Americans have $1 trillion problem

While large numbers defy comprehension, Americans should try to wrap their minds around the huge sums of money owed on the fastest growing segment of the federal budget. The interest expense on the national debt will hit the $1 trillion mark in a decade then become a consistent $1 trillion outlay each year. While economists generally track spending, revenues, and deficits as a share of gross domestic output, there is something to be said about the sheer magnitude of an annual interest cost of $1 trillion, and the profound effect that a bill of that size would have on the budget.

Millions, billions, and trillions may be phonetically similar, but they have vastly different magnitudes. A million is certainly large, but a trillion is a million times a million. While a $5.7 billion disagreement on a wall may have shut down the government for more than a month, budget debates having a $1 trillion interest expense at their core, enough to fund a wall long enough to wrap around the world twice, will be substantially worse.

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The interest expense on the national debt is, for the most part, payments owed on outstanding borrowings and not all that unlike the interest charge many of us see on monthly credit card statements. It is tolerable if the purchases were worthwhile, perhaps for investing rather than for consuming. Fortunately, the federal government enjoys a much better credit rating than the rest of us, and it pays a much lower interest rate.

While federal spending for Social Security and Medicare are frequently and accurately cited as the major drivers of the unenviable budgetary outlook for the country, the Congressional Budget Office estimates that net interest will increase at a substantially faster pace than entitlements. Interest payments are forecast to double from $325 billion last year to $650 billion in about five years. This is a course that will have the United States spending more money on interest than national defense by 2025.

Americans should not be surprised by the magnitude of this interest cost because the federal government has for many years followed a deliberate policy of spending more money than it collects, thereby requiring heavy borrowing in good times and bad. Even now with low unemployment and interest rates, high asset values, and an expanding economy, the United States finds itself in a $1 trillion budget deficit pattern with little political will to alter a design where spending growth steadily outpaces revenues.

The national debt is the accumulation of many years of operating in the red. It is close to $22 trillion and will continue to rise along with interest due. Congress occasionally debates debt levels and imposes a limit, but that is an ineffectual gesture because borrowing needs are driven by past budgetary decisions rather than the imposition of an after the fact debt ceiling, which is now suspended but slated to be reimposed next month.

Notwithstanding attention in policy and academic circles regarding the economic and fiscal impacts of government debt, borrowing is never free. It costs households and it costs the government. Borrowing only makes sense if you think you will have more money in the future. Unfortunately, recent tax changes weaken the ability of the United States to repay its debts because less money will be available in the future. Tax cuts might better be described as tax deferrals. Citizens will pay down the road or, perhaps more likely, our children and our grandchildren will foot the bill.

Economists and fiscal policy analysts have differing opinions regarding how much debt is sustainable. The traditional argument against incurring large amounts of debt has been that public borrowing crowds out other uses for investable resources, reduces national savings, and increases upward pressure on interest rates as borrowers compete for increasingly scarce resources. Debt, however, can be a valuable fiscal tool if it is used prudently, such as for investment or to support countercyclical stimulus.

Regardless, a significant portion of the federal debt cake is already baked. Interest payments will be high for the foreseeable future. Perhaps the best that policymakers can reasonably do at this point is to ensure the situation does not get dramatically worse. While the economy is strong, new efforts should be made to stabilize the primary deficit, which excludes interest payments, to lessen the structural budgetary imbalance that exists. If not, interest payments will consume an ever increasing share of the wealth in the United States, and it is sure to negatively impact future generations.

If the United States was not stuck with such a huge interest bill, the funds could be used in countless ways or taxes could be cut by thousands of dollars for every American household. But first the country must pay this interest expense, which is not exactly the kind of public spending that generates enthusiasm among citizens who would prefer to pay taxes in exchange for federal programs designed to protect and care for them both now and in the future, not so much for services done in the past.

Douglas Criscitello is a senior lecturer and executive director of the Golub Center for Finance and Policy at the Massachusetts Institute of Technology.