Get the latest news, research, commentary and analysis on what is impacting your quality of life. From top scholars to regular citizens, this blog’s contributors make the latest in empirical research on economic freedom accessible and easy to understand, issue by issue.
We’ll Never Know the True Cost of the Massive National Debt
October marks a new fiscal year for the federal government and, just like in previous years, we are certain to fund much of our spending in the upcoming twelve months by taking on more debt.
We all know that being in debt is no fun—whether it’s a student loan, a car payment plan, or a home mortgage. Having to pay back what you owe means you have to forgo other things you would prefer to spend money on, and deny yourself opportunities to enhance your wellbeing.
There are also risks associated with debt, of course. What if you lose your job? Or your house or car is damaged and you don’t have adequate insurance to cover the loss? Inability to pay back debt can have a huge impact on your life.
Yet despite the drawbacks and risks, many of us are willing to go into debt for an education, to start a business, for reliable transportation, or for housing. In other words, we decide that there are instances when the benefits of borrowing money are greater than the costs of paying it back.
The federal government is supposed to be making the same calculation—looking at the risks posed by having debt, then deciding whether or not the benefits of the loan outweigh the risks. But that isn’t what the government is doing. Borrowing from foreign countries to enable current spending is now the standard operating procedure in Washington, no matter what the drawbacks of borrowing or the risks involved.
In 2000, U.S. national debt was about 57 percent of GDP. It grew to 70 percent in 2008, and today it is a full 102 percent of our GDP. The Congressional Budget Office (CBO) projects that in 25 years our debt will be double our GDP, meaning we will owe more than twice the value of all goods and services produced in America in an entire year. Think of this in terms of a household’s finances and budgeting: It would be the equivalent of a household having an annual income of $50,000, spending $88,000, putting the extra $38,000 on a credit card loaded with more than $320,000 of debt—and continuing to spend regardless.
The increase in the national debt is reaching staggering proportions. We are adding more than $1 trillion to it every year. If we continue spending at that rate then, in the coming decades, the interest on the debt alone will be nearly impossible to pay.
Bad enough as that is, there’s another disturbing aspect to having such massive debt: When the federal government borrows money, that money isn’t available to invest in the productive sector of the economy. And when we pay the interest on the growing debt, that money likewise is denied to entrepreneurs who might have put it to more effective use.
The interest on the national debt last year was more than $450 billion. (To use our household example again, that would be like earning $50,000 a year but having to pay $10,000 of it in credit card interest.) What if those interest payments had instead gone to entrepreneurs and innovators and start-ups? How many new jobs would have been created and how many new products brought to the market? What new industries didn’t even have the chance to get off the ground for lack of funds? We can only guess what might have happened and what opportunities we missed.
With each taxpayer currently on the hook for around $113,000 of our nation’s debt, we have to ask what we can do to prevent the cost of borrowing from getting even more damaging to our economy. Well, we simply have to stop doing what got us here in the first place: over-spending.
Take a look at the chart below.
The current gap between spending and revenue is sobering, as is the recent sharp increase in debt. Some argue that we should merely increase revenues to close the gap. But even if we did risk harming our fragile economy by raising taxes, the government is projected to continually increase its spending to a level that could not conceivably be covered by taxation, which leads to further debt and more harm. We need to control spending now.
A large national debt restricts economic freedom by forcing us to direct resources toward paying the debt instead of where we would have used them otherwise. What is the true cost of a huge national debt? It is jobs that would have been created, the goods and services that would have been offered, the opportunities that we’ll never have, and the economic freedom we have lost.