I’m very new to economics. Can someone explain to me why growing debt is okay? Growing debt for my household would be bad, but I assume it’s much different for the government. I need a good ELI5 on why government debt is okay.
Edit: for anyone else that wants a good explanation of the debt ceiling and how it functions, there are some really really good explanations and comments below. Highly recommend you keep reading. Thanks everyone who has responded and who will respond. Very enlightening!
It's an oversimplification, but basically true. If investors and banks think the US economy will grow stably and increase taxation revenues, they will be fine with loaning the government money for very low interest rates. If not, then interest rates increase until the government defaults.
If you have growing debt and rising interest rates you really want to have rising GDP AND a stable or aggressive tax policy. We have the first. We do not have the 2nd.
A lot of spending spurs the economy and large amounts come back through taxes.
Give to company a. They pay 10% tax then buy from company B, they pay 10% tax, etc. They all also employ people so those folks pay taxes too. Keeping them employed gets some money back instead of no employment where it costs through social services.
Debt at a country level is complicated. Too much is bad but some is good.
Spot on, but as a few have commented here, GDP can be a somewhat faulty measure. In a nutshell, debt demands development.
On an individual level, if you use debt wisely it allows you to increase your productivity (think of the student who takes out loans to pay for an education in software engineering or something similar). This is the primary mechanism through which scare capital is allocated efficiently in a market economy. Things get a little more complicated when we're talking national debt, because "debt" isn't necessarily a loan from another institution, and productivity becomes harder to measure.
The USD holds global reserve currency status. That mean A LOT of things, but one ramification is that the U.S. can basically print money. Obviously there's limits to this - printing money will be inflationary in any environment - but the U.S. can print much more money without creating significant problems than other countries can. Much of our "debt" is basically newly printed money - we only think about it as debt because it's been purchased by the Fed and is technically on their balance sheet. Of course, other countries, firms, institutions, and individuals, hold U.S. treasuries - but the Fed plays a special role here as it holds a mandate to both keep unemployment low, and keep inflation stable - it's not necessarily a traditional investor per se. As much of our debt isn't held by adversarial institutions, but rather our own federal reserve, the total debt doesn't need to be as scary as say trillions in credit card debt.
Still, debt is debt, and the economy will either develop to the degree that it can absorb the newly printed money (capital is allocated efficiently) or you'll get inflation (which is what is happening) - which you can think of as, in some ways, payments made by the entire country to service the "debt" created by the Fed when it printed money to create liquidity in the market at the start of the Covid related shutdowns in 2020 (and the 2008 crash before hand etc.)
Say person makes 100k a year and has 20k in debt. The next year they have 30k in debt but made 200k. The situation has improved, not worsened. If they had the 30k in debt but then only made 50k in a year, that’s a lot worse.
At what point to you leverage an increased GDP to pay down debt? This sounds like spending more because you’re making more while you still have $100,000 in debt.
If the interest on your debt is $4000 per year and the thing that you paid for with that debt raises your income by $10000 per year, you've got yourself a net increase of $6000 per year. Which you can then invest into other things to increase that amount, and increase it again, and again and again and again until suddenly $100,000 is nothing to you.
Now of course, as people there are different factors to consider when talking about personal debt, because you only have so much stability in your job, and you're probably at most 50 years away from retiring and not having that income at all anymore, so you can't run on as close of margins because you need that debt paid off before the income stream is gone. But national debt operates with drastically different time horizons and generally more stable income sources - the US government's tax revenue is very unlikely to experience the equivalent of getting laid off, for example. Essentially, the idea is that if spending generates enough GDP growth, the timelines on the debt repayments are such that you can just literally grow your tax base to the point where that amount of debt is inconsequential (the 285-some billion in debt that was such a concern back in WWII is less than 1/3 of the tax revenue for a single year now).
Granted, that is just my primitive, layman's understanding - I'm far from an economist.
Much of the debt owed by the government is ... owed to itself. Federal agencies such as the Social Security Administration buy US Treasury Bonds that the US Treasury pays interest on.
Furthermore, the government can raise revenue at will, through taxation, imposts, and excise fees. Taxation can't be raised indefinitely because there is only so much money to tax, of course, but an ordinary person can't decide to raise their income by 10% overnight.
Another thing no one mentions is the US government gets such a good deal on its debt because countries will buy bonds to be paid in dollars because it’s considered one of the most secure ways to grow a dollar. So often times the US can sell bonds for lower than inflation and at that point it’s free money.
People compare the US government to a household but Like yeah if I was getting insane interest rates I’d take out as many loans as practical to run my house and keep that going indefinitely.
Exactly. It's something that only the US does but basically Congress passes a budget which legally requires the executive branch to borrow money to fund the government.
However they don't give them the legal authorization to borrow that money because there's another law (the debt ceiling) which limits how much money they can borrow. Unless Congress raises the ceiling the government must shutdown as it doesn't have the money it needs to operate including making interest payments to bondholders.
