The National Debt as an Economic Indicator
I remember first hearing that America was in debt and thinking it was the end of our country as we knew it. My understanding of debt meant having to sell all your assets and start your life over completely. However, years later, America is still standing despite our total debt having grown to a whopping $33 trillion dollars in 2023. So what exactly is the national debt and how does it actually reflect a country’s overall economic standing?
A country’s national debt is the total amount of outstanding borrowing by the federal government throughout the country’s history. This consists of debt held by the public (DHBP), which is cash borrowed from domestic and foreign investors and intragovernmental debt, which is transactions amongst different sections of the government. The graph below breaks down where exactly the cash used in the intragovernmental debt comes from and goes to.
A national debt increasing faster than the nation’s GDP can signify slow economic growth for a country. It also means that the ratio of debt to budget is rising, since more of the nation’s funds need to go toward paying off the interest on said debt. This boils down to the country having less money to invest in future economic endeavors and also less economic opportunities for its citizens as a whole. To truly measure the severity of a country’s debt burden we should compare it against its GDP or gross domestic product. This is the total value of all the goods and services that a country produces throughout a year. Comparing a country’s debt to its GDP helps clarify the country’s ability to actually pay back its debt. A country able to continue paying interest on its debt, without refinancing or hampering its own economic growth, is generally considered to be stable. Furthermore, a country with a high debt-to-GDP ratio is more likely to struggle paying off its external debts and more likely to default in general.
The graph below shows U.S. debt as a percentage of its GDP over time. There are peaks in the graph that correspond with times when the government ran large budget deficits, like in the economic recession of the early 2000’s and the financial crisis of 2008. We can see the largest peak of all time was in 2020, when the debt was 134.8% of the nation’s GDP.
Besides looking at the actual numbers, the national debt also tends to affect Americans’ perception of the state of our economy. At the beginning of 2023, the Pew Research Center reported that 57% of Americans said that reducing the budget deficit should be a top priority for the government. Reducing the national debt continues to be a top priority for voters in presidential elections.
