How Worried Should We Be as the U.S. National Debt Exceeds $40 Trillion

The U.S. national debt has crossed the $40 trillion mark for the first time in history, sounding alarm bells about the country's fiscal future.

Danny Leipziger, the managing director of the Growth Dialogue and a professor of international business at the George Washington University School of Business, explains how we got here, what rising debt means for households and why bipartisan action is needed to address the financial burden.

Q: The news that the U. S. national debt passed the $40 trillion threshold has produced some shockwaves in the media and concerns about what this means for the average American. What's the real story and how did we get there?

A: It is a milestone, a negative one for sure, since this means that debt is now 120% of the nation's GDP, and just paying the interest on that gigantic sum means that more than one-fifth of government spending is going to service the debt. This means that there is less money available to finance other needed expenditures; in fact, when combined with health care, social security and other mandated programs, there is little left in U. S. coffers to rebuild bridges, old power-grids, not to mention other urgent needs.

Q: Many are asking how we got here. Can you break this down for us?

A: How we got there is crucial since our national debt was only $5 trillion in 1996, rising steadily to $ 20 trillion a decade ago. Now it has doubled very quickly. These dynamics are the result of the government spending more than it receives in tax revenue. We have consistently been running a fiscal deficit, now about 6% of GDP, and this is financed by selling bonds and thereby increasing our national debt.

Q: Some say that higher interest rates are the result and that this is hurting American households and adding to the concerns of inflation outstripping wage gains. How worried should we be?

A: There are a number of pathways by which this hurts the average citizen. First, in order to finance these deficits, the government has to offer higher yields to bond purchasers, driving up interest rates. This affects mortgages, the cost of credit card debt, and any loans that have variable interest rates. Second, as I mentioned, it crowds out other necessary expenditures. Third, it can make inflation a larger concern as interest rates affect corporate borrowing costs and these increases can be passed on. When combined with the impact of high tariffs, the American consumer will see prices rise.

Q: So, what's the answer and what is there to stop the nation's debt levels from doubling again in the next decade?

A: The longer-term answer is to find bipartisan solutions to cut the deficit. In 2010, we had the Simpson-Bowles Commission (officially the National Commission on Fiscal Responsibility and Reform), led by a Republican Senator and a Democratic Congressman that proposed placing caps on future spending and halting the steady attrition of tax revenue, that has actually fallen as a percentage of national income. Tax breaks and unnecessary spending are killing the budget, and bipartisan institutions have been pointing this out for quite a while, but to no avail.

Q: We have heard concerns about the solvency of the social security system. Are these legitimate worries?

A: Yes, very much so, since people are living longer, and the demographic reality is that we will see a decline in those paying into the system while the promised payments are increasing. This is a hidden liability on the fiscal picture that can only worsen our national balance sheet.

Q: Finally, some have expressed concerns that the declining role of the U.S. Dollar or say the attractiveness of U.S. government bonds is hurting us, and may further drive up interest costs. As an economist teaching international monetary issues to undergraduates, what can we say about this?

A: That's a good observation since although there is no strong contender to the U.S. Dollar as a global reserve currency, appetite for U.S. bonds has weakened, also causing yields to rise. In fact, the U.S. Treasury recently went into the market buying bonds to try and slow this trend. But this is a band-aid. The bottom line is that the days when the government can simply issue debt to finance deficits are looking murkier, and the costs of ignoring the nation's debt are rising. The $40 trillion mark should be taken as a serious warning signal, and politicians of both parties need to react responsibly.