At time of writing the United States owed $19.3 trillion in public debt. It owed another $5.9 trillion in debt held by its own agencies. Together, these figures come to a national debt of $25.2 trillion. With substantially more coronavirus spending almost certainly still to come, 2020 will be one of the most expensive years in U.S. history. As a percentage of gross domestic product (GDP), the coronavirus response has already pushed government spending to its highest levels since World War II (the single most expensive event in U.S. history). How is the United States going to pay for all of this?
It Won’t, and That’s OK
Fundamental to understanding the national debt is understanding a common mistake: The government does not follow the rules of household finances. One of the reasons for this is the importance of U.S. debt to global markets. Both private companies and foreign governments use American securities as a way to store capital, putting millions and billions of dollars into Treasury bonds, bills and notes, secure in the knowledge that they will get this money back.
In addition, foreign governments and companies buy U.S. securities as a source of U.S. dollars. The dollar functions as the world’s reserve currency, and owning, selling and collecting the interest on these assets ensures ready access to dollars.
These two factors (among others) have made U.S. debt instruments essential to global banking and business. For that to continue to work those debt instruments must continue to exist. If America paid off its debt, there would be no Treasury bonds to generate interest for foreign governments and no Treasury notes for companies to store value with. This is one of the reasons why the U.S. can generally get very favorable interest rates. The people who buy U.S. debt need those instruments almost as much as the U.S. does.
This is not a normative statement on the value of paying off debt. Nor is it a policy argument for whether or how much the U.S. should pay. The scope of issues raised by the national debt are complex and beyond the scope of this article, but also very real. It is a balancing act: When deciding how to approach the national debt, the government weighs its interest payments and debt concerns against the need to keep a substantial amount of U.S. securities in circulation. The result is that America will pay off some of its debt, but global finance depends on the country never paying off all of it.
Generating Revenue (Fiscal Policy)
When it comes to actually repaying borrowed money, the U.S. has two main options. The first is repayment through fiscal policy.
Repaying the debt through fiscal policy is what most people think of when they refer to paying down the debt. This means setting aside a portion of the federal budget and using it to make payments on principal and interest. To do this Congress would have to find the money to spend on debt service. Since the government has not run a budget surplus since 2001, this would require one of two things:
Taxes are the main form of revenue for the federal government, with most of its revenue coming from personal and corporate income taxes. (Since the 2017 tax cuts, individual income taxes have dominated federal revenue by a fairly wide margin.) By raising taxes the government can increase its revenue. This would close the gap between how much Congress spends and how much it takes in, allowing it to dedicate a greater percentage of the federal budget to debt.
The other way to manage deficits is through spending. By cutting spending, the government can also close the gap between how much it takes in and how much it spends. With less revenue earmarked for spending programs, Congress can then dedicate a greater percentage of the federal budget to paying down debt.
Printing Money (Monetary Policy)
The second option for repaying the national debt is through what is known as monetary policy. This means that, rather than raising taxes to generate revenue, the government simply creates the money it uses to pay down debt. Since the U.S. borrows in its own currency, and can create more of that currency at will, it isn’t actually possible for the country to default on its debt except by choice. At any given time Congress can authorize the Treasury to print the dollars it needs to pay any debt.
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