The Consequences of Debt
Our ever-increasing $36 trillion national debt exceeds the size of the U.S. economy—the largest in the world—and has surpassed the historic peak following World War II, with a debt-to Gross Domestic Product (GDP) ratio of 122 percent.
If Congress does not act swiftly to confront the structural disconnect between reckless federal spending and incoming revenues, our nation will experience either slow and painful economic demise through sustained stagnation or a swift and catastrophic sovereign debt crisis whereby our creditors lose confidence in our ability to service and repay our debt. This distrust will jeopardize the dollar’s dominance as the world’s reserve currency and result in massive tax hikes and austere spending cuts. Both scenarios would imperil our Republic and our nation’s future.
HOW DID WE GET HERE?
Since 2001, the last time the federal government ran a budget surplus, the gross federal debt has increased from $5.8 trillion (55 percent of GDP) to over $36 trillion today (122 percent of GDP). The largest increase of any presidential administration occurred under President Biden, adding $8.5 trillion to the debt after the economy had reopened and facing no recessions during his administration.
The hallmark failure of the Biden administration, which served as the catalyst of our current economic demise, was the $1.9 trillion-dollar American Rescue Plan (ARP) Act of 2021, which President Biden signed into law on March 11, 2021. Shortly following ARP’s enactment, inflation spiked to a historic, 40-year high, which was swiftly coupled with crippling interest rate hikes.
The results have been catastrophic for both American taxpayers and the fiscal health of our nation alike. Prices have soared, real wages have deteriorated, while economic opportunity and consumer confidence have plummeted. Worse yet, the ensuing interest rate hikes, combined with mounting national debt have caused us to cross an alarming fiscal threshold: the federal government now pays more in interest on the national debt than on our national defense.
WHAT DOES THIS MEAN FOR AMERICANS?
1. Inflation
Prior to enactment of the ARP in early 2021, consumer price inflation was just 2.6 percent. By year end, in December 2021, year-over-year inflation had spiked to 7.2 percent. Peak inflation reached a historic, 40-year high of 9.0 percent. In total, under the Biden administration prices increased by 20.9 percent.
During this period [01/2021-12/2024]:
- The cost for the average family of four to purchase the same goods and services they enjoyed prior to the enactment of ARP increased by $18,496 per year or $1,541 per month
- Food prices increased by 22.6 percent
- Gas prices increased by 32.3 percent
- Rent increased by 24.1 percent
Inflation erodes purchasing power over time and Americans have felt the pain of higher prices at the grocery store or at the pump in the last four years. In fact, combined with slow wage growth, record inflation has cost Americans $8,000 in cumulative real income under President Biden.
2. Higher Interest Rates
In an attempt to eradicate inflationary pressures caused by Biden’s deficit spending spree, the Federal Reserve hiked interest rates 11 times between March 2022 and July 2023. While these rate hikes were necessary to combat the adverse effects of Bidenflation, they also came at a considerable cost: higher borrowing costs for both the government and taxpayers in the form of higher mortgage rates, more expensive credit card debt, and increased loan payments.
Under President Biden, the yield on 10-year Treasury securities increased from 1.1 percent to a high of 5.0 percent. Consequently, the average effective interest rate paid on the national debt doubled from 1.7 percent to 3.4 percent and net interest costs rose from $352 billion to $881 billion.
Household interest rates saw similar results:
- Mortgage rates rose from 2.8 percent to a peak of 7.8 percent
- Credit card rates rose from 14.8 percent to a peak of 21.8 percent
- New car loan rates rose from 5.0 percent to a peak of 8.4 percent
Higher debt also leads to slower economic growth. A literature review, authored by Jack Salmon at the Cato Institute, examined 40 academic studies on the impact of federal debt on economic growth and found that 36 of these studies showed a statistically significant negative relationship between debt and growth.
The Congressional Budget Office (CBO) reflects this dynamic between growth and debt in its modelling as well. According to CBO’s model, growth can be increased by reducing debt, estimating about a 0.1 percentage point increase in economic growth by stabilizing the debt-to-GDP ratio (reducing debt relative to the CBO baseline).
This faster growth resulting from lower debt would benefit Americans as well. CBO estimates that simply stabilizing the debt-to-GDP would raise projected per capita real income by $5,500 by 2054. Failing to slow the accumulation of debt (or worse, accelerating it) would directly harm the financial standing of American families and businesses alike.
3. Risk of a Fiscal Crisis
Perhaps the greatest threat we face from our debt is the one we don’t see: a fiscal crisis. According to CBO, a fiscal crisis is “a situation in which investors lose confidence in the value of the U.S. government’s debt… such a crisis would cause interest rates to rise abruptly and other disruptions to occur.”
This would entail substantial financial losses by institutions that hold large amounts of our government’s debt such as banks, pensions, and insurance companies—potentially leading such institutions to fail entirely. The failure of the Silicon Valley Bank was a glimpse of what a fiscal crisis could look like.
Given the interdependent nature of the world’s financial markets and the U.S. dollar’s role as the global reserve currency, such a crisis would almost certainly have irrevocable international repercussions. For instance, if international investors and foreign governments lose confidence in the U.S. government’s ability to pay its debts, this assumption could jeopardize the dollar’s reserve status, making it yet more difficult for the federal government to borrow and perform its vital duties on behalf of the American public.
Economists estimate the government’s ability to continue borrowing via an assumption known as “fiscal space,” which is the amount of money a government has available to spend without putting its financial health at risk. Paul Winfree of the Economic Policy Innovation Center estimates that the U.S. government’s fiscal space will be exhausted by the 2050s. The Penn Wharton Budget Model estimates there is only about 20 years for the government to right its fiscal ship, after which no level of tax hikes or austerity could prevent a government default.
THE PATH FORWARD
We must address our unsustainable debt before it further jeopardizes our economic future. Unmanageable deficits and skyrocketing debt results in everyone having to pay more. If interest costs continue to dominate federal expenditures, they will surely undermine our economic stability and global trust in the dollar. To realize the full extent of the benefits borne from pro-growth policies such as tax reform and regulatory relief, we must also root out wasteful, fraudulent and unnecessary spending to restore the fiscal health of our country. The solution is straightforward: reduce deficits and take meaningful strides towards lowering the national debt.
As Republicans prepare to turn the page and execute President Trump’s America-first agenda, we must persist in the difficult task of reducing government spending and unleashing economic growth. True fiscal responsibility lies in pairing tax cuts with thoughtful spending reforms to ensure economic growth without undermining long-term financial stability. The House-passed FY25 budget resolution accomplishes this objective by providing a fiscal framework which pairs tax cuts for hardworking families and small businesses with substantive spending cuts and savings targets that seek to reform broken federal programs through the eradication of waste, fraud, and abuse. Failing to do so limits our growth potential, makes it harder to bring down the cost of living, and merely shifts the tax burden onto our children through higher future tax rates or higher inflation. The balanced approach of the House budget resolution is an important step to restoring fiscal responsibility in Washington and securing a prosperous future.
In January, Chairman Arrington penned an op-ed in the Wall Street Journal on the urgent need to address the national debt. Read the full op-ed here.
