Why the $ 22 trillion national debt doesn’t matter – here’s what you should worry about instead

US federal government debt reaches another milestone this month: it’s now a record $ 22 trillion in nominal terms.

It is $ 67,000 for each man, woman and child living in the United States, and it has grown by $ 2 trillion since President Donald Trump took office in 2017. By comparison, US debt is over the total size of the US economy by 20 Trillion dollars and is equivalent to gross domestic products of China, Japan and Germany combined.

This colossal sum is the reflection of the large annual budget deficits which the federal government has led, almost continuously, since 1931. Prior to that, surpluses were much more common, with the exception of the years after the Civil War.

With another round of anxiety-provoking debates on the debt ceiling likely to return in the coming months, like others economists, I thinks it is worth considering whether we should even care about the size of the public debt.

The fault is not imminent

First of all, it is important to note that current levels of US debt do not indicate any imminent risk of default.

As long as the US federal government remains a “constant concern” – fiscal institutions are strong and efficient, fiscal authority is maintained, and the long-term productive capacity of the national economy is assured – there is no there is no economic reason to fear default on debt. Political reasons, such as debt ceiling, that’s another matter.

To stay solvent and ultimately pay what it owes, the US Treasury – which sells notes and bonds to investors to raise money to finance the budget deficit – needs only to balance its books over the long term, rather than an arbitrary unit of time such as a year.

Historically low interest rates on government debt suggest that bond market participants agree with this point of view and do not fear a sovereign debt default in the United States Indeed, with these low rates, sufficient economic growth may allow the government of borrow indefinitely.

Why it doesn’t matter

While $ 22 trillion is a large number, it is essentially irrelevant to proper thinking about the economic role of the US government or responsible fiscal policy.

Public debt simply reflects the tax schedule. Higher spending levels today require more borrowing – and more debt – as long as the taxes necessary to pay those expenses are pushed into the future.

But regardless of when taxes are collected, what ultimately matters is how much of the economy’s scarce resources the federal government commands and controls, and how those resources are used, that depend primarily on the level and composition of government spending. To paraphrase Milton Friedman, expenses are taxed.

In short, public debt can be a poor indicator of the direction of fiscal policy or its burden on the private sector. The government can be extremely intrusive in the economy and therefore an obstacle to growth and well-being even if its debt is low. For example, Venezuela sovereign debt only represented 23% of its GDP in 2017, yet its economy was in turmoil for several years.

Or he can effectively manage expenses to promote wellness even if his debt is high. In 1945, the United States debt / GDP ratio was 120 percent immediately after the government mobilized the economy to win World War II.

High debt should not prevent the government from spending on laudable public projects. And low debt does not prove that the level or composition of public spending is appropriate.

Health insurance accounts for around a third of public debts considered to be “off balance sheet”.
AP Photo / Pablo Martinez Monsivais

The real burden of worrying

Yet the $ 22 trillion “on balance sheet” debt is likely to dreadfully understate the federal government’s true liabilities and its potential demand on the economy’s resources.

The national debt is the government’s formal commitment to repay its creditors. But Uncle Sam has many other commitments for future expenses that are supposedly off the books. “Off-balance sheet” commitments. These liabilities do not appear in standard debt measures.

While these commitments are different in nature from the promise to repay previously borrowed funds, they nonetheless represent a potentially significant burden on taxpayers – and certainly a government tax on the economy.

These commitments stem from implicit and explicit commitments federal loan guarantees that support housing and education policy, of deposit insurance and Federal Reserve Actions that try to promote a stable financial system and commitments to the elderly and the poor through Social Security, retirement benefits, and Medicare and Medicaid.

Economist Jim Hamilton recently estimated that such off-balance sheet commitments could exceed $ 70 trillion, more than three times the present value of Treasury securities in circulation. The largest share, about a third, is Medicare.

So okay, worry about the debt, but choose the right measure to worry about.

The purchase of treasury bills to finance public debt spending was once considered an act of patriotism.
Photo AP / Charles Kenneth Lucas

How to get a good night’s sleep

But if the excessive burden of public debt on future generations is keeping you awake, there is a simple solution: buy Treasury securities with the money saved from current low taxes and bequeath those securities to your children.

They can use both principal and interest to pay high future taxes, with no ultimate effect on their net wealth or well-being.

In other words, taxpayers can use capital markets to offset transfers of their wealth – through taxes – to bondholders by becoming bondholders themselves. Overall, as long as private savings increase with government borrowing – and it is plausible to assume that this will be the case if people feel the need to save to pay higher future taxes – the latter should not crowd out borrowing for the productive activity of the private sector.

Plus, worrying about the federal debt won’t stop you from getting a good night’s sleep.

This is an updated version of a originally published article March 19, 2015.

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