What is the economic impact that I feel as a one living in the US when it comes to a growing federal deficit? What does it matter (at 4 trillion, can’t we just ignore it)?. If it were to grow to 10 trillion, or even 20, would anything significant come of it? Or is it just a political hot-topic that voters seem to like?
You must differentiate between the deficit and the national debt. The deficit is the current annual amount by which the government is outspending its means. The national debt is the total amount owed by the government (including interest). When there is not enough cash on hand to pay the government’s immediate “needs,” the government has two option: 1) it can print more money, causing inflation (higher prices now–think 1970s), or 2) it can borrow the money–this means that it is spending in deficit (causing higher prices later and risking public’s retirement).
The problem is that when the government borrows money, it doesn’t get to do so for free, there is a cost to borrowing money called interest. The higher the government’s debt, the greater the interest that is due.
When the government has a large debt, interest rates for everyone can go high as well because there isn’t as much money available for everyone else. Right now, even though we will start to have a deficit again this year for the first time since 1995 (or so), interest rates are very low because the government hasn’t had to borrow any money. When the government is borrowing, the cost of money becomes very high and interest rates go up.
Another drawback to having a deficit (and therefore adding to the national debt) is that the money has to be paid back. Unless the government gets enough money to meet its current needs and to pay back any money it owes, a tax hike may be required to meet its obligation. In addition, you should be scared as hell about the source from which the government borrows when there is deficit spending. Over the last several years (decades?) a favorite source of funds for government borrowing is from the Social Security Trust Fund. (sorry, no immediate cite, but it is relatively common knowledge–it is for this reason that Bush and Gore kept talking about a lock box). So, the government is borrowing against the retirement of the American populace and is relying on the next generation to pay enough taxes so that loans to the fund can be repaid and funds are available for retirees to live on in the future. There are other sources for government borrowing–for example, bonds.
So, should you be concerned about a larger national debt? Absolutely (at least IMHO).
First, let’s straighten out the terms. The US is expected to run a deficit in the $300 billion range in the next year. The deficit is the gap between all revenues and all expendatures. (Think about it like, a hamburger flipper who makes $18k a year, but spends $21k in the same year through taking cash advances from his credit card).
The debt is the total amount of borrowing that has accumulated over the years. Congress puts a limit on the amount of public (read:government) debt, and that limit currently stands at $6.4 trillion. (Think about debt like, that hamburger flipper borrowed $3k this year, $1k from his parents last year, and he still owes $3k on the car that he financed four years ago).
Probably the most immediate impact of a large national debt is that a good portion of our annual budget - somewhere in the range of 12% - consists of interest payments on the debt. Keep in mind that the way the government finances debt is though bonds, and bonds earn interest. That’s around $180 billion in taxpayer money that doesn’t buy any goods and services for us hard-working Americans.
So how does this effect you? Other than the fact that a decent chunk of your federal taxes doesn’t really buy anything new – it just makes the minimum payments on the big ol’ national credit card – many economists think that high deficits and high national debt results in higher interest rates. This is not universally agreed upon (others think that much much people save and invest have much more bearing on interest rates than national debt, and there’s some good points on that side, too).
But higher interest rates mean that the hamburger flipper will have a harder time buying a house because he might not be able to afford the payments on, say, a 30-year fixed mortgage at 12% interest. Well, who cares if that schmuck can’t buy a house? Because along with a house, he’d have to buy a dishwasher, a water heater, and all the other stuff that comes with it… and those durable goods are important to our economy as a whole.
Also, if interest rates are high, it makes it more expensive for businesses to invest in capital goods - more or less, machines that make machines - so businesses are less likely to grow, become more efficient, hire more people, and pay stock dividends. Less economic activity = harder for people to be wealthy.
Thank you for the clairifactions. This part might be better suited for GD, but I’ll say it here.
By that, do you mean harder for people to become wealthy, for harder for the wealthy to stay that way?
If you look at the context it means:
Less economic growth -> fewer jobs -> fewer opportunities for people (wealthy included) to have a means of acquiring wealth.
Those with the ability to acquire wealth outside of a job (interest/rents/stocks) still come in tight but it’s the rest of us who really suffer.
I’d say both. Imagine what would happen to Bill Gates’ wealth if Microsoft was downsizing because not as many people were buying computers equipped with Windows. But I don’t have a good macroeconomic explanation to back that up.