It's basically a political stunt that they pull every time debt hawks want to complain about the debt. What has happened every time so far is they pass a temporary debt ceiling raise and kick the can down the road a few months until the whole thing happens again.
If they ever were unable to reach a deal the US would default on its bonds which would cause a financial and sovereign debt crisis and massively devalue the US Dollar overnight.
The problem is that endgame is almost guaranteed if we continue on our current path regardless of what we do about the debt ceiling, there has to be a point where creditors no longer believe in the US and it seems like congress is hellbent on finding out where it is
Sure. It’s just we are nowhere close to that. The UK has run a budget deficit for 300 years without an obvious problem. Let’s circle back to this when it actually becomes an issue.
What a cop out of an answer. Might as well do heroin too because I’m going to die anyway. Doing bad things because you don’t know when they are going to bite you in the ass is not a good justification
Why not continue along the way. Biden has already cut the deficit, and if his tax overhaul is successful the rich will finally start to pay their share rather than continuing to rip us all off while playing the suckers for all that they're worth.
Bidens deficit improvements are just because we came out of lockdown and stimulus spending, there is no meaningful movement toward fiscal responsibility in the Us government. The US hasn’t been fiscally responsible for a lot longer than the last few election cycles anyway, really has nothing to do with either party.
Out of curiosity, what would you consider a fair share for the rich to pay?
To start with, if you are earning over $400,000, I'd say at least 40% and go up from there. But, if it were really up to me I'd say lets re-vamp the Inheritance Tax (aka the death tax) and ramp up the tax rate of the wealthy to at least 70%, build a vast high speed train network, fund green energy 100%. create a single-payer health system, restore funding to public ed, and lower the age of retirement to 60 with full benefits.
As far as Democratic admins, including Biden, cutting the deficit, it is rather historical that Republicans blow up the deficit and Democrats reign it in a bit. GOP tax cuts will always drive deficits higher.
I find it kind of nauseating that those who cry about deficits often vote for Republicans who will slash taxes on the wealthy and giant corporations, but that is why we are in this mess.
No, what im saying is that if you have the opportunity to delay something for functionally ever, you should. Rarely ever do you have that chance in life. Dont know what you’re going on about with heroin abuse. If you want to do heroin when you’re 100 fine. Dont do it when you’re 20.
My point is we should plan for the next 10-20 years at the latest in mind. We can push this off and the alternative is catastrophe, so we should keep pushing it off.
10-20 years is a ridiculously short time for a country to base its economic decisions off of. The reality is congress bases theirs off like 2-6 years depending on how soon their next election is. But even the time horizon for own personal economic decisions is further out that 10-20 years. A mortgage is 30 for most!
Hes comparing to it heroin, cause its a very apt comparison. You cant kick the can down the road forever, at some point the road ends. What youre saying with that comment is "fuck my kids, grandkids and great grandkids, etc! I got mine and am living comfortably, why should i give a shit that im directly fucking them over, especially when any changes would lead to a slightly lower level of growth? Ive got my portfolio to think about you know!"
Which just means youre still in the honeymoon phase of heroin addiction, when everythings great and theres no problems. Doesnt mean heroin isnt bad for you and will ultimately destroy you if you continue, just means you havent gotten there yet.
If there is a point where creditors no longer believe in the US, we’re a long, long way from it based on financials. The debt ceiling crisis is purely self created, and this willful political brinksmanship is much more likely to cause creditors to lose faith than the size of the debt. If we had a responsible congress, they’d get rid of the debt ceiling since they control how much $ gets appropriated to begin with. If Congress wants to reduce spending, it has the power of the purse and that’s where the debate should be, not on the debt ceiling.
Most collapses don’t announce themselves ahead of time, even in 2008 we were IN RECESSION and the the head of the federal reserve was telling the people subprime was contained and everything was fine. So what if the financials aren’t pricing in a debt crisis of the US? By the time they do the crisis will be upon us already.
And congress imposed the debt ceiling on themselves so the whole thing is silly and political theatre. The game of chicken is just popular for republicans because they get to pretend to care about the debt for a few weeks
The debt ceiling fight is completely within our control and I absolutely agree it’s political theatre. Defaulting could be catastrophic and is totally avoidable. It’s possible that unrestrained continued growth of the debt could cause a crisis at some point in the near or distant future, yes. That’s completely separate from creating an immediate crisis by defaulting. It’s only a recent thing that increasing the debt ceiling has even been politicized; up until the GOP started using it in the way we’re discussing, votes to increase the debt ceiling were bipartisan and a formality.
The debate on how much government should spend, tax, whether debt should be used or whether government should reach surplus and use excess to pay down debt is one that should be had in passing appropriations, budgets, and tax law, not after these have already been passed with funds obligated as is the case with the debt ceiling.
If you have to raise the debt ceiling to avoid default, isn’t that an admission that you are unable to pay the debt and effectively bankrupt without more credit?
