The latest issue of Time magazine features a stark red cover with a strident warning:
“DEAR READER,” it reads. “You owe $42,998.12.” As it goes on to explain, “That’s what every American man, woman and child would need to pay to erase the $13.9 trillion in U.S. debt.”
Needless to say, that’s a hefty chunk of change, more than 80 percent of the American median household income. But does that number actually mean anything?
“It just seems unbelievably silly,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. “This has nothing to do with people’s future living standards, nothing to do with the ability of the government to pay back its debts. It’s basically zero information.”
— TIMEPolitics (@TIMEPolitics) April 14, 2016
Time’s alarmist headline, built on the granddaddy of all back-of-the-envelope economic arguments, implies that there is a mound of debt that we have to eradicate now or else face dire consequences. That line of reasoning obscures some basic facts about how government debt operates.
At the most basic level, public debt is not due all at once, now or in the future. Anyone with a student loan debt or mortgage knows that’s not how debt works. The Treasury Department issues debt at maturities ranging from a few days to 30 years. Today, the average dollar owed by the government comes due in 69 months, or 5.75 years.
So let’s imagine that instead of paying back their share of public debt all at once, the average American had five years to do so. Would ordinary income taxes suffice?
The back-of-the-envelope answer: easily. Take an average taxpayer as defined by the Tax Foundation, a single adult without dependents making about $51,000 a year. He or she pays roughly $8,600 in income taxes each year. Over five years, the total paid back to the government by that average worker at current tax rates: $43,000.
Does that number look familiar?
That’s just a portion of government revenue. Income taxes account for a mere 47 percent of tax receipts. Payroll taxes make up a third, and corporate taxes make up 11 percent. Taken together, tax receipts totaled $3 trillion in 2014, enough to cover the current public debt in, again, just about five years.
Of course, that doesn’t mean we actually will extinguish the national debt anytime soon. The government currently runs at a deficit, meaning Uncle Sam spends more on public programs than he takes in every year in tax revenue. Though the deficit has been coming down in the years following the Great Recession, the overall level of debt will continue to grow.
Government as Corporation
But these calculations ignore a more basic point about national debt, Baker said. “The government doesn’t have to pay down its debt. We can roll this over forever.”
This may sound like bunkum to anyone with a bank loan; household debt always comes due. But the government isn’t a household. If the U.S. wants to issue bonds to cover debt payments, there is literally a world of investors who will happily buy up bonds at low interest rates. The world has little fear that America will ever default.
Baker compares the government not to an individual — whose lifespan is finite — but to a company. Companies hope to operate in perpetuity. And like the government, nearly every corporation maintains a significant level of ongoing debt, often reaching into the billions. General Electric, for instance, currently holds nearly $200 billion in debt.
“No one’s concerned about that as long as it’s a healthy growing company,” Baker said. “The CEO is not going to come to the board and say, ‘I have a plan to pay off our debt.’ Their intentions are to be around indefinitely.”
Likewise, the U.S. government plans to be around a bit longer than any 30-year bond. Indeed, there has been a national debt since 1835, and there will continue to be one. As Alexander Hamilton said, “A national debt, if it is not excessive, will be to us a national blessing. It will be a powerful cement to our union.”
That’s not to say there isn’t reason for some concern, according to David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. Though the debt isn’t currently causing the sorts of problems fiscal hawks warn about — inflation isn’t rising, for instance, and interest rates remain historically low — it’s poised to be a headache in the future.
“It’s really hard to tell people you should not worry about the debt today, but you should worry about it tomorrow,” Wessel said, pointing to the inevitable increase in government payments to support retiring baby boomers. “We should do things today that avoid problems tomorrow.”
Paradoxically, Wessel said, that means increasing the debt today to make crucial infrastructure updates and other investments for the future. It’s hardly a left-field view. The International Monetary Fund, the Federal Reserve and other establishment institutions have pinned persistently slow growth rates, in part, on the reticence of governments in the developed world to provide adequate stimulus to economies still shaky from the global financial crisis.
“At the federal level, the fiscal stimulus of 2008 and 2009 supported economic output, but the effects of that stimulus faded,” Fed Chair Janet Yellen said in a speech last year, bemoaning efforts to reduce deficits. “By 2011, federal fiscal policy actions became a drag on output growth when the recovery was still weak.”
Paying Less for More
In absolute terms, the public debt is large, standing at 74 percent of gross domestic product, nearly double the 50-year average. Debt ballooned after 2007, as America grappled with its deepest recession since the 1930s.
Yet the public debt is less costly than it has been in decades. Thanks to historically low interest rates, interest paid by the federal government amounted to just 1.2 percent of GDP last year, well under half of what it was in the 1980s and 1990s.
But as Wessel points out, interest rates will eventually rise, our debt will become more costly, and politicians will be tempted to cut spending elsewhere to make up for the shortfall. “Congress’ reaction will be to squeeze out everything else, including investments in the future,” he said. As a possible solution, Wessel envisions a mix of tax reforms and changes to benefits programs staggered over a decade to ease the future debt burden.
The takeaway for ordinary Americans: The national debt currently has little bearing on quality of life; the economy could even use some additional stimulus. Eventually we’ll have to reckon with it, but eradicating the national debt is not — and has never been — necessary or desirable.
Suffice to say, no one is going to knock on your door and demand $43,000 to pay down the national debt anytime soon.