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News Tuesday that gross U.S. government debt had surpassed $30 trillion for the first time caused a flutter of headlines but merely yawns from the political class. That might have something to do with the arsonist not wanting to hang out at the scene of his fire. But it’s worth a moment to explain how to think about that gargantuan debt number.
The first point is that the debt really isn’t $30 trillion. About $6 trillion of that is debt the government owes to itself in Social Security and other IOUs. Social Security is a promise made by politicians to workers. It isn’t a contractual debt like a Treasury bill that must be repaid or risk default. Future politicians can refuse to pay workers what they owe, and eventually they will.
The debt held by the public is some $24 trillion, which is bad enough. That’s more than 100% of GDP, a level the U.S. has previously reached only during wartime. Much of this debt is held by Japanese or Chinese, who won’t take kindly to not being repaid. But they’ll keep lending that money as long as they assume they will be repaid.
The real issue is interest on all that debt, and what it means for the federal fisc. The debt costs very little when interest rates are near-zero. But when they rise, as they soon will, the burden of interest costs on the debt rises too. By one measure every percentage point increase in rates adds $100 billion a year or more to debt costs. That must be financed either with higher taxes or more debt.
In Washington’s fantasy world, spending is a free lunch. It isn’t, as eventually Americans, if not politicians, will learn the hard way.
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Appeared in the February 3, 2022, print edition as ‘$30 Trillion in Debt and Counting.’
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