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YOU DECIDE: Will the national debt sink us?

September 18, 2009

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu


Dr. Mike Walden
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A couple of weeks ago the Congressional Budget Office (CBO), nonpartisan experts on the federal budget, boosted their estimate of the national debt in 10 years by $2 trillion. The CBO says the national debt will be $14 trillion in 2019, up from $7 trillion today.

The announcement set off renewed concerns about what the national debt means to taxpayers and to the nation's economy. So let me try to answer some common questions about the national debt, what it means and whether you should be worried.

What is the national debt? Think of the national debt as the federal government's outstanding credit card balance. At any point in time, it's what the federal government has borrowed but not yet repaid. The debt is not the same as the deficit. The deficit is what the government adds to the debt each year. So the debt is always much larger than the deficit.

Isn't $14 trillion, or even $7 trillion, an enormous amount? Yes, but when we deal with the federal government or a large industry or corporation, the dollar amounts will be gigantic. So economists try to put them in perspective by asking what percent of the economy is represented by the dollar amount. In the case of the national debt, the answer today is 53 percent, and the CBO expects this to rise to 68 percent in 2019.

Actually, the U.S. doesn't have the highest national debt on a percentage basis. Italy, Japan and France, to name a few, have much higher relative debt loads.

Will the national debt have to be repaid? Yes and no. Yes, in the sense that any individual government debt security - called a treasury security - will be redeemed when its term ends. Think of a treasury security as like a bank CD (certificate of deposit). The federal government has a perfect record of paying interest on treasury securities and then paying back the principal (the amount invested in the treasury security) when the security's term is up.

But the federal government never has to run its debt to zero for one simple reason - the country (we hope) will never end. It's like the federal government is a person who never dies. The debt can be continually rolled over to the next generation. But is this fair? See the next question.

Wouldn't it be better to have no national debt? Although my late mother would disagree, debt serves a useful purpose. Consider this example. Say Tom needs a car in order to work and earn an income. Yet Tom has no savings to use to purchase the car. Fortunately, he can borrow (go into debt) to buy the car and repay the debt while he's working. Tom is, therefore, better off using debt than not.

For government, this means using debt to build roads, bridges, public buildings and perhaps even to finance education - all functions that have long-lasting positive benefits. So debt can make sense. Also, paying off debt over time from both current and future taxpayers - both of whom benefit from the projects - seems more reasonable than having only today's taxpayers foot the bill.

Most debt issued by state and local governments is legally limited to bricks and mortar projects. However, there is no such limit for the federal government.

Does the national debt hurt the economy? This has been a much debated question, even among economists. At a glance, there's no obvious connection between the size of the national debt and economic growth. For example, the economy grew in the 1980s, when the debt was expanding (as a percent of the economy) as well as in the 1990s, when the debt was contracting. Also, there's substantial research showing interest rates don't necessarily rise when the debt expands.

So is there no cost from the national debt? Yes there is, and to explain, let's return to personal finance. The bigger a person's credit card balance, the greater the monthly interest cost, even if it's only the minimum payment. This means the person will have less money to spend for other things, like food, clothing, gas, etc.

It's the same for the federal government. The necessary interest payment on the national debt is estimated to jump from under $200 billion this year to over $700 billion in 2019. The total additional interest cost on the additional national debt incurred between now and 2019 is put at $3 trillion. This is $3 trillion that could be spent on other things, either by the government or by taxpayers.

This is the way to look at the debt's cost - what else could be done with the money servicing that debt? And this is what you, I and our elected representatives have to decide - is the debt buying us products and services that are more vital and more important than the others we could buy with the same money? This is a very big "you decide."

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/

Posted by Dave at September 18, 2009 08:38 AM