The Nation That Cried, “Debt!” 

You don’t have to look hard to find alarm about high U.S. government deficits and debt. If the government budget isn’t brought under control, “it won’t take much to squeeze out private spending and drive the U.S. back into a recession,” or it will “precipitate an economic nightmare that will dwarf the Great Depression.” The problem: “we’re looking at a fiscal crisis that will drive interest rates sky-high.” The danger: “This is how empires decline. It begins with a debt explosion.” 

Scary stuff. Until you see the dates. Those quotations are from 1984, 1992, 2003, and 2009. Yet, here we are two to four decades later and it is hard to find the disasters arising from the government’s debt. To be sure, there have been economic problems since the early 1980s, but not from high government debt levels. Government interest rates remained low throughout those years, and the empire is still throwing its weight around. 

Constantly warning of a nonexistent imminent danger is the sort of thing that gets young boys eaten by wolves. If you learned to shrug off the alarmist screeds from the last forty years, is it time to start being concerned? The answer depends on what it is that concerns you. Much of the discussion surrounding the government debt has muddled together the quite different economic and ethical issues. Let’s sort those out. 

The Economics of Government Debt 

The federal government’s budget deficit is the amount by which spending exceeds revenue; in 2026 that is projected to be $2.1 trillion. The government’s budget debt is the total amount owed to creditors; in 2026 that is projected to be $32 trillion. Those are big numbers. If you personally owed someone $32 trillion, you (and your creditor) might be a bit concerned. 

Obviously, the U.S. government has more resources than you do, so we need a different gauge. The most often-used measure compares the size of the debt to GDP, which measures the total amount of production in the country. The CBO estimates that in 2026, the debt-to-GDP ratio will be around 101 percent. (The only time it was higher—106 percent—was at the end of World War II.) If the U.S. government wanted to pay off its entire debt right now, it would need all of the income generated in the entire economy this year. That seems very alarming until you remember that the government doesn’t have to pay off its entire debt this year. If you have a home mortgage, it is likely that the value of your debt exceeds your current income, but you aren’t worried because you do not have to pay off the entire debt today. 

Nevertheless, when the size of government debt is equal to the size of the GDP, many people get worried. Reinhart and Rogoff, for example, showed that when debt-to-GDP ratios are higher than 90 percent, economic problems arise. But a country with the economic size and power of the current United States can presumably weather a higher ratio than the norm. Theoretically, there is a debt-to-GDP ratio that will create problems even in the largest economy in the world, but we have no way of precisely determining that limit from the experience of smaller countries in the past. 

While it is hard to estimate the effect of the existing debt-to-GDP ratio, the trajectory of that ratio is noteworthy. In the four years from which the alarmist quotations in the opening paragraph were taken, the debt-to-GDP ratios were 33, 47, 35, and 52 percent. Remember the last of those numbers was in 2009. We are truly entering uncharted waters. 

What are the dangers? First, let us dispense with the often-repeated claim that the U.S. government is about to default on its debt. This shows up regularly with the kabuki dance around the government “debt limit,” a limit set by Congress that can be raised by Congress at will. When the artificial debt limit is hit, the government does have to curtail spending (until Congress inevitably raises the “limit”), but there is no reason to expect that the Treasury Department will default on debt payments rather than furlough a larger number of employees.  

What, then, is the actual danger of a high and rising government debt? First, there is the interest rate problem. When the government increases the amount it wants to borrow, people do not automatically want to lend more. A basic supply and demand graph will show you that as demand for something (loans) rises, then the price (interest rates) will rise. The higher interest rates are not a particular problem for the government; it can just borrow more to make higher interest payments. But as the interest rates on U.S. government debt rise, the interest rates in the rest of the economy also rise. Those higher interest rates are not good for borrowers, which includes people buying houses and firms building factories. 

The second danger of the higher government debt is that the government has the ability to forestall those higher interest rates by creating money. In the U.S., this happens when the Federal Reserve buys government debt by creating the money to pay for it. The higher money supply leads to higher inflation, which by definition lowers the real value of the dollar, making the debt less onerous for the government. But this “inflation tax” is costly for the population.  

The best sign that the current U.S. debt levels may be approaching the point where the debt has real consequences is the current squabble between President Trump and the Federal Reserve. The President wants to minimize the effect of the debt on interest rates by increasing the amount of money; the Fed wants to minimize the inflationary impact of creating money to buy the debt, thereby letting interest rates rise. 

