As the year begins, the U.S. national debt has reached a historic level – $34 trillion.
It’s a lot of money, but what does it really mean for Americans? Experts have said that U.S. households shouldn’t worry. Still, increasing debt could mean that the nation will need to take a different approach to spending in the future.
As for the immediate future, the national debt could play into decisions about several things that impact the public. For example, government spending.
According to USA Today, the debt has already “been a source of tension among politicians, with lawmakers narrowly avoiding a default last year through a debt ceiling deal.”
Debt ceiling deals have been contentious in recent years, often bringing Democrats and Republicans head-to-head. Last summer, Fitch ratings downgraded the U.S. default rating and cited the frequent standstills regarding the debt ceiling.
Conservatives generally advocate to cut spending, while liberals typically seek to bring in revenue by implementing more taxes. If government spending is cut, it might impact programs that aim to help those in need, such as food stamps and Social Security. Higher taxes might make wallets leaner.
One example of a proposal to cut government spending was outlined in an opinion piece published this week by Deseret News. It called for reform to Social Security. However, proposed reforms to the program are generally unpopular and just last year Congress decided against cuts to it.
An example of a tax measure that could help decrease the nation’s debt would be a wealth tax.
“Advocates of a wealth tax argue that it would be an effective and progressive means of raising revenues while addressing wealth and income inequality and affecting only a very small fraction of U.S. households,” explained the Peter G. Peterson Foundation. “Critics counter that a wealth tax would be difficult to enforce, would lead to tax evasion (reducing the amount of revenues actually collected), and may be unconstitutional.”
JPMorgan strategist Michael Cembalest expects wealth taxes will crop up in the future due to pressure from markets and rating agencies. According to a Business Insider article, JP Morgan warned that the $34 trillion deficit could be a “boiling frog” situation.
“A boiling frog situation is one in which people fail to act on a potential problem that grows over time, causing it to become more severe until it eventually bubbles over,” the outlet explained. “A frog thrown in boiling water might jump out, but if the water comes to a boil slowly, it’s too late by the time it notices it’s being cooked.”
Whether by decreased funding for federal programs or through increased taxes, it is possible that Americans will feel the ramifications of the national debt in their wallets, according to USA Today.
“We’re going to have to make some hard choices about what we want to spend money on, and what we're willing to pay for, and how we want to raise that money,” said Betsey Stevenson, a professor of economics and public policy at the University of Michigan, per the outlet.
Stevenson noted that inflation – which has been stressing American consumers in the wake of the COVID-19 pandemic – will continue to make the nation’s debt figure grow larger. Estimates from the Congressional Budget Office indicate that debt held by the public is projected to rise in relation to the size of the economy each year to reach 118% of Gross Domestic Product by 2033. That would be the highest level ever recorded.
“Debt would continue to grow beyond 2033 if current laws generally remained unchanged,” said the budget office. University of Pennsylvania’s Penn Wharton Budget Model indicates that the U.S. debt held by the public cannot exceed roughly 200% of the GDP and that under current U.S. policy, financial markets can sustain just 20 more years of accumulated deficits before defaulting.
“The Treasury Department says it’s unclear exactly what sort of repercussions would follow a default, but it ‘would likely have catastrophic repercussions in the United States and in markets across the globe,’” USA Today reported.
It also reported that congressional leaders Sunday announced a deal on a short-term funding bill that will keep the government open into March.
If the government adds on a lot more debt going forward, experts said the interest rates could rise – including mortgage rates that would be felt by homeowners.
“Net interest costs reached $659 billion in fiscal 2023, up 39% from the previous year, according to the Treasury Department,” said USA Today. Yet, Treasury Secretary Janet Yellen and some other experts have said that the rates are at a reasonable level.
While some changes might be imminent Brett House, a professor of economics at Columbia Business School, told USA Today that the record debt figure “does not mean the sky is falling,” and that the U.S. remains amongst the growth leaders of the industrialized world.