issue guide: National Debt

Pro & Con

see also the skinny, background & facts, links

There aren't two absolute sides to the debt debate. That's because most agree it's generally good to reduce deficits and keep the debt in check - economists just disagree on how serious a problem deficits are and how they should be tamed. Although there's no clear pro/con on the issue, arguments on the left side of the page go under the loosely defined "deficits are really bad and/or we may have to raise taxes to cut them" camp, while the arguments on the right fit with the broad "having deficits is not disastrous, but raising taxes would be" way of thinking. Keep in mind, many thinkers fall somewhere in between.

Deficits and interest rates

Deficits raise interest rates which squeeze the economy.

Interest rates are the rates at which we borrow money. They are influenced by the Federal Reserve, but in general rates are set by the law of supply and demand; for example, if more people want to borrow money, rates will go up. Some economists say that deficits push up interest rates in two ways. In one theory, by forcing the government to borrow more, deficits increase demand for money and so push up interest rates. Another more recent theory says that when people think the government will continue to run a deficit, interest rates also get pushed up by causing people to anticipate future problems for the economy. High interest rates often spell bad news for the economy, by making it harder for businesses to take out loans and so discouraging growth.

Deficits have only a small - if any - effect on interest rates.

Economists don't disagree that government deficits can affect interest rates, but some say they do so almost unnoticeably – simply because the overall market for borrowing money is so huge when looked at internationally (even with its billions of dollars in annual deficits, the government is still a relatively small player). They also point out that interest rates are currently at an exceptionally low level and are not likely to be pushed up enough to discourage borrowing. As for the theory that expectations of future deficits push up rates, critics say this theory is not born out in practice and is based on faulty logic.

Tax cuts and the deficit

Lower taxes may lead to growth in theory, but not necessarily in practice – taxes will eventually have to be raised on future generations.

The idea that low taxes stimulate growth (see opposite column) was promoted during the Reagan years, but some economists say the theory never panned out in practice. Not agreeing with the argument that the country can “grow” itself out of debt, some economists believe that eventually taxes will have to be raised on future generations to pay for today's deficits (the other ways to pay off debts - by radically reducing spending or printing new money - are seen as unrealistic or unwise). Even if the theory is correct, certain economists today say that the enormous burdens faced by the country in the near future (relating to rising costs in Medicare and Social Security), make it unlikely that the country will simply be able to grow its way out of its current debt.

Tax cuts that add to the budget deficit are needed to stimulate the economy.

The US economy is driven by spending and investment; the private sector's activity is far more critical to growth than the government's spending. Some economists argue that, in general, you want to keep as much money as you can in the private sector and out of government to keep the economy strong. The reasoning continues that the less you tax individuals, the more they will spend and invest, which leads to a more vibrant economy. With the economy growing, businesses and individuals will have more income to tax; that means, even at lower tax rates, the government will collect more taxes and the budget deficit will decrease and perhaps eventually disappear.

The burden on future generations and growing obligations to foreign nations

Future taxes will flow out to foreign nationals and to the rich.

Even though most of the US debt is currently owned by US nationals, the portion of the debt held by foreigners is on the rise. That means future generations will have to share the return on government securities with the rest of the world. (Also, because people who hold government securities tend, on average, to be richer Americans, taxes received from lower income taxpayers will end up subsidizing the incomes of the rich, widening the income gap.) Depending on borrowed money from outside the US has the added risk that someday, if our debts get out of hand, foreign entities may not be so eager to lend money to us. That would force the US to pay significantly higher interest rates to borrow money. Our "indebtedness" to foreign nations also gives those nations an unwelcome political leverage over the US.

Future generations will not carry a heavy burden due to debt because of an expected rise in incomes.

Even if taxes have to rise sometime in the future to pay off our debt, some economists believe that the negative impact of those higher taxes will be partially balanced by an increase in incomes. This increase comes from the fact that many taxpayers are also holders of government bonds and securities, and therefore receive interest and principal payments on the debt from the government. Future generations are therefore both the payers and the beneficiaries of government debt.

Budget deficits and trade deficits: Another common criticism of budget deficits is that they're pushing up our trade deficit, but this op-ed from the secretary of the Treasury argues that budget deficits are only a small part of the trade deficit picture.

Did we miss something, let some slant slip in, lose a link - or do you just have something to say? Drop a line below! In the spirit of open dialogue, cJ asks you keep it civil, keep it real and keep it focused on the message, not the messenger. See our policy page for more on what that all means.