For as long as I’ve been aware, the United States has been over $20 trillion in debt. However, the US is still the richest country on the planet and manages to keep the vast majority of its people off the streets. And as far as I know, this number is only increasing with time. So then why does it even matter?
In: Economics
Manageable levels of Government debt are arguably a good thing. What’s important is that a government can’t be in a position where it cannot afford to pay it’s Bonds when they become due without needing to borrow excessive amounts of money or slashing all of it’s spending. This is what happened in Greece.
To put it into perspective the yearly budget of the US is 3.8 Trillion, while the debt is 22 Trillion. Yes 22 Trillion is a lot of money, but you have to take economy of scale into consideration. That’s comparable to a person that makes $50,000 a year owing $285,000 on a house. Which is just outside the 40% x 15 years rule. So it’s a bunch of debt but not excessive.
There’s actually an entire industry built around government debt. The Bond market and retirement industry. Most of the governments debt is owned by individuals and pension funds in the form of Bonds. A bond is a termed loan where the government agrees to borrow X amount of money for Y years and then pays it back at Z interest rate. These are considered a very safe investment (the US government is constitutionally obligated to pay its debts) and as such much of the US retirement savings and pension funds are heavily invested in US bonds. So government debt in that sense is a good thing.
Government debt is much more like corporate debt than personal finance. We keep being beaten over the head that personal debt is bad, and that’s where this idea of all debt is bad comes from. *Why does the government keep doing something that they tell us is a bad thing?*
Almost all the fortune 500 companies operate in debt, because borrowing money helps companies grow. When you talk about leveraged buyouts and corporate acquisitions these are almost always done with debt, few mega-corporations buy out companies in cash.
The government operates in much the same way. If they need money now to operate it’s easier to borrow than it is to get more money from taxes. Tax revenue fluctuates through the year so some months have less money coming in than others, so the government borrows to make up for shortfalls in the budget.
To be perfectly honest this is also a big part of the problem. Raising taxes and slashing spending is an easy way for politicians to become unpopular, while borrowing money isn’t seen the same way. That’s a big part of the reason the debt keeps getting bigger.
In a healthy state the government should borrow money to maintain programs and operations when the economy is low, and should pay back it’s debt when the economy is strong. Unfortunately that often doesn’t happen. The government has a tendency of borrowing heavily to pay for things like wars which rake onto the debt.
Government debt is fine when it’s well managed, but unfortunately more often than not governments fall into one of two categories. Left wing parties often spend too much on programs while not raising taxes enough, while the Right slashes taxes too much to incentivize business which put more of a burden on social programs and usually while running up military expenditures in the process.
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