The colossal U.S. debt, now hovering at a staggering $33 trillion, has become a defining conversation piece for many fiscal conversations. It’s a number that’s hard to grasp, often cloaked in anxiety, controversy, and divisive opinions.
Every fiscal year since the turn of the millennium has witnessed the U.S. spending more than its revenue, forcing the nation into the corner of borrowing. But is all this borrowing a financial apocalypse in the making, or could there be a silver lining somewhere?
Debt: A Necessary Evil or a Useful Tool?
Kris Mitchener, a distinguished economist at Santa Clara University’s Leavey School of Business, paints the public debt with a more nuanced brush. Mitchener suggests that borrowing, historically, has been the go-to move in times of crisis, sparing the present generation from a choking tax noose. However, since the onset of the pandemic, the debt has rocketed by over 89%.
While many top-tier economists collectively dismissed it as a non-concern during 2020, arguing that it wasn’t the time to penny-pinch, today’s climate is different. With the most pressing phase of the health crisis behind us, attention shifts to whether this ballooning debt spells doom for the U.S. economy.
William Gale, a key voice at the Brookings Institution, opines on the duality of debt. Debt, like a double-edged sword, has its merits and demerits. The real question isn’t about utilizing debt but discerning when, why, and how much to deploy. This sentiment is echoed by Michael Peterson, the torchbearer of the Peter G. Peterson Foundation, who critically notes that the U.S. is tapping into its debt resources, irrespective of the economic climate – be it sunshine or rain.
The Vital Debt-to-GDP Metric
One key metric economists lean on to gauge the weight of a nation’s debt is the debt-to-GDP ratio. For the U.S., this number is inching perilously close to a full 100%. Analytical insights from the Committee for Economic Development of the Conference Board suggest that a country with the economic stature of the U.S. should ideally hover around a 70% debt-to-GDP ratio.
Lori Esposito-Murray, who helms this committee, offers an insight into the balancing act of this ratio. On one hand, debt can fuel significant national projects and cushion the blow of unforeseen crises like the recent pandemic. However, the other side of this coin is the nation’s capacity to manage and service this debt without teetering on the edge of fiscal ruin.
This servicing aspect has come under the spotlight with the Federal Reserve’s decision to hike interest rates, a move in play since March 2022. Ostensibly aimed at reining in economic activity, this strategy has its fair share of critics and advocates.
Stephanie Kelton, a seasoned economist at Stony Brook University, introduces an intriguing angle. Elevated interest rates, she suggests, can pump substantial sums into the coffers of bondholders. This influx of money, in the form of interest earnings, functions like any other income. Thus, rather than being a drain on the economy, these funds could potentially be channeled back, stimulating economic activity further.
The narrative around the U.S. debt isn’t straightforward. Like a convoluted web, it is rife with complexities, each strand intertwined with the next. While borrowing may seem like an ominous shadow, there’s more to the story. As the nation marches forward, the challenge lies not in shunning debt but in mastering the art of leveraging it effectively. Only time will reveal if the U.S. can navigate this treacherous path with aplomb or if the pitfalls of debt will prove too great to surmount.
