Why is high public debt bad for the economy? An analysis of economic data for 22 countries over more than a century indicates that high levels of government debt result in lower levels of economic growth. A 2012 economic study examined over 110 years of economic data and concluded that advanced economies whose debt levels reach 90 percent of GDP face much slower economic growth. Their research showed that these periods of reduced growth often lasted longer than a decade.1 According to the Congressional Budget Office’s 2013 Long Term Budget Outlook Report, U.S. debt levels may reach 76 percent of GDP at the end of 2013, the highest levels since just after World War II.2 America is on the path to a dangerous accumulation of public debt. Current government spending and debt levels are perilously high and future spending is on Key Terms track to rise even higher Deficit Spending: Government spending due to increased spending that is in excess of revenue, using funds raised on entitlement programs by borrowing rather than from taxation. and interest payments on Public Debt: Total debt owed by a existing debt. Projections government or a nation to its creditors. The show that pressures from national debt of a country is often measured an aging population, rising as a percentage of GDP. healthcare costs, and GDP: Gross Domestic Product, a measure federal health insurance of the total value of goods and services subsidies will only intensify produced within a nation’s borders. GDP the problem. growth is a measure of economic growth. Debt Ceiling: A debt limit introduced during World War I designed to give the U.S. Treasury the flexibility to borrow without having to get Congressional approval to pay for expenses Congress has already approved. It has been raised 78 times since 1960. U.S. Treasury Securities: The U.S. finances its deficit spending by issuing shortterm and long-term Treasury securities. These notes, bonds, and bills are sold to individual, corporate, and government investors around the world. Since the U.S. is the largest economy in the world, Treasury bonds are considered by many to be “safe haven” investments with very low risk. In this report Treasury bonds and Treasury securities will be used interchangeably.
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MONEY MATTERS
In order to avoid a serious economic crisis, U.S. policy makers should learn from the experiences of Greece and Japan and address our public debt issues. The federal government is quickly exhausting its ability to pay its bills. Future debt debates should focus on the need to reduce excess federal spending while protecting our still-fragile economic recovery.
SPRING 2013
In simple terms, high levels of national debt are bad for several reasons. First, servicing debt is very expensive. The more the U.S. borrows, the higher our interest payments to bondholders are each year. By 2020 the federal government will spend a projected $900 billion each year just to pay interest on existing public debt. That’s more than the government currently spends on Social Security. Second, our growing debt means that the federal government must increasingly rely on foreign investors to pay its bills. This can give significant bargaining power to foreign governments such as China, the largest foreign holder of U.S. debt and have long-term effects on our strategic and military interests. Third, just as with an individual borrower, growing national debt sends signals to investors (our creditors) that the U.S. is becoming a credit risk. While a person might be able to max out his or her credit cards, at a certain point the interest rates on those cards may jump from 12 percent to 30 percent, sending that individual into a debt spiral of increasingly higher interest payments. Similarly, as our debt grows, the government may have to offer higher and higher interest rates on Treasury Bonds to convince investors to buy.
How did we get here? America has not always operated with such a large public debt. After financing WWII through deficit spending (and selling war bonds to the public), the