Question

What challenges will the U.S. economy face given a higher debt limit for future economic growth?

Answer 1

The U.S. debt is the sum of all outstanding debt owed by the federal government. On February 11, 2019, it exceeded $22 trillion. It passed the milestone of $21 trillion on March 15, 2018. The U.S. Treasury Department's "Debt to the Penny" shows the current total public debt outstanding. This figure changes every day. The debt clock in New York also tracks it.

In the short run, the economy and voters benefit from deficit spending. It drives economic growth. The federal government pays for defense equipment, health care, and building construction. It contracts with private firms who then hire new employees. They spend their government-subsidized wages on gasoline, groceries, and new clothes. That boosts the economy. The same effect occurs with the employees the federal government hires directly. As part of the components of GDP, government spending takes a huge chunk, most of which is allocated to military expenditure.

Over the long term, a growing federal debt is like driving with the emergency brake on. As the debt-to-GDP ratio increases, debt holders could demand larger interest payments. They want compensation for an increased risk they won't be repaid. Diminished demand for U.S. Treasurys would further increase interest rates. That would slow the economy.

Lower demand for Treasurys also puts downward pressure on the dollar. The dollar's value is tied to the value of Treasury Securities. As the dollar declines, foreign holders get paid back in a currency that is worth less. That further decreases demand. Also, many foreign holders of U.S. debt are investing more in their own countries.

At that point, the United States will have to pay exorbitant amounts just for the interest. The amount of federal spending today points to high-interest payments on the debt in the near future.

Congress realizes it is facing a debt crisis. Over the next 20 years, the Social Security Trust Fund won't have enough to cover the retirement benefits promised to baby boomers. That could mean higher taxes once the high U.S. debt rules out further loans from other countries. Congress is more likely to curtail benefits than raise taxes. That would primarily affect retirees younger than 70. It might also hit those who are high income and not as dependent on Social Security payments to fund their retirement.