Consequences of national debt felt by all

By James Jordan-Wagner
Dec. 17, 2017 at 9:15 p.m.
Updated Dec. 18, 2017 at 1 a.m.

James Jordan-Wagner

James Jordan-Wagner   Contributed Photo for The Victoria Advocate

The U.S. debt is more than $20 trillion.

That is about $63,000 a person and about $170,000 a taxpayer. About $6.3 trillion is owed to other countries, primarily China, which holds about $1.2 trillion in U.S. bonds, and Japan, with about $1.1 trillion.

The ratio of debt to gross domestic product is slightly more than 106 percent, which means we owe more than the entire economy produces in one year. This is below the all-time high of 118 percent, set in 1946, just after the end of World War II. There are several implications of this.

A country with a high debt load that slips into recession requires a bigger stimulus to have an economic effect. Japan, which has a debt-to-GDP ratio of about 250 percent, has been mired in recession or slow growth for two decades in spite of repeated stimulus efforts.

As more money is borrowed and the amount of debt increases, more of current income (tax revenue) is obligated to pay the interest. The U.S. currently pays about $24.4 billion in annual interest payments on the national debt.

When a family borrows money to buy a house, the amount of the mortgage payment is not available to use in other purchases or to invest for future interests, such as retirement or sending children to college. The median mortgage payment in the U.S. is about $1,000, depending on the region and the age of the mortgage. That means $1,000 a month is not available.

Extrapolating this, the government is unable to spend $24.4 billion on things such as the military, health care, veterans' care, road construction or any number of other priorities because it is obligated to interest payments. As more is borrowed, that amount will continue to rise, and other obligations will suffer as a result.

In the worst case, a country that has borrowed too much eventually will find that no one will lend it money without reform. Something like this happened in Greece following the financial crisis in 2008 and 2009. Concerned about the continued ability to repay, Greece's lenders demanded large reforms that included tax increases and spending cuts. Since Greece is a member of the European Union and does not control its own currency, as the U.S. does, the circumstances are different. Nonetheless, eventually a country gets to the point where lenders will no longer provide financing, resulting in forced austerity.

Finally, a country with a large external debt load essentially is asking its children to pay for its current lifestyle. As we debate the merits of expanding the deficit, it is useful to consider these issues.

James Jordan-Wagner is the interim dean of the University of Houston-Victoria School of Business Administration.


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