America's Massive Debt Has Come Back to Bite Us

January 11, 2013

After a difficult fight over the fiscal cliff, politicians must come together once again to debate over the debt ceiling, despite raising it a little over a year ago, say Antony Davies, an associate professor of economics at Duquesne University, and James R. Harrigan, a fellow of the Institute of Political Economy at Utah State University.

  • The current debt ceiling is at about $16.4 trillion.
  • That would require about $52,000 per person in the United States to pay off the debt.
  • But that doesn't assume the $400 billion a year in interest the government has to pay.

If the government continues to borrow money and spend it, there will be serious implications for every taxpayer. First, there will likely be a reduction in public services. Currently, 17 cents of every dollar goes to paying interest on the debt. But that figure will rise to 25 cents in the next decade, meaning that cuts will have to be made to pay off the debt and the interest it accrues.

Second, many Americans will experience lower wages and an incentive to delay their retirement. Right now, the government artificially lowers the interest rate to keep things cheap. As a result, seniors can't retire because their investment savings have earned low returns. More troubling is that Americans will be faced with higher taxes in order to pay off the debt.

Moreover, the Fed will simply run out of money to pay its bills and be forced to pay more money. It has already done this with its quantitative easing policies. But the effect of printing more money will be inflation, which in turn means higher prices on goods and services for consumers.

Lastly, the government may cut entitlement spending for programs like Medicare and Social Security to rein in the debt. In the past, politicians raised the retirement age or forced workers to pay income tax on their benefits. As the debt grows, it is likely that politicians will resort to changing benefits packages or tweaking these programs to ensure their sustainability.

Source: Antony Davies and James R. Harrigan, "America's Massive Debt Has Come Back to Bite Us," Mercatus Center, December 29, 2012.

 

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