Will the US Ever Pay Off Its Debt?
Why Our Debt Is So High and How We Can Fix It
The U.S. debt is the outstanding obligations owed by the federal government. On Oct. 1, 2020, it hit a new record by exceeding $27 trillion and it has increased by at least $1 trillion each year since 2007.
Over the past 15 years, Congress has made several attempts to lower the debt but haven't been able to reduce the growth of what we owe. Since these attempts didn't work, what can and should be done?
Why the United States Still Has Debt
Most creditors don’t worry about a nation's debt (also known as "sovereign debt") until it's more than 77% of gross domestic product (GDP); that's the point at which added debt cuts into annual economic growth, according to the World Bank.
In the second quarter of 2020, the U.S. debt-to-GDP ratio was a record 135.64%. Around $21.02 trillion of this debt is public debt, which is what the government owes investors. The retirement and disability funds of the Social Security program account for 13.3% of that debt.
So what's stopping the United States from eliminating its debt? There are three main reasons why:
- U.S. economic growth has historically outpaced its debt. For example, the U.S. debt was $258.68 billion in Aug. 1945 but the economy outgrew that in less than three years. By 1960, the GDP more than double. Congress believes that today's debt will be dwarfed by tomorrow's economic growth.
- Congressional representatives have a lot to lose by cutting spending. For example, if elected officials cut Social Security or Medicare benefits, they could lose their next election.
- Raising taxes can be politically unpopular. For example, experts believe President George H.W. Bush lost re-election because he raised taxes after promising he wouldn't raise taxes at the 1988 Republican convention. He raised taxes in 1990 to reduce the deficit, and voters remembered.
U.S. Debt Milestones
Here are some debt milestones since 1929:
|The Debt Exceeded||On This Date|
|$5 trillion||Feb. 23, 1996|
|$6 trillion||Feb. 26, 2002|
|$7 trillion||Jan. 15, 2004|
|$8 trillion||Oct. 18, 2005|
|$9 trillion||Sept. 5, 2007|
|$10 trillion||Sept. 30, 2008|
|$11 trillion||March 16, 2009|
|$12 trillion||Nov. 16, 2009|
|$13 trillion||June 1, 2010|
|$14 trillion||Dec. 31, 2010|
|$15 trillion||Nov. 15, 2011|
|$16 trillion||Aug. 31, 2012|
|$17 trillion||Oct. 17, 2013|
|$18 trillion||Dec. 15, 2014|
|$19 trillion||Jan. 29, 2016|
|$20 trillion||Sept. 8, 2017|
|$21 trillion||March 15, 2018|
|$22 trillion||Feb. 11, 2019|
|$23 trillion||Oct. 31, 2019|
|$24 trillion||April 7, 2020|
|$25 trillion||May 4, 2020|
|$26 trillion||June 10, 2020|
|$27 trillion||Oct. 1, 2020|
Congress has suspended the debt limit until after the 2020 presidential election. It wants to avoid a repeat of the 2011 and 2013 debt crises that hampered Congress during an election year.
Four Ways the United States Can Pay Off Its Debt
In most discussions about paying off debt, there are two main themes: cutting spending and raising taxes. There are other options that may not enter most conversations but can aid in debt reduction, too.
The 2010 bipartisan Simpson-Bowles report is a good example of how the government could cut spending to reduce debt. The report proposed balancing the budget through a mix of spending cuts and tax reform. Though Congress didn't adopt the complete plan, the government implemented parts of it with some success. However, a 2015 report from the Committee for a Responsible Federal Budget indicated that, while a piecemeal approach reduced debt, full-fledged adoption of the Simpson-Bowles plan may have produced a significantly lower debt-to-GDP ratio.
Raising taxes can generate revenue the government can use to pay down debt. However, if the government raises taxes too high, it can cut into tax revenue and hurt the economy. Finding that tipping point is a conundrum expressed by a concept known as the "Laffer Curve." But even though tax cuts are tricky, they proved successful in the mid-1920s, the mid-1960s, and the early 1980s.
Grow the Economy Faster Than the Debt
Increasing the GDP has a two-fold benefit: it generates extra revenue to pay down debt and it reduces the debt-to-GDP ratio if GDP growth outpaces debt growth. Therefore, driving economic growth is one way to reduce debt. However, Congress tends to disagree on how to create that growth. Most Democrats push increased spending, while most Republicans champion lower taxes.
Congress should shift spending from defense to job-creation areas like infrastructure and education. Almost 15% of government spending goes to the military. Yet past studies indicate that the money spent on the military is less effective in creating jobs as money spent in other areas. For example, education and mass transit spending could produce more than four times the jobs created by military spending. In many cases, job creation can help boost the GDP, which can help lower the nation's debt-to-GDP ratio.
The Bottom Line
- Federal debt is at its highest point in American history.
- Cutting spending and raising taxes can help reduce debt but jeopardize elected officials' popularity.
- Raising taxes and cutting spending are the two most popular solutions for reducing debt.
- Driving up the GDP can help reduce the debt-to-GDP ratio.
- Diverting spending from the military to other sectors can boost job growth and help the economy.
The Surprising Truth About the US Debt Crisis
How the 2011 Budget Almost Caused a U.S. Debt Default
4 Ways to Reduce the Interest on the National Debt
Why You Should Care About the Nation's Debt
What Is the Debt-to-GDP Ratio?
US National Debt by Year Compared to GDP and Major Events
Simpson-Bowles Plan: 6 Real Steps to Fix the Debt
Contractionary Fiscal Policy: Definition, Purpose, Example
How the Government Uses and Abuses Discretionary Fiscal Policy
The US Debt and How It Got So Big
Why US Deficit Spending Is Out of Control
If the FY 2013 Budget Didn't Pass, What Was Spent?
5 US GDP Statistics You Need to Know
What Is the Federal Budget?
Which Countries Have Too Much Debt?
What Is the Public Debt?