Will the U.S. Debt Ever Be Paid Off?

3 Ways to Reduce the Debt, and 3 Reasons Why It Won't Happen

will the debt ever be paid off
The U.S. debt gets larger and larger each year. Illustration: Turnbull/Getty Images

The U.S. debt is more than $19 trillion. It's by far the largest in the world. It has increased by $1 trillion each year since 2007. That growth occurred despite many desperate attempts to stop it. In 2011, the U.S. debt crisis threatened to force America to default on its debt. In 2012, the fiscal cliff crisis almost stopped the government in its tracks. In 2013, a government shutdown did occur. The debt increased despite threats to block raising the debt ceiling.

 Since these attempts didn't work, what can and should be done?

Three Ways the United States Can Pay Off Its Debt

There are three ways to decrease the debt. The first is to cut spendingSequestration tried to force the government to cut all spending by 10 percent. No one in Congress thought it was a good idea. Members adopted it to force themselves to come up with something better. The Simpson-Bowles report recommended many good ways to cut the debt. But Congress ignored it. Even with sequestration, the debt continued to grow. To truly cut the debt, Congress would have to cut spending so severely that it would slow economic growth. That's because government spending is a component of gross domestic product.

The second is to raise taxes. There is the risk that this move will cut economic growth. According to the Laffer Curve, that's especially true if the tax rate is more than 50 percent. If Congress raises the tax rate beyond that level, then the additional revenue generated will be lower than before.

That's because that tax rate is enough to curb incentives to grow businesses and income. 

The third is to drive economic growth at a faster rate than the debt. The most important is the debt-to-GDP ratio. That compares the level of debt to the entire economic output of the country which is measured by GDP.

The debt-to-GDP ratio is more than 100 percent. That means every employee and business in the country would have to work more than a year to pay off the debt. 

That can be done by shifting federal spending from areas that don't boost growth and job production to those that do. Almost 25 percent of government spending goes toward defense. Contrary to popular opinion, that's not the economy-booster it was in World War II. One reason is because defense, like every other industry, has become more focused on technology and equipment. That means it doesn't create as many jobs per dollar as in the past. What creates the most jobs per federal dollar? It is construction spending on bridges, roads and public buildings. To reduce the debt, the government should shift spending from defense to public infrastructure. For more, see 4 Best Real-World Ways to Create Jobs.

Will The United States Ever Get Out of Debt? 

It's unlikely America will ever pay off all its debt. That's because this kind of sovereign debt, one owed by countries, is only a threat when creditors become worried it won't get paid back. What is that tipping point when creditors start to worry? According to the World Bank, it's when the debt-to-GDP ratio exceeds 77 percent.

The U.S. debt-to-GDP ratio is more than 100 percent. That means the debt is more than everything the United States produces in a year.

Keep in mind that creditors only worry about the public debt, which is $13.9 trillion. The public debt-to-GDP ratio of the United States is only 76 percent which is not yet at the tipping point. 

If the public debt is only $13.9 trillion, who owns the rest? Mostly the Social Security Trust Fund. The government will need to pay this one day, as baby boomers retire. Creditors aren't worried about this component of the debt yet.

Will the government ever pay it off? It is not likely it would for three reasons:

  1. Elected officials get voted out of office if they cut popular programs like Medicare, defense and Social Security. 
  2. Over time, the economy will have grown robustly enough to dwarf the debt. The U.S. debt at the end of World War II was $259 billion. That was a lot then but not much now. Politicians are banking that today's debt will be dwarfed by tomorrow's economic growth.
  1. The only way to reduce the debt is to cut spending or raise taxes. Both are highly unpopular. This is why most people only want to do it to others.

Therefore, the only way the United States will reduce its debt is if the American people are ready to tighten their belts and accept austerity measures. The most painless time to do so is when the economy is booming with GDP growth rates above 3 percent and unemployment at 5 percent or less. In fact, that's the best time to cut the debt because it will slow economic growth and actually prevent a recession. For more, see Business Cycle Stages.