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This paper will address the numerous causes and effects of the United States National Debt, both on the US citizen, the US government, and the world. Firstly, however, a parallel must be made. Beginning in 2008, the Eurozone member nation of Greece entered a crippling and tumultuous economic downturn that has crippled its government and caused panic among global financers. Despite three substantial bailouts from the International Monetary Fund, the European Central Bank, and its neighbors in the European Union, Greece largely failed to recover its economy. With a 25% unemployment rate and extreme austerity measures in place, its economy is in a poor state, and the accruement of billions of euros of debt to its creditors has made true stability a far off dream. Greece narrowly avoided a default in fact, only scraping by due to its creditors being extremely lenient and altering their payment deals. ( Greeces Debt Crisis Explained )
Greece has a national debt of roughly 391 billion euros, or 428 billion US dollars. This total comes out to a little over 180% of Greeces GDP, or gross domestic product, the total sum of all goods and services produced and sold in the country per year, arguably what the country is worth. Thanks to interest rates, the Grecian debt rises by 875 USD per second. Greece has slid into the grey zone of paying off credit with credit to avoid default at this point. They are a poster child for what irresponsible economic policy can do. So what does this have to do with the United States National Debt? ( Greece Debt Clock ) Greece serves as an important warning, and a solid example of what could happen to the United States on a smaller scale. Where Greece bears a debt of 428 billion US dollars at 180% of their GDP, the United States bears a national debt of 18.6 trillion US dollars at this time of writing. Thats roughly 106% of the US GDP. The United States massive economy allows for significantly more debt to be accumulated before extreme economic downturns, but we are rapidly approaching that point. ( United States National Debt Clock )
What does this mean? What can debt do the country? The effects are far reaching and devastating. A nation with cripplingly high debt will experience a decrease in investment, an extreme slow-down of economic growth, and most damningly rapidly growing inflation and debt taxes. Each of these facets in smaller doses harm everyday citizens, and on larger scales can incite wars and end nations.
Economic studies show that for roughly every 100 billion US dollars added to US debt each year, there is a net impact of 102 billion US dollars shaved off of expected growth of GDP over the next ten years. In other words, for every dollar that the US government adds to the national debt, the total value of the US economy permanently decreases by a little over that amount over the next ten years. The current economic system is in many ways unsustainable if we continue to accrue debt, as our GDP will find itself unable to balance out to our growing interest rates. This happens largely due to the fact that interest on private investment is kept low by the Federal Reserve in an attempt to combat growing deficits, and the ever increasing need for tax hikes to fight the mounting debt each year causes investment to fall period. ( High Debt is a Real Drag )
This slow downturn is something that is regularly ignored when budget policies are reviewed in the House of Representatives and the Senate, as it is generally regarded as something that can be addressed at a later time. The most attention the national debt gets from politicians is when the debt ceiling is approached. The US debt ceiling is a cap on the Federal Governments ability to borrow on interest, one which has simply been risen each election cycle instead of working as intended to cap off borrowing. ( Debt Limit )
Of more important long term note from national debt is the resulting tax hikes and inflation of the US dollar. The only two ways to address rising debt is to decrease spending and increase income. Unfortunately, for over fifty years the United States has seen only increased spending in all areas, with no sign of stopping. As such, many politicians turn to the other option in the form of tax increases. While theoretically good for helping to make interest payments, such hikes tend to hurt the economy more in the long run by decreasing the overall amount of money invested by citizens into said economy. Beyond that, the Federal Reserve attempts to control debt by issuing new currency to help pay it off, an act known as inflation. In the past, a dollar had a set value based on the price of gold. This gold standard was removed and replaced with what is known as fiat currency, where the value is based on what the government says it is. Under this system, the more dollars there are, the less they are worth compared to other currencies. As such, when the Federal Reserve issues new money into the system, such as when they bailed out major banking firms during the 2008 recession, the value of everyones dollars around the world decreases. Two prime examples of where inflation got out of hand and resulted in national collapse were in ancient Rome, and Weimar Germany. Romes national debt spiraled out of control, requiring the Empire to mint more and more silver coins to finance its legions that were fighting to put down peasant tax revolts. Rome eventually split and collapsed into waring nation states, and never recovered to its former glory. ( America Far too Similar to Ancient Rome ) Weimar Germany struggled to finance its massive war effort as the Allied powers demanded WWI reparations. It got to the point where Germans burned Marks, the currency of the day, to heat their homes. They had to go food shopping with wheelbarrows of money to be able to afford anything. ( Hyperinflation in Weimar )
