When Is the Federal Debt Too Much?

When Is the Federal Debt Too Much?

(UnitedVoice.com) – It’s an age-old question to an age-old problem. When is government debt too much? For decades, the US federal government went from millions of dollars to trillions of dollars in debt. In November 2020, the federal government spent $145 billion more than the revenue it brings in from taxes, regulatory fees, and other forms of income. As of October 1, 2020, the government accumulated $27 trillion in total debt.

Government debt can be good, and it can be bad. In the short-term, government debt is a way to borrow money to inject into the economy to spur economic growth. The debt is typically secured through US Treasury bonds. In the old days, the debt was used to improve or build new infrastructure, education or ensure pension obligations were met.

This isn’t the old days.

COVID-19 has played a major role in America’s explosive government debt in 2020, and it’s not done as Congress considers a nearly $1 trillion new relief package to help Americans struggling through the pandemic. If Biden is inaugurated, he might push through some far-left Democratic policies like student debt elimination, free community-college, health care and other high-income spending items that might add trillions more on top of the deficit.

Where Is Government Borrowing Spent?

In 2019, the US federal government spent $4.4 trillion. That’s 21% of the Gross Domestic Product (GDP). The GDP is a measure of a government’s likelihood of paying off its debt. Of the $4.4 trillion, $3.5 trillion was paid by revenue generated by the government. The remaining $984 billion budget deficit was paid for by government borrowing. The following three areas made up the bulk of government spending:

  • $1 trillion, 23% of the budget, went to make social security payments.
  • $1.1 trillion, 25% of the budget, paid for Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and Obamacare subsidies.
  • $695 billion, 16% of the budget, went towards national defense.

Thanks to COVID-19, the federal government has spent trillions of new deficit spending dollars. From November 2019 to 2020, the federal government added $4.44 trillion in new debt.

When Is Government Debt Bad?

When politicians increase the debt to pay for programs, they delay the inevitable consequences that could likely result. During the short-term, the debt has been used to pay for government spending without raising taxes. Since COVID-19 began ravaging nations worldwide, interest rates have plummeted, making government borrowing cheap or nearly free and delaying any potential consequences even further.

In a country like the United States, which issues debt in its own currency, there is virtually no limit to manipulating government debt. Consequently, politicians like Democratic socialist Rep. Alexandria Ocasio-Cortez (D-NY) advocate for wild deficit spending. To legislators like her, government spending alleviates all social problems.

Of course, there is no such thing as a free lunch. Spending because the US can manipulate its currency valuation through printing money and setting interest rates is smoke and mirrors. In the long term, interest rates will rise. As the GDP increases, it could cause major disruptions to the US economy if national emergencies or international crises hit America’s shores.

One option to control the debt includes increasing inflation through the Federal Reserve by raising interest rates. However, that hurts everyday people as the prices of products and services rise while their incomes remain the same. The net result is things get more expensive, and the middle class doesn’t have more money to pay for the things they need or want.

The point before American’s finances are hurt is when the federal debt is too much. It’s hard to know exactly what that number is thanks to COVID-19 and currency manipulation of the dollar. Nations across the globe are struggling with the same conundrum. As long as interest rates remain low, most economists aren’t concerned about the spending to help Americans through the pandemic.

However, if they rise in the future, it could present real problems.

Don Purdum, Independent Political Analyst

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