How Much Should We Care About the National Debt?

By Travis Rayome, Political History

The United States Government is around $36,220,000,000,000 in debt as of April 2025, according to figures calculated by the US Treasury. The figure is immense, exceeding America’s 2023 gross domestic product by trillions. The sheer scale of the debt informs why reducing it has been one of the current Trump Administration’s largest stated goals in their policy agendas so far. The debt arises from the Federal Government’s annual deficits, when the budgets adopted each year entail spending at a higher rate than the revenue raised through taxes and fees. The money comprising the annual deficit is borrowed in the form of debt securities such as bonds to allow for spending not already covered by revenues, which when aggregated over time, adjusted for inflation, and including interest, provides the final debt figure. The deficit has grown significantly each year since 2015, aligning with both consistent increases in annual federal spending over the past several decades and relatively stagnant revenues.

But what are the implications of the nation being in debt? At such a large scale, the United States Government operating at a negative overall fiscal balance and increasing its debt with each passing year heightens the severity of a potential recession, which could cause a global economic crisis. This is because when the government sells bonds (securities purchased by the public that act as loans issued to the government) to resolve the deficit, thereby accruing debt, the lenders purchasing them do so with expectations of a return on their investment with interest over the bond’s lifetime. Investors are forward-looking, meaning that they purchase bonds based on how they expect them to perform. More mature bonds, which are paid off over the course of longer periods, are perceived as riskier investments due to their increased exposure to changes in macroeconomic trends, and so holders of longer-term government bonds tend to demand a higher yield. Investors must therefore anticipate that eventually, fiscal policy will adjust to balance the budget, meaning there is an implicit expectation that at some point in the future, the US Government will adjust spending and revenues to resolve budget deficits and compensate the investors who purchased its debt (Gokhale et. al 2023). As national debt accrues and fiscal policy trends towards larger and larger spending deficits, though, many economists predict that investors, expecting lower yields on their investment, will increasingly demand returns that the government cannot provide (Gokhale et. al 2023). Economists warn that this “snowball effect” could one day result in the government defaulting on its debt, which would plummet the value of government bonds, causing all those holding them to lose money, which would lead to a recession. Because markets rely on bonds as a stable-value asset for trading, this means that a government default could collapse the entire economy, as all of the transactions and assets backed by treasury bonds would lose value and vast amounts of existing wealth would evaporate. This implication has sharpened criticism of deficit spending as hazardous to the nation’s economic health.

Luckily, there are numerous methods of staving off potential crises caused by unsustainable debt. Congress can increase the debt limit of the United States Treasury, banks can take out loans from the Federal Reserve, and interest rates on bonds and other financial assets can be adjusted, among other fiscal and monetary mechanisms. While these actions can all help keep the economy running, they do not address the issue at the heart of the national debt: the United States Government’s revenues are insufficient to cover its spending. 

The past 40 years of presidential administrations have fundamentally shaped the relationship between revenues and expenditures in modern America. Ronald Reagan’s approach to America’s fiscal position favored wide cuts to fiscal policy, hoping that the economic growth brought on by lowered government spending, deregulation of business, and sizable tax cuts to corporations and top earners would compensate for the lack of public investment. Reagan’s presidency saw the national debt triple from $995 billion to nearly $3,000,000,000,000 in his eight years, the largest increase in United States history up to that point (Yergin and Stanislaw 1998). In the 21st Century, George W. Bush’s further tax cuts for corporations and top earners and massive increases in military spending during the Iraq and Afghanistan Wars increased the national debt by upwards of trillions as well (Ruffing and Friedman 2013). While the Obama Administration’s heavy public investment successfully restarted economic growth after the Great Recession and reduced the annual deficit from over $1.4 trillion in 2009 to $430 billion in 2015 and $585 billion in 2016 (Jones 2020), the problem was far from solved by the end of his term as deficits remained and debt kept accruing due to large unfinanced expenditures such as corporate debt buyouts and continued regressive tax policies (Committee for a Responsible Federal Budget 2016). These decisions failed to address existing fiscal needs even if deficit spending saw a substantial downward trend under the Obama Presidency. Donald Trump’s first term saw the trend of sharply regressive tax policies and increased military spending continue, leaving office with $8,400,000,000,000 added to the national debt, the highest proportional increase under any president during peacetime (Committee for a Responsible Federal Budget 2024 and Sloan et. al 2021). 

But what does a high national debt mean for the average person? What effects does it actually have on daily life? Critics of deficit spending argue that increasing debt is harmful to the economy and increases financial burdens on the public, on top of increasing the risk of a recession as discussed earlier. However, analyses of recent trends in fiscal and monetary policy suggest that the direct negative implications of rising spending deficits on the public might be overblown. 

First, there is evidence to suggest that increasing national debt could be an unreliable predictor of recessions, contrary to assertions made by critics. The economy of the United States under the administration of President Joe Biden, who continued the pattern of high deficit spending and compounding national debt, saw production/GDP grow to exceed its potential while the yield curve was inverted (Statista 2024); i.e., investors expected lower yields on their longer-term bonds, a trend economists cite as prompting a recession (Gokhale et. al 2023), yet the economy grew. This signals that by itself, national debt does not inherently increase the risk of a recession and the assumption that deficit spending inherently harms the economy cannot be applied to contemporary America (Mason 2020). An analysis conducted for the Roosevelt Institute also found a notable lack of correlation between deficit and several key macroeconomic factors, meaning government borrowing does not “crowd out” private investment or drive up inflation on its own. Instead, the analysis found that deficit spending can actually help prevent a collapse in market activity and keep down unemployment by stimulating economic growth during periods of unsure economic health (Mason 2020).

