National debt held by the U.S. topped $31 trillion this week, according to a report from the Treasury Department. CNN Business reported that the debt has never creeped this high before.
However, the relationship between this dollar amount – unfathomable to most people – and the average American might be hard to imagine. How might this debt load effect everyday citizens?
Where does the debt come from?
According to the Treasury Department, the national debt is actually “composed of distinct types of debt, similar to an individual whose debt may consist of a mortgage, car loan, and credit cards,” that the nation has carried since it was founded. For example, some of the nation’s first debts, including money borrowed from the French, totaled $75 million during the American Revolutionary War.
With this debt, the federal government is able to pay for programs and services available to the American public. At the end of each fiscal year, there is typically more spending than revenue, creating a deficit in the nation’s budget and the government borrows money to cover it, adding to the debt along with interest on the amounts borrowed.
“Simply put, the national debt is similar to a person using a credit card for purchases and not paying off the full balance each month,” explained the Treasury Department. “The cost of purchases exceeding the amount paid off represents a deficit, while accumulated deficits over time represents a person’s overall debt.”
In recent decades, there have been a number of events that caused spikes in the debt, including: the Afghanistan and Iraq Wars, the 2008 Great Recession and the COVID-19 pandemic. From the 2019 fiscal year to the 2021 fiscal year, spending increased by 50% due to the pandemic, according to the Treasury.
“Tax cuts, stimulus programs, increased government spending, and decreased tax revenue caused by widespread unemployment generally account for sharp rises in the national debt,” it said.
How will this debt impact Americans?
According to the Peter G. Peterson Foundation, “as the federal debt mounts, the government will spend more of its budget on interest costs, increasingly crowding out public investments.” This “growing debt also has a direct effect on the economic opportunities available to every American,” said the foundation.
It explained that when high levels of debt crowd out private investments on capital goods, “workers would have less to use in their jobs, which would translate to lower productivity and, therefore, lower wages.”
Another way national debt can impact average Americans is its relationship with inflation, which increased around 8.3% over the past 12 months, according to the most recent Bureau of Labor Statistics report on the Consumer Price Index.
“An increase in the price level directly reduces the real value of government debt,” according to the Federal Reserve Bank of St. Louis. It also explained that “surprise inflation transfers wealth from holders of U.S. government debt – who include both Americans and non-Americans – to U.S. taxpayers.”
The bank said that unexpectedly high inflation rates in the U.S. have reduced the real value of the national debt in the past. In the aftermath of World War II during 1946 and 1947, inflation rates were high at 12.9% and 11% as the government removed wartime price controls. However, it helped bring down the ratio of debt to gross domestic product.
As for the “recent burst of inflation in the U.S. and the rest of the developed world,” the bank said it is expected to reduce the real value of existing debts while also raising expected inflation and increasing the cost of borrowing in the future.
Congressional Budget Office estimates cited by the Peter G. Peterson Foundation indicate that interest costs will total $8.1 trillion under current law over the next decade. Already, the U.S. spends more than $965 million per day on interest payments.
Last month, the Fed raised interest rates, one of multiple raises so far this year as part of an effort to bring inflation down.
If the U.S. were to reduce the debt to 79% of the size of the economy by 2050, income per person would increase by $6,300 by that year, per CBO data cited by the Peter G. Peterson Foundation.
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