US government debt: should we be worried?
Let’s break down US government debt-what it is, who holds it, and whether it’s something we should worry about.
US government debt is currently over $36 trillion dollars. This is the total amount the US government owes to people who have bought U.S. Treasury bonds-basically, IOUs. The government sells these bonds to raise money whenever it runs a budget deficit, that is, spends more than it collects in taxes.
Debt isn’t necessarily bad. Most governments borrow money, just like individuals or businesses do. The money may be used to invest in things like infrastructure, education, research and development, or managing recessions, which could all in principle be good things for the government to spend money on. Of course, not all government spending is wise-examples of poor decisions include wasteful subsidies, overpriced contracts, or projects that are driven by politics rather than public need, like ‘bridges to nowhere’ or duplicative programs that do the same thing as existing ones. So the first question we should ask is, “Is what we’re doing with the borrowed money worthwhile?”
In the 2023 fiscal year, the US government took in $4.4 trillion in revenue and spent about $6.1 trillion, so we had to borrow $1.7 trillion to cover the difference. What did the US government spend $6.1 trillion on? $1.3 trillion went to Social Security. About $840 billion went to Medicare, so those two programs are one-third of the federal budget. We spent a little more than $800 billion on national defense. The next-largest category are net interest payments, which added up to almost $660 billion.
If you’re keeping track, we’re already at $3.6 trillion dollars. Add in Medicaid spending, at $616 billion, and we’re almost at the total amount of revenue that the federal government collected in 2023. And we haven’t even talked about expenditures on research and development, education, and infrastructure, although some of these activities are included in the categories above! Together, the US government spends hundreds of billions of dollars per year on these, but they don’t make up as large of a share of the budget as Social Security, Medicare, and Medicaid.
Looking at the numbers, it’s easy to see that, without drastic spending cuts or tax increases, the US will continue running budget deficits, which means it will have to keep borrowing and increasing the national debt.
To whom does the US owe this money to? You might think that most of the U.S. debt is owed to foreign countries. But actually, the majority-about 75 percent-is held by Americans. This includes U.S. individuals — retirees, savers, and others who buy Treasury bonds, often through mutual funds or retirement accounts. Other domestic holders include banks and financial institutions — they hold Treasuries as safe, reliable assets. About 13 percent of the debt is actually held by the Federal Reserve — yes, the central bank itself owns a large chunk of U.S. debt as part of its efforts to manage interest rates and the economy. Finally, federal trust funds, including Social Security and Medicare, hold about 7 percent. These programs collect taxes and invest the surplus in Treasuries until they need the money.
The other quarter of the debt is held by foreign investors. The biggest foreign holder is Japan, with over $1 trillion in U.S. debt. China used to be the biggest, but its holdings have declined in recent years. Other major holders include the United Kingdom, Canada, Luxembourg, and the Cayman Islands-though some of these act as intermediaries for global investors.
But the most important question isn’t how much debt we have. It’s whether we can afford to service it. Right now, the US can still borrow at relatively low interest rates and has never defaulted on its debt. Plus, the US issues debt in its own currency-the dollar-which gives it more flexibility than countries that borrow in foreign currencies. But interest rates have been going up, which means that an increasing share of the US government budget will have to be devoted to making interest payments. That means less room for other priorities.
Rising debt also comes with other downsides: if interest rates rise, government debt can lead to lower private investment, which is sensitive to interest rates. High government debt can also reduce our ability to respond to future crises because investors aren’t as keen to lend to a country in trouble if its debt is already high.
To recap, without tax increases or major spending cuts to key entitlement programs like Social Security, Medicare, or Medicare, the US government is set to continue running deficits and accumulate more government debt. US government debt currently exceeds $36 trillion, and most of it is owed to Americans. In many ways, people holding U.S. debt still see it as one of the safest investments in the world. That said, debt can’t grow forever without consequences. The key is balancing smart borrowing today with sustainable policies for the future.
Originally published at https://mytwocentsandcounting.substack.com.
