your economy because you can take on large initiatives like infrastructure,” said Lori Esposito-Murray, president of the Committee for Economic Development of The Conference Board. “You could take on crises like the pandemic, but you have to watch where your debt-to-GDP ratio is because that really is the stability indicator of whether you can actually service this debt or whether you’re tilting the balance.”
Servicing the debt can become difficult when interest rates are higher. The Federal Reserve has been increasing interest rates since March 2022 with the goal of slowing down economic activity.
But some argue that servicing the debt at a high interest rate can actually stimulate the economy.
“The Fed is pushing up interest rates and this is feeding hundreds and hundreds of billions of dollars in additional income to bondholders,” said Stephanie Kelton, professor of economics at Stony Brook University. “So people who are holding government bonds, paying higher rates of interest, are getting a huge windfall in the form of interest income and that income can be spent just like any other form of income.”
Source: CNBC