Another common assertion made by critics of deficit spending is that a high national debt indicates a weak, insufficiently growing economy that is failing to serve the needs of the public adequately. However, recent studies have found that the connections drawn between deficits and tangible economic decline by traditional measures are less useful than previously thought in determining the real adverse effects of rising national debt on the public (Harrison 2021). Deficit spending has not been proven to consistently reduce economic growth, for example, given that the effects of economic decline (low wages, lack of market activity, slowed productivity growth, decreasing labor force participation, etc.) are often resolved through public investment targeted at driving up demand for spending, creating jobs, boosting growth in wages and productivity, and allowing for an increase in government revenues. This indicates that the relationship between deficit spending, national debt, and economic decline is rather nebulous and that the rules are not consistent enough for this kind of a blanket statement (Mason 2020, Auerbach and Gorodnichenko 2017). A good example of this complex relationship is the American Recovery and Reinvestment Act of 2009 (ARRA). Passed under the Obama Administration to jumpstart recovery from the Great Recession, the ARRA primarily focused on economic stimulation, injecting new funds into the economy to promote growth. The act required heavy deficit spending and increased the national debt, but the investments made through it were crucial in enabling a sustained economic recovery after the Great Recession and improving conditions for the public by creating millions of new jobs, boosting GDP significantly, and providing much-needed improvements to America’s infrastructure (Lew and Porcari 2017). As mentioned before, the annual deficit decreased consistently over the course of Obama’s tenure from 2009 onwards, showing that the benefits of savvy public investments like the ARRA have the potential to balance the federal budget. Even discounting its effects on the national debt, the ARRA was largely helpful in reducing financial burdens on average people by lowering the tax burden on working families, bolstering crucial social services, substantially increasing employment and spending, and providing easier access to affordable food and housing for millions (Bernstein and Spielberg 2016). So, given the effects of the ARRA, if stimulating growth requires a spending deficit, then that does not mean the entailing increase in debt is permanent nor inherently harmful to the lives of average people. The same goes for taxation: the harm of both tax cuts and increases is relative to the needs of the public, what taxes are spent on, and whether the burden of taxes is shared equitably.

An alternative to deficit spending proposed and implemented by many governments in the past is reducing government programs to save money. The thought is that following the cuts, because the market is no longer “crowded out” by government spending, private institutions will increase their activity and provide public services instead, and conditions for average people as well as the deficit will improve from growth led by the free market. In practice, though, past efforts to improve public welfare through the private sector have not been proven effective. As has been evidenced by recent market trends, the “crowding out” effect of government spending is too inconsistent to deem public investment inherently harmful to economic activity (Mason 2020). Furthermore, public disinvestment, deregulation, and cutting taxes on corporations and top earners to encourage market-led economic growth has not shown to actually bolster economic health, improve the lives of average people, nor address the national debt, as demonstrated by the Tax Cuts and Jobs Act of 2017 (TCJA)’s failure to increase the earnings of 90% of all workers while benefiting those already at the top heavily, thereby increasing inequality (Kennedy et al. 2022) and generating inequities in the tax burden. The TCJA’s goals of promoting free-market activity, as well, did not prove to actually affect general economic growth positively, if at all (Marr et. al 2024). The TCJA also cut off trillions in potential government revenues that could have reduced the national debt and improved social services, which are crucial in reducing inequality, strengthening the economy, and reliably alleviating financial burdens on the public (Anderson et. al 2016 and Madzinova 2017). In short, research has demonstrated that tax cuts at the top like the TCJA don’t benefit the majority of people in numerous key ways (Marr et. al 2024). In contrast with the outcomes of the post-recession economic stimulation of the ARRA, the increase in deficit spending and national debt due to the TCJA can be seen as a greater overall negative for public welfare because the policy failed to justify the resulting deficits/debt; it did not improve overall conditions, entail meaningful public investment, nor promote growth.

Resolving the national debt is relatively simple: it is a matter of how the government collects revenues and what they are spent on. Productive and conscious spending by the government can promote equitable economic growth that negates the harm of potential resulting deficits (Harrison 2021) and, along with responsible progressive taxation, can help adequately raise the revenues necessary to address public debt while bolstering long-term growth (Gale et. al 2015). The large, consistent increase of America’s national debt, given the complicated relationship between the variables that shape it, should not be seen solely as the result of a weak economy or an argument against public investment because it is an aggregate of deficits over time caused by both productive, pro-growth public investment such as the American Recovery and Reinvestment Act of 2009 and comparatively unproductive policies such as the Tax Cuts and Jobs Act of 2017. Whether or not national debt is a detriment to the economic health of the nation comes down to how public funds are used and the effects of the programs they are used on (Harrison 2021), as well as how the government decides to allocate its tax burden. Policies that favor regressive taxation and cutting spending, in practice, tend to both stifle economic growth and increase financial burdens on the public while equity-focused fiscal policies such as progressive taxation and savvy public investment have been demonstrated to promote growth and improve general conditions, This ensures that social services are properly funded, efficiently improve public welfare and stimulate the economy, and that the tax burdens and outcomes of public investments are equitable are key in ensuring sustainable economic growth and mitigating any potential harm posed by spending deficits and national debt.

References:

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