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The United States is again facing the end of its debt ceiling. Last month, Treasury Secretary Janet Yellen warned that the government could default on its debt obligations after December 15 if there is no increase in the debt limit.
If Congress fails to strike a deal, the United States would default for the first time in its history.
At the end of October, the national debt rose to about $ 28.9 trillion. The amount held by the public, which includes foreign governments, was around $ 22.6 trillion, while US intragovernment holdings were around $ 6.3 trillion.
The last time the amount of debt held by the public declined was in 2001, according to Wendy Edelberg, a senior economic studies researcher at the Brookings Institution and director of The Hamilton Project, an economic policy initiative.
Edelberg said from 1998 to 2001 this amount was reduced each year. In the second quarter of 2001, the federal debt held by the public was approximately $ 3.3 trillion, compared to $ 3.5 trillion in the same period the year before. These were boom years for the US economy, which helped reduce the government’s borrowing requirement.
David Primo, professor of political science and business administration at the University of Rochester, said the White House believes this era of fiscal responsibility will continue.
Ironically, Primo noted that at the end of President Bill Clinton’s second term, his administration issued a press release touting that the United States “is on track to eliminate its public debt over the next decade.”
âObviously that didn’t happen,â Primo said.
In fact, the last time the United States could completely paying down the national debt was about 186 years ago – back in 1835.
Since the beginning of the 2000s, the national debt has continued to increase. Edelberg and Primo said a series of events and decisions, including tax cuts, the American wars in Iraq and Afghanistan and the financial crisis of 2007-2009, all pushed up debt.
Primo said that between the early to mid-2010s, following the financial crisis, the federal debt and deficit began to receive more attention, but then dissipated.
To reduce the national debt, Edelberg said we need to raise taxes or cut spending, which would be “painful.”
While these trillion dollar sums seem huge, said Edelberg, “there is nothing particularly urgent about reducing the size of the total amount of outstanding debt.”
She explained that for a start, even if you kept the total face amount of debt constant, you would reduce its burden relative to the size of the economy each year.
âWe are a country that experiences somewhat predictable growth from year to year, and we are a haven for people around the world who really want to invest in the United States. at any time, âsaid Edelberg. “In fact, our financial system has organized itself in such a way that it is quite dependent on having a whole stock of treasury securities to trade.”
Part of the reason is that investors view buying government securities as a way to get a decent return with virtually no risk.
According to experts, a better way to think about the national debt is not the total amount, but the amount as a ratio of the country’s gross domestic product.
Edelberg said what is worrying is that the total stock of debt is expected to rise more and more relative to the overall economy. She and Primo said it should be stabilized.
When the share of debt becomes too large, Primo said, it ends up stifling economic growth because too much money is pumped into government operations instead of private investment or consumption. He added that it could also become more difficult for the United States to borrow money if creditors start to worry about the growing size of debt.
âWe don’t know how too big it is,â Primo said.
Correction (Dec 2, 2021): An earlier version of this story distorted the years when the federal debt and deficit started to receive more attention.