Is the national debt still a big worry?

When I recently reviewed my columns of past years, I was surprised I hadn’t written about “the debt” – meaning the national debt – in six years. If anything, concerns about the national debt have increased in recently.  So, it’s time for an update addressing several important questions – how bad is the debt, what are the consequences of the national debt, and what are ways to control the national debt?  You will then be able to decide how high of a priority addressing the national debt should be.

To know how bad the national debt is, we have to decide how to measure it.  Just as with personal debt, we don’t want to measure the national debt simply by its dollar amount.  Why? Because the size of any debt is relative.  For example, if you tell me you have $100,000 in personal debt, I don’t know if the amount is high or low because the relative burden depends on your income.  If your annual income is $20,000, then a $100,000 debt burden is very high.  But if your annual income is $2 million, then a $100,000 debt burden is low.

Economists use two measures to gauge the national debt burden.  One is the total amount owed in the national debt as a percent of total national income.  The second is the interest payments on the national debt as a percent of total national income. In both cases the measures are typically done annually, and the national income measure used is “gross domestic product (GDP).  GDP is the value of all goods and services produced in the country in a specific time period, such as a year.  Another way of understanding GDP is simply as the sum of all income earned from the production of goods and services in the country during a year.

The latest data show the total national debt is121% of national income. This is more than twice the level in 2000, three times the level in the late 1960s, and it is a national record.

The second measure also shows alarm, but not as much.  Currently annual interest payments for the national debt as a percent of GDP is 3.8%, higher than the 2.3% in 2020, but lower than the record 5% in 1991.  However, the US rate is among the highest compared to similar rates for other countries.

What are the consequences of our national debt, particularly if it is increasing?  Economists worry about three adverse effects, including a drop in the international value of the dollar, an increase in interest rates, and a slowdown in economic growth.

Since the end of World War II, the US dollar has been the dominant currency in the world.  The dollar had been viewed as a currency that held its value, so foreign traders liked to use dollars.  But worries about the rising US debt and the ability of the US to make debt payments can cause the dollar’s relative value to decline, and this has happened recently.  This means foreign products and services the US imports – which totaled over $4 trillion in 2024 – can become more expensive and cause the domestic inflation rate to increase.  Inflation can also increase if the Federal Reserve creates money to buy some of the debt issued by the federal government.

More government borrowing can also increase interest rates, and the reason is simple.  Think of interest rates as the price of borrowing, which results from the interaction of people and institutions that want to borrow money and people and institutions that want to loan money. Since the amount of loanable funds is generally limited at any point in time, when borrowing increases, interest rates also rise as borrowers compete for the relatively scarce money and lenders worry about higher inflation decreasing the value of future debt payments.

Lastly, as more borrowing causes interest rates to rise, consumers and businesses will eventually borrow less due to the higher cost of loans.  While this may initially appear to be a good result, less borrowing can eventually cause less spending and hiring in the economy and possibly lead to a recession or worse.

The conclusion is the impact of a rising national debt goes beyond government.  It also affects households, businesses, and the entire economy.  But, what can be done?

Up to now, we’ve mainly relied on the Congress and the Presidency voluntarily cutting spending and/or increasing taxes to contain borrowing. This actually worked in the 1990s when President Clinton and the Congress took the federal budget from a deficit to a surplus.  Indeed, at the end of the 1990s there were people talking about disadvantages of a budget surplus!

But the surplus didn’t last, so now people are looking at establishing rules about the federal budget for moderating borrowing.  One rule would divide federal spending into “current spending” and “capital spending.”  Current spending would be for operating the government, and only taxes could fund current spending.  Capital spending would be for investments, like roads, housing, and military equipment, and borrowing would be allowed to fund capital spending.   Most states, including North Carolina, use this type of budget system.

A relatively new rule that’s been discussed would mandate taxes to be automatically increased when borrowing reached a certain percentage of GDP.  Since new taxes are generally not favored by the public, the idea is Congress and the Presidency would work hard to keep borrowing under the stated threshold.

There’s also the ultimate rule – an amendment to the Constitution mandating a balanced budget - meaning no borrowing except in cases of a national emergency, such as a war. But not enough states have ratified the amendment to allow it to move forward.

I’ve now been a professional economist for almost five decades, including over four decades teaching at NCSU.  I can’t count the number of times I’ve said the national debt is the “big issue of our generation.”  Yet since I keep adding new generations to my proclamation, I wonder if I will ever see a day when I can say, “the debt was the big issue of past generations?”   You decide.

Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.