National Debt Part 2: Private Sector Perspectives
Good to Know
This blog article is the second in a three-part series, including:
- Federal agency perspectives,
- Private sector perspectives, and
- Summary comparison.
How does our national debt impact the private sector in the United States? Unsurprisingly, economic experts do not unanimously agree that our rising national debt to gross domestic product ratio is cause for alarm. However, few economists dismiss the rising ratio as unimportant for the long-term.
We’ll consider the following in this article:
- Quick refresher on the debt process,
- Opinion of well-respected sources, and
- Summary
Refresher
The last time the Federal budget was balanced was 2001. Every year since then, the Federal government’s spending has been higher than Federal revenues.
There are two basic approaches to funding our annual Federal deficits:
- Increase revenue or
- Borrow.
In recent decades, the federal government financed the annual deficit primarily through debt, specifically by selling Treasury bonds to individual investors, institutional investors, businesses and foreign governments. According to the Government Accountability Office (GAO), “The debt is growing because the country keeps borrowing to finance an increasingly large gap between government spending and revenue. The underlying conditions of the problem have existed for over two decades. Every fiscal year since 2002, the federal government has run a deficit—meaning spending exceeds its revenues.”
Expert Opinions
According to the well-respected Peter G. Peterson Foundation, “… increased federal borrowing puts upward pressure on interest rates. A Congressional Budget Office (CBO) study found that each percentage point increase in the debt-to-GDP ratio boosts inflation-adjusted 10-year interest rates by 2 to 3 basis points.” By that estimation, and notwithstanding the latest jump in rates, long-term interest rates could rise by more than one-half of a percent in the next decade.
Higher interest rates raise the price of borrowing, thereby deterring private investment. According to CBO estimation, the net result of this trade-off is that for every dollar the federal deficit increases, private investment would fall by 33 cents.”
From another perspective, the cash used by U.S. consumers to purchase Treasury bonds and other Federal debt could have been used to purchase private sector investments such as stocks. From that same perspective, a reduction in private investment tends to reduce our national GDP (gross domestic product). Not to be overlooked, debt-fueled inflation puts pressure on family budgets as well, potentially reducing consumer spending on an inflation-adjusted basis.
Summary
The author respectfully suggests that—based on expert opinions—our relatively high government debt to GDP ratio is a cause for judicious corrective action, rather than a cause for panic. Stated another way, since the COVID-induced negative GDP growth of 2020, the trend has seen consistent quarterly GDP growth—perhaps not as robust as we’d like, but positive to be sure. To paraphrase Chicken Little, the sky is not falling…but we need to watch the weather forecast.
