The nations debt has just reached a new milestone at $15.2 trillion which means that it is now bigger than our $15 trillion GDP. What is even worse is that predictions are being made that debt will reach over $23 trillion by 2020.
The Bottom Line
January 9, 2012
The nation's debt has reached a symbolic milestone. With gross domestic product of roughly $15 trillion and total debt of $15.23 trillion, our total debt is now bigger than our economy, as USA Today noted Monday.
What's more, the Obama administration's projections put our debt at more than $23 trillion by 2020, well in excess of the projected $22.5 trillion GDP. Analysts agree that the rising debt ratio is not good, but they can't agree on just how bad it is, and while there's at least some agreement among economists about how to fix the problem, lawmakers have no such common ground — which is one of the biggest hurdles to actually doing something about the debt dilemma.
First of all, take a deep breath. That $15 trillion doesn't have to be paid back all at once. Think of it in terms of a household budget: The average household income is a little under $50,000, while the average sales price for single-family homes is about $169,500. Many homeowners owe more than they make in a year, and that's not cause for alarm in and of itself.
That $15 trillion figure is also a little misleading, said Bill Gale, a senior fellow at Brookings Institution and co-director of the Urban-Brookings Tax Policy Center, because it includes money owed by one government agency to another. A more important figure is net debt, which is the amount the U.S. owes investors and now hovers at around 70 percent of GDP, Gale said.
The other silver lining is that the interest on the country's debt currently is not a huge burden, said Eileen Appelbaum, senior economist at the Center for Economic and Policy Research, a liberal think tank. But the flip side is that if policymakers can't agree on solutions to rein in debt, servicing that debt will become more burdensome, especially if interest rates rise from their current rock-bottom levels.
"A higher debt burden means a higher chance we will get downgraded again, which eventually means higher interest rates," said Francisco Torralba, chief economist for Morningstar’s Investment Management division. Standard & Poor's decision to downgrade the United States in August has not led to substantially higher interest rates, although weak eurozone economies like Italy have to pay 7 percent or more to convince investors to buy their debt.
As the economy gains steam, tax revenues will rise and government expenses will fall for social services such as food stamps and unemployment insurance will drop. A thornier problem is the escalating costs of entitlement programs like Social Security and Medicare, said Aaron Smith, senior economist for Moody’s Analytics.
CEPR's Appelbaum said policies that targeting the cost of health care — which is rising at a rate that far outstrips inflation — could help rein in the government's expenses.
Sweeping changes to these programs are politically unpalatable, while incremental changes are unlikely to be big enough to keep up with spiraling costs. The alternative is altering the tax code to bring in more revenue.
"If you get into the household side, then it starts to get a little political," Smith said. Instead, simplifying the corporate tax code and eliminating loopholes that let some companies pay little to no tax should be a priority, he said.
Lawmakers might not agree on how, but it's clear the U.S. needs to make some headway on chipping away at the debt.
"It's obviously an issue that needs to be tackled," said Smith. "We're on an unsustainable path and what needs to be done is we need to stabilize the debt and eventually start to bring it down as a share of the economy."
Raising the GDP is crucial, economists say. This increases tax receipts, which means more revenue flows to the government, and it decreases the national debt as a percentage of GDP. Growing the GDP in an economic slump is easier said than done, though.
"Two important things we can do here are alleviating the debt burden of homeowners… coming up with some sort of plan that reduces the mortgage burden homeowners have," Torralba said. The huge number of underwater mortgages in the country hamper spending and mobility.
"The other thing Washington can do is approve a fiscal stimulus plan that stimulates investment, job creation and consumption," he said, pointing out that infrastructure projects like road improvements give the private sector and job creation a boost. But the current deadlock in Congress when it comes to approving spending projects make it unlikely these kinds of initiatives will be launched anytime soon.
"The economy is more important than the budget," Brookings' Gale said. "The first priority has to be to get the economy moving, ... but it's not really clear what the plan is right now."
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