The national debt is shown in real time on a clock in lower Manhattan, next to Bryant Park. The numbers are moving so quickly that they are blurry, adding tens of thousands of dollars every second to a total that has already surpassed $39 trillion and doesn’t appear to be going back. On their way to lunch, people pass it. Some pause to snap pictures. The majority continue to travel, which may be the most accurate depiction of the country’s reaction to the debt that anyone has been able to create. The quantity is nearly cosmic. And Washington has come up with something that resembles an institutional shrug rather than a solution, despite years of urgent-sounding hearings, bipartisan commissions, and fiscal restraint laws.
There are several debates around the US national debt in Washington. There are three of them working concurrently, each based on a distinct set of presumptions about the meaning of the number and what, if anything, it needs. The disagreement over whether the issue is real, urgent, or even a problem at all in the traditional sense is the first step towards understanding why Congress is unable to agree on a solution.
The position with the oldest history and the strongest emotional appeal is the fiscal hawk position. The argument goes something like this: $39 trillion is more over 120% of GDP, a ratio that has traditionally foreshadowed financial problems for sovereign debtors. More specifically, the US now spends more than $1 trillion a year just to pay off the interest on its current debt. This amount has increased to the point where it surpasses the entire defense budget and discourages the kind of public investment in infrastructure, education, and scientific research that promotes long-term growth.
The trajectory, which is fueled by mandatory spending on Social Security and Medicare that was designed decades ago for a demographic reality that no longer exists, points toward a future where that restriction becomes much more binding. Every dollar spent on interest payments is a dollar that cannot be used for anything else. The headline debt amount completely ignores the unfulfilled obligations contained in such programs, which some analysts estimate to be worth over $100 trillion in present value terms. Fiscal hawks contend that this is the real crisis concealed behind the one that has everyone worried.
The growth and stimulus camp challenges the interpretation rather than the numbers. They contend that the debt-to-GDP ratio—which may be enhanced by either decreasing the numerator or increasing the denominator—is the pertinent indicator rather than the debt in absolute terms. A expanding economy lowers need for safety-net spending, increases tax revenue, and eventually makes a certain amount of debt more bearable.
Austerity policies that lower short-term deficits by raising taxes or cutting spending run the danger of impeding the growth necessary to make the debt sustainable. Several European nations fell into this trap following the 2008 financial crisis, and the consequences did not clearly improve their fiscal conditions. Analysts of the Penn Wharton Budget Model have noted that official Washington accounting is set up in a way that makes future financial shocks appear farther off than they actually are, which undermines simple assurance on both sides of this argument.
The third camp, which is smaller but academically serious and occasionally connected to Modern Monetary Theory, makes a more radical claim that the risk of default in the traditional sense does not apply because the United States controls its own monetary system and borrows in its own currency.
According to this perspective, the debt cap is mostly a political tool that Congress use to fabricate crises rather than a real financial restriction. Accordingly, real resource allocation and inflation are the concerns to be concerned about, not the amount of nominal debt. This stance has consistently drawn mockery from fiscal hawks and sincere participation from fewer serious economists, which is likely related to the appropriate distribution of reactions.