So what does this mean for the United States? The US dollar isnt at the point that the German Mark was, but its moving in that direction, and the repercussions can already be felt. A product that cost 20 US dollars in 1915, produced and sold the same way, would cost 470 US dollars today due to inflation. ( US Inflation Calculator ) Even now, youll hear arguments about minimum wage and how it hasnt caught up with the Cost of Living. While market prices largely affect the Cost of Living, a major contributing factor is inflation, and when the minimum wage was first implemented, it largely was kept in line with inflation. Now, this is no longer the case, and those living on minimum wage find themselves in difficult economic situations. ( Deflating Minimum Wage Costs Workers Billions of Dollars )
So where is all this money that the United States is spending going? Is the spending worthwhile? To answer this question requires an explanation of how Federal spending works. The United States borrows and spends on a near incalculable scale, so overall details in this paper will be sparse, and focus on a few major key points. The Federal Government has a few types of spending, the two most important being Mandatory, and Discretionary. Mandatory spending is whats applied when laws are put in place to distribute money to programs. Examples include Highway projects, Social Security, the new Healthcare programs, Retirement programs, and funding for Federal offices. Discretionary spending represents about one third of the yearly budget, and is broken up between numerous departments in the Government, primarily the military. ( Federal Budget Glossary )
Discretionary spending is the easier of the two types of spending to address, so this report will begin there. The 2015 Federal Budgets Discretionary spending fund was roughly 1.11 trillion US dollars, 598.5 billion (54%) of which went to the US Military, be it a defense branch, contractors, or funding to defense companies such as Lockheed Martin or General Dynamics. It also includes funding to foreign military powers such as Israel or Saudi Arabia. The remainder of the spending is broken up between numerous areas, including foreign aid, education, supplements to mandatory spending, and transportation, among others. ( Military Spending in the United States )
Mandatory spending on the other hand totaled to 2.6 trillion US dollars in 2015, broken up dramatically between many projects. Social Security and Unemployment took up roughly 50% of the Mandatory spending at 1.3 trillion US dollars. Medicare and Health spending took up roughly 33% of the spending, and the remainder was broken up between Veterans Benefits, Transportation, and Agriculture subsidies. Attached at the end of this document will be charts of Mandatory and Discretionary spending to allow for a visual reference of how spending was broken down in 2015. ( Presidents 2015 Budget in Pictures )
Mandatory and Discretionary spending combined totaled out to roughly 3.7 trillion US dollars rounded down. This substantial number does not include 252 billion US dollars spent on attempting to pay off interest on Federal debt. Estimated tax income for 2015 totals only 3.34 trillion US Dollars, leaving 16% of the budget to be they accrued 108 billion USD in debt, with spending expected to rise in 2016. Of even more concern is the fact that the United States accrues 537 billion USD and growing each year in interest. So in principle, the United States had a net result of an extra 353 billion USD in debt at the end of 2015. This pattern is similar to the past 50 years of budgets, with only a small handful of exceptions. ( Presidents 2015 Budget in Pictures )
How can this issue be corrected? How can we cut spending and tackle the debt? Can we prevent the eventual collapse that this path leads to? Unfortunately, there isnt any clear answer. Some groups call for massive spending cuts, others for massive tax hikes. The unfortunate truth is that the United States is rapidly approaching the proverbial point where it cant have its cake and eat it too. The best solution would be expansive spending cuts across all major entitlement programs, a massive cut to US military expenditures, and a solid restructuring to all government programs to reduce costs. Will we have the drive and will to make the necessary changes? Only time will tell.
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