America’s financial health is in trouble, and while government spending continues unabated, most Americans, including politicians and others, seem too preoccupied to care. The country’s national debt is currently 35 trillion dollars, or over $100,000 per person. And despite recent reassurances by Janet Yellen, the Secretary of the Treasury, that the “debt is sustainable,” sustainable debt makes our society less so, with the United States having a debt-to-GDP ratio of 122%, one of the highest in the world.
In the strictest sense, Yellen’s statement is correct. Yes, the United States government can afford to pay the interest on the debt given the current economic environment, but it is also wrong given the fact that the debt is making our economic well-being less sustainable by suppressing the rate of growth necessary to maintain the debt-to-GDP ratio. Economic growth occurs through investments in capital, infrastructure, and technology. Investments in large scale government projects, if spent wisely, can boost economic output, but the government can’t afford to invest as much as it could when 870 billion dollars each year go to paying the interest on the debt. How does that affect you and me? Interest on the debt is money that is dead to the economy. That dead money cannot help you get where you want to go when you are stuck in traffic, or build you a faster internet, or lower your energy bill. In each case, there is a loss of productivity. So why should we accept this outcome? More broadly, when did our society become OK with servicing such a large debt load?
Personal finance teaches us the basic principles of money management: spend less than you make, save for the future, and invest in things that have growth potential. Our nation’s central bank, The Federal Reserve, provides teachers and students with hundreds of lessons pertaining to personal finance. Their curriculum teaches children from kindergarten to high school traditional, sound financial advice of a balanced budget. Why don’t our nation’s elected officials and leaders — including Janet Yellen who previously served as Federal Reserve chair — follow these same principles? Today, instead of hearing about fiduciary responsibility, we are told that the debt is “sustainable.”
The truth is that sustainable debt has real costs that are rarely mentioned. Instead of spending money on interest payments, we need to ask where else the money could have been spent. The annual interest payments on the debt are more than the government budget for military (820 billion) or Medicare (747 billion) and much more than it spends on education (222 billion). We’re making interest payments rather than budgeting for needed national security, improved health outcomes, and better educational attainment. It is the same as an individual paying interest on her home loan while refinancing the balance in perpetuity, never having any equity in the house.
Another reason why debt is not desirable is it extends the burden of repayments to future generations who will experience more of what we are seeing today: higher interest rates, inflationary pressures and reduced economic growth as money goes to the servicing of the debt instead of growth-promoting projects. Debt should not be a political shell game that gives current voters more than they can afford. Unfortunately, fiscal responsibility in Washington is rarely on the agenda. And even though they do not yet have a vote, America’s youngest cohort, Gen Alpha-ers surely prefer not to inherit the mismanaged financial burdens of previous generations.
Our political leaders talk about the debt-to-GDP ratio, when they could be talking about ways to create a national rainy-day fund, a contingency for the next pandemic, war, economic crisis, or natural disaster. This should not be a radical idea; 89% of adults report having an emergency savings fund. Is it too much to ask for fiscal policy makers to do likewise? Individuals know intrinsically that accumulating too much debt leads to a crippling financial future and bankruptcy. If the people understand this, why do the leaders who run this country lack the will to act responsibly? And this is just one example of the perils our country faces.
Civilizations crumble when they stop telling the full truth and start providing excuses for actions that undermine the social fabric. Rather than leaning into “sustainable debt,” we should lean into policies that create more human flourishing in the long run (such as investing in libraries, new technologies, and health procedures that prolong life). We owe it to ourselves and future generations to reduce our 35 trillion-dollar debt.
