If a stack of $100 bills worth $1 trillion would measure 631 miles high, how high would the stack of $100 bills be to pay off the $23 trillion U.S. public debt?
Approximately 14,500 miles, which would stand up to half the height of Mount Everest. But those with a credit card are building up their own personal mini Mount Everest.
“Every time we use a credit card we are building up debt,” said UCSB economics professor Benjamin J. Cohen. “If over the course of time our income fails to match the accumulation of debt, we are in deficit. Same for families; same for business enterprises; same for every level of government.”
When governments spend more money than the revenues raked in from taxes, they are building up debt. In situations when the economy is stagnant, governments are known to lower taxes and increase spending to help stimulate the economy. The spending is typically focused towards domestic programs and projects like funding agencies or building roads.
Franklin D. Roosevelt’s administration, for example, launched the New Deal in 1933 to combat the Great Depression. The New Deal gave birth to many highways and several agencies (known as the alphabet agencies) such as the Agricultural Adjustment Administration and the Federal Housing Administration.
After the Financial Crisis exploded about a decade ago, the public debt grew at a magnificent speed, even after accounting for inflation. The U.S. entered 2008 with a public debt of almost $9.5 trillion, which doubled in seven years. Compared to 2008, the public debt has grown 240 percent, while inflation bounced between 0 and 3 percent over the same time period.
The money that the U.S. government borrows, however, is not without interest. The government services its debt by paying interest to those it has borrowed money from. One channel through which the government borrows money is by selling treasury bills (also known as T-bills). With the assumption that the Federal Reserve is not simply printing bills to make interest payments to T-bill holders, the government must restrategize its spending, tightening and loosening belts in areas where necessary.
“It’s like pieces of a pie,” Mr. Cohen explained. “The bigger the slice of pie that must go to pay interest, the less pie there will be for other programs” such as national defense or health care.
The recalibrations of federal programs, however, affect different parts of society in different ways.
“If farm support is cut, farmers are hurt. If food stamps are eliminated or Medicaid benefits are cut, poor people suffer. If defense spending is cut, workers in the defense sector may be laid off,” said Mr. Cohen. “That is what the budget fights in Washington are all about — whose piece of the pie is to be reduced…whose ox will be gored.”
Payments on a 10-year T-bills are about 2 percent, translating to interest payments that can ravage up to 15 percent of the federal budget. If government borrowing continues to increase, the interest rates must keep up to entice borrowers to continue lending money, and this is when the global market flexes its muscles.
“Higher interest rates will have to be offered to persuade lenders to keep buying government bonds. This in turn will attract lending from abroad, which in turn will drive up the exchange rate of the dollar,” said Mr. Cohen, whose recent book “Currency Statecraft” addresses the role currency plays in a country’s geopolitical ambition.
When the dollar appreciates and becomes more expensive for foreigners to buy, U.S. exports become more expensive for the world, an effect that would hurt U.S. firms in the world markets. Deficits, however, are “to a large degree, inevitable — but for political reasons, not economic reasons,” according to Mr. Cohen, who pointed out that the government has the power to raise taxes on its citizens.
“But that is where the politics come in,” said Mr. Cohen. “Politicians understandably find it much easier to spend money than to raise taxes. Hence in practice almost every government runs a budget deficit. Budget surpluses are rare.”
Most economists point out, however, that a surplus does not necessarily mean that the country is in great economic shape. Imagine, for example, a country in which the government does not fix the potholes of a much used road in order to avoid tapping into its surplus or a person who does not want to take on a mortgage but instead waiting to have all the money for a home saved up.
“Many of us carry debt — a home mortgage or a car loan, for instance. Whether that is good or bad depends on whether our present or future income is likely to be adequate to service our debt.”
For the government, a typical measure of its debt-service capacity is the ratio of deficit to gross domestic product. The higher the ratio, the lower the debt-service capacity. A ratio under 3 percent is considered a safe debt-service capacity by most economists. The U.S.’s ratio, however, surpasses this rule of thumb.
“Today that ratio in the U.S. stands at 4.6 percent, up from 3.8 percent just a year ago,” said Mr. Cohen. “The rapid rise of the ratio should be a cause for concern.”
The government has two main tools to address the deficit: cut spending or raise taxes. This pair of tools are known to split the divide in American politics.