What the national debt means for future generations

What the national debt means for your children (and your children’s children)

When you turn on the TV or pick up your phone, it sometimes seems like the old axiom “no news is good news” has taken on a new meaning. Gun violence, climate change, inadequate or overly expensive health care, are just a few of the heavy topics making headlines and spurring fractious debate on social media.

Yet another problem may be in the offing just offscreen. The national net debt has risen to $16.1 trillion, according to an economic viewpoint in The New York Times. That’s the net debt, which is the amount of debt held by the public (people and entities outside the government) versus the total debt, now standing at $22 trillion, which includes debt that one part of the government owes to another part of the government. 

According to a June 2019 report by the Congressional Budget Office, the net debt is projected 78% of the gross domestic product (GDP) by the end of the year. The GDP is the total monetary value of all the goods and services produced in a country in a year. The CBO projects net debt to be 144% of GDP by 2049. Large budget deficits over the next 30 years are projected to drive federal debt held by the public to unprecedented levels, according to the report.

To put that in perspective, the debt has averaged 42% of GDP over the last 50 years and “it has exceeded 70% of GDP during only one other period in U.S. history — from 1944 to 1950 following the surge in federal spending that occurred during World War II,” the report stated.

How does the debt affect me now?

A trillion—it’s 12 zeros in case you were wondering—is such a large number that it might not even seem real. Simply comparing the debt to the GDP isn’t much easier to comprehend. William Gale, a senior fellow in economic studies at the Brookings Institution, suggests using the fiscal gap calculation as another way to grasp the scope of the debt.

“Suppose the government in 30 years wants to keep the debt-to-GDP ratio where it is now,” Gale said. “How much would taxes and spending policy have to change now on a permanent basis to make that happen?”

The fiscal gap is about 4%, said Gale, who called it “an enormous number.” In other words, he said, if you are paying 8% in federal income taxes now, you would have to start paying 12%, a 50% increase, to maintain the 78% debt-to-GDP ratio. And that translates to an additional $600 to $800 billion per year.

“What this calculation does is two things: First, it puts the necessary adjustment in terms of a share of current income. The other thing is it highlights that the problem is not the current debt-to-GDP ratio, it’s the projected debt-to-GDP ratio,” he said.

Gale, author of “Fiscal Therapy: Curing America’s Debt Addiction and Investing in the Future,”  believes the national debt also has consequences for people right now.

“It’s true that there’s no appetite in D.C. to cut the deficit. But it’s also true that there’s very low appetite to address any of the social needs we’re facing right now, whether it’s healthcare or infrastructure or climate change or investment in kids,” Gale said. “And part of the reason is the high debt kind of casts a shadow over any government policy-making efforts.”

Looking into the future

At the moment, the national debt is largely overlooked by the public, and we have low interest rates to thank for that, Gale said. Given current interest rates, the government’s interest payments on its debt are low. 

Gale hypothesized that there are a couple of things that could bring the national debt to the forefront of the country’s consciousness.

One of them would be a ratcheting up of the trade war.

“If the trade war heats up significantly that will chip away at fiscal policy, either the dollar’s role as a reserve currency or Chinese holding of debt or just a generally weak economy,” he said. 

Another thing that could call attention to the national debt is if the Social Security and Medicare trust funds run out of money. Medicare’s trust fund is projected to reach $0 in 2026 and Social Security is on pace for the same fate in the 2030s, Gale said. If either thing were to happen, some adjustments would almost certainly have to be made to policies.

What it means for future generations

The CBO, which makes its projections assuming “current laws generally remain unchanged,” also warns that Americans could start to feel the effects of the national debt.

If its projections are accurate, the CBO report states, “That debt path would dampen economic output over time, and rising interest costs associated with that debt would increase interest payments to foreign debt holders and thus reduce the income of U.S. households by increasing amounts.”

The cost of borrowing for the average American, say for a mortgage, would also get more expensive because of higher interest rates, says Christopher Viale, president and CEO of Cambridge Credit Counseling Corp. It changes the terms on credit cards, too. “For people who are more in tune with what’s going on in the government, that could change their behavior,” he says. Meaning they may spend or borrow less. Higher interest rates for borrowing also could drive down home prices because people wouldn’t be able to afford as large a mortgage.

Gale, however, is not opposed to the national debt or even a higher national debt because he pointed out that debt is far from the only thing that we will pass along to our children and grandchildren.

“If we are using the money to build a better education system, a better healthcare system, a better justice system, and make it possible for our families to function better in the market, adjust climate change, etc., and the price of that is higher debt, I think that is probably an acceptable bargain,” Gale said. “But the problem we’re facing is we’re not doing any of those things, but we’re still getting rising debt.”

And if the debt is high, Gale thinks policymakers will be reluctant to address the major challenges facing our country. He said he thinks that is an even bigger issue than the “gradual deterioration of living standards” and passing additional burdens onto future generations, which would be two other consequences of the projected rising debt.

He also sounded a word of caution about the projections.

“If interest rates rise, the national debt will balloon,” Gale said. “That changes the subject entirely.”

Proposals to solve the problem

On the surface, the solution seems simple: The government needs to spend less, tax more or some combination of the two.

But it’s not quite that easy. Few people love the idea of paying the government more money and receiving fewer services.

Gale suggests a three-part approach to addressing our national debt and other issues:

  • Reform entitlement programs. Gale would like to make changes to Social Security and Medicare without adversely affecting their ability to reduce poverty and provide social insurance, he said. 
  • Make major new investments in health care, climate change, education, and children, among many other things.
  • Raise and reform taxes. This is a particular point of emphasis for Gale.

“We’ve got taxes that are at several decade lows right now (relative to) GDP,” Gale said. “We’ve got rising spending in Social Security and Medicare and so we need to get taxes not just back to their average level of GDP, but higher than that to address the aging of the population.”

Harvard University economics professor N. Gregory Mankiw wrote in his New York Times economic viewpoint that he would prefer to see the government cut spending. But he also acknowledged that might not sit well with everyone. So he proposed a series of changes to the tax code that would tackle things like the rising cost of healthcare and student loan debt.

“Congress should reform the tax treatment of carried interest, which the finance industry uses to secure the lower capital gains rate for some forms of compensation,” Mankiw wrote. “It should repeal the overly complicated and inequitable treatment of pass-through businesses in the 2017 tax bill. It could increase the corporate tax rate from 21% to, say, 25%, which would still be well below the 35% rate that prevailed when President Trump took office. Finally, it should strengthen tax enforcement.”

Both Gale and Mankiw suggest value-added taxes, which Mankiw wrote, “efficiently raise substantial revenue in many European nations.” Gale also said Americans “desperately need” a carbon tax.

Gale and Mankiw agree that raising taxes on the rich alone will not solve the problem.

“Yes, we should raise taxes on high-income households, there’s lots of ways to do that,” Gale said. “But no, that probably won’t be enough in and of itself to address the problem. That’s not a reason not to raise taxes on high-income households, it’s just an acknowledgment that the problem is very big.”

While the national debt is massive and the projections are daunting, Gale argues that we don’t have to view the future with a sense of foreboding.

“I hope we don’t just dump the burdens on future generations,” he said. “It seems like it’s sort of an unofficial compact among generations in America that each tries to leave the world a better place than it was before. I feel like we can make the necessary investments we need to in climate change and kids and health and infrastructure and all that, and still keep the debt under control.”

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