The Ethical Problems of Government Debt 

On strictly economic grounds, it is possible but not certain that the current situation is different than it has been over the last forty years. To prevent negative economic impacts from high debt, Congress could simply exert some control over spending. (Yes, I hear your laughter.) But what about the ethical issues? 

A basic principle of debt is that it is sensible to borrow to pay for an asset that will be used over time. If you buy a house you plan to live in for a long time, a thirty-year mortgage makes sense. Why incur all the cost in Year One? Businesses operate the same way, buying equipment that will last many years and paying for it over time. 

The same principle applies to the government. A new road will last for years, so it seems a bit inequitable to bill current users the entire expense. Borrowing allows future users to help pay the expense. The same idea would hold for schools, courthouses, and submarines. Federal investment constitutes about 10 percent of total spending.  

Around 90 percent of the total spending is being paid to people as salaries, transfer payments, or interest. There are interesting ethical questions surrounding payments such as these. I could make a charitable contribution to someone who has a need or I could hire people to perform services for me. Government payments are slightly different, though. When the government gets involved, people are compelled to contribute and someone else is deciding who should receive the payment. To take the most politicized example, some government programs are effectively taxing wealthy individuals to give aid to less wealthy individuals. There are reasonable moral arguments (whether you agree with them or not) that such transfers are good. In a democratic republic, these matters get sorted out in elections. 

Government debt, however, changes the calculation. Now, the payments are being made to people currently alive, but the bill is being delivered to people not yet born. Only the recipients of the transfer payments are alive to vote on whether such a transfer is a good idea. You can see the temptation. Suppose you were offered a billion dollars right now, which will be paid for by some unknown people at some distant time in the future. Would you have the moral strength to refuse the offer? Think of all the good you could do with that billion dollars. You could fund schools and homeless shelters and battered women’s shelters and still have enough left over to buy that nice house on the beach you always wanted. Win-win-win, right? 

The ethical issues are even starker when we factor Social Security into the question. The myth of the Social Security program is that people pay into the system during their working years and then at retirement, get back what they paid in. The reality is, as the CBO puts it, “Social Security’s actuarial deficit over the next 75 years, a summary measure of the program’s sustainability, is equal to 1.5 percent of GDP or 4.3 percent of taxable payroll (total earnings subject to the Social Security payroll tax).” 

In 2033, the problem will become very noticeable. The government is not holding individualized savings accounts for each individual; instead, revenue is collected from people currently working and paid to people currently retired. Back in the 1980s, people realized that when the Baby Boomers retired, the number of retirees would increase relative to the working-age population. So, the “trust fund” was born; the Social Security taxes were set to be higher than the amount being paid out, which built up the trust fund. Eventually, when the Baby Boomers started retiring, the trust fund balance was drawn down. In 2033, the trust fund will be emptied. At that point there will be three options: 1) cutting Social Security benefits, 2) raising taxes by a sizable amount (1.5 percent of GDP!), or 3) borrowing more. Which seems most likely?   

Think about the intergenerational aspect of the post-2033 world. Back in the 1980s, only people who benefited from this arrangement were of voting age. It is only people who are alive in 2033 who inevitably will decide to borrow and pass the cost of the payments to people not yet born. It is also worth noting that current retired people are, as a group, the wealthiest set of people in the society. 

The Moral Quandary 

There is no shortage of debate about the ethics of debt. “Neither a borrower or a lender be” is oft repeated and ignored. There is a vast literature on the evils of lending at interest, and admonitions to avoid going into debt are legion. But personal moral codes do not necessarily apply to governments.  

What, then, are the ethical issues surrounding government debt? This is a good time to start taking that question seriously. When government debt levels are reasonably low or the result of infrastructure spending, then with reasonable expectations of economic growth, the future burden of the debt is small as a percentage of future (and higher) income. So, the concerns in 1984 or 2009 may have been overblown. But, we should all be able to agree that at some point the debt level gets sufficiently high that it will not be a small economic burden to future generations. We should also all be able to agree that at some point, borrowing from the future to increase our current consumption levels is problematic. The question is whether we are now at that point. 

We do not need to hunt very hard for an ethical principle to follow here. “Do unto others as you would have them do unto you.” I think we can all be profoundly grateful that people in the past built the interstate highway system and fought World War II. Would we all be glad if past generations decided simply to transfer wealth from us to them so they could enjoy higher consumption levels? Determining the answer to that question is left as an exercise for the reader. 

Image licensed via Adobe Stock.