All you need to know about the federal debt

All you need to know about the federal debt


The federal debt. Is it a crisis that
demands immediate attention? Should Congress make fixing the debt its
top priority? Or have we made largely uncelebrated
progress? Let’s look behind the headlines and see
what’s really going on. First, the debt: the total amount of money
the government has borrowed because it’s been spending more than it takes in in
taxes. The debt is not a problem right now, the economy
is not yet back to normal and the treasury is able to borrow billions
of dollars at very low interest rates. The problem lies in the future. The likely
trajectory of government borrowing after the economy and the job market
regain their health. The federal debt has been rising as a
share of the economy for the past several years. It’s now higher than at any time since
the end of World War II. This is what the 10-year picture look
like in 2008 (image of a graph). Before the Great Recession, the debt was
about 35 percent of GDP, the value of all the goods and services produced in a
given year. It was projected to rise, but only
gradually over the ensuing decade as more Baby Boomers became eligible for Social Security and Medicare and as health care costs rose. Then
came the worst recession since the Great Depression. Fewer people with jobs meant less tax
revenue for the Treasury and more spending and unemployment
benefits and food stamps and the like and because all that was borrowed money projections for the federal debt rose. And
then, to fight the misery of the recession President Obama persuaded
Congress to pass an $800 billion package
of tax cuts and spending increases. The stimulus, or
as he prefers, the American Recovery and Reinvestment Act, that meant still more
borrowing. By 2011, the debt had nearly doubled and it was projected to rise towards 100 percent of GDP over the following 10 years as the
economy returned to health and interest rates rose towards normal
levels. Much hand-wringing ensued. Would the US government be able to keep
borrowing, would financial markets crash, would interest rates surge? Then came a
couple of big changes, changes that actually improved the outlook. Congress
raised taxes on upper income families and that’ll bring in a lot of money over
the next decade; and then the pace of increase in government spending on
health, particularly on Medicare, slowed unexpectedly. That changed the
projected trajectory of the debt for the better. Yes, sometimes
things in washington do get better, but we’re not out of the woods yet. The
debt is still high by historical standards and it’s forecast to keep climbing from
around 75 percent of GDP today to 80 percent of GDP by 2024. And,
it’s projected to climb higher after that. This is a trend that cannot
be sustained indefinitely. To learn more, visit http://www.brookings.edu/hutchinscenter

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