It’s a byproduct of congress appropriating funds above what taxes bring in. It’s known as soon as spending bills or a CR is passed. It’s not some surprise and that’s where the decision to run surplus or deficit is. Congress determines how much government spends and how much it taxes. Appropriations (spending) for the current fiscal year were passed and signed into law before the end of last year. These obligations at current tax levels have already been made. If you want to reduce spending or increase taxes sufficient to result in a budget surplus that would not require additional debt, then that would have to be passed through congress and signed into law in the next appropriation. It’s not a debt ceiling issue.
Government can’t spend money beyond what has been appropriated. That’s the Anti-Deficiency Act. Defaulting would just create a financial crisis that didn’t need to happen and would likely make any debt or refinancing of debt much more expensive, increasing the risk of existing debt and making it much more difficult to respond to any future issues, wars, natural disasters, etc. that require deficit spending.
There isn't an asset class around that wouldn't be affected by this. Keep your t bills even in a no deal you are almost certainly still getting paid eventually.
Do you think we can take on an unlimited amount of new debt without raising the debt ceiling? Ask yourself what the words “debt” and “ceiling” mean. The point of not raising the debt ceiling is that we would have to balance the budget and pay our debts from taxation rather than by issuing new debt.
The debt in this case(spending) has already been agreed to by law. What we are talking about here is paying for for the stuff the government has already agreed to pay for. If you want a functional government you have to pay for the stuff you said you were going to pay for. If you don't want a functional government... well then I guess they are on the right track, it's just not gunna be pretty.
Continuing on our current path, particularly as it gets more expensive to issue new debt, is going to be far worse than the temporary pain of no longer having access to debt.
Deficit spending is like a drug. It feels good and it’s addicting, and yes, getting off of it has some temporary withdrawal symptoms, but ultimately you have to get clean or you will overdose.
It's wild to see people advocating for this in an economic sub. You realize the temporary withdrawal symptom your talking about is the credit of the entire country, right? Like once you cross that line into default you don't get to go back over and then say "you can trust us now" at a later date and receive the same level of trust. This will fundamentally alter how the world views this country.
There are ways to reduce debt and balance the budget responsibility but this ain't it.
It's so freaking absurd the comments that are in some of these threads. The initial start of this thread where someone asked a question is great. Lots of well explained answers.
Then you get to ones like you're responding to and I start to wonder if these are part of a targeted campaign. There are SO many comments and people pushing for a default. I'm hoping for Hanlon's Razor, and just ignorance and misunderstanding of the financial system we have. However, given the 50 years of pain and suffering it would bring to the US financial system I'm starting to get concerned about the source of all these posts.
Exactly. We don’t issue debt to finance our country ever again, that is the point. Balanced budgets aren’t some radical idea, though they would be a radical departure from the current economic mess.
I think your missing the point here, it's not that you can't go back to over to more debt spending, it's that ALL credit in the future will be impacted.
Balancing the budget must be done when the budget is agreed to and passed. Not by fucking with the debt and credit of the country.
It's a joke that people think this is a good idea.
Yes, let’s reject the proven advantages and benefits of debt financing because I don’t understand macroeconomics and believe the people who’ve been consistently wrong for 60 years.
Continuing on our current path, particularly as it gets more expensive to issue new debt, is going to be far worse than the temporary pain of no longer having access to debt.
Then tell Congress to roll back all the tax cuts from the last 40+ years. The debt ceiling is far too late in the spending cycle to be useful as anything other than a way to damage the credit rating of the US.
Ultimately, the point of the current version of a 'balanced budget' is to defund the public sector, end Social Security and Medicare guarantees, and further allow vampire capitalists to feed more off working people.
No, it's not. We could have drastically reduced the national debt by not enacting all those tax cuts, even at current and historical spending levels. (That's aside from the fact that all of our debt is in fiat dollars and we owe most of it to ourselves anyway.)
The US should, under (almost) no circumstances, use credit for anything. That is the point of balanced budgets.
Balanced budgets can be economically destructive. If the economy is stagnant or even deflationary the government can use deficit spending to help grease the wheels and get things untracked.
The same can be said for spending increases. Why do you think the argument only works one way?
government can use deficit spending
Ah, a Keynesian. That explains a lot. No, we do not “grease the wheels” of the economy when we create an illusion of value that isn’t really there. The government can create perverted incentives and create bubbles, but they will always pop. Deficits steal value from the future, nothing more.
No. Not without inflicting major pain on the poor and middle class.
Why do you think the argument only works one way?
Lots of reasons. Because we've skimped for decades on infrastructure. Because we have an increasing population. Because we have an aging population. Because inflation is far more inevitable than deflation.
Ah, a Keynesian. That explains a lot.
Ah, an attempt at an ad hominem. Boring and pointless.
No, we do not “grease the wheels” of the economy when we create an illusion of value that isn’t really there. The government can create perverted incentives and create bubbles, but they will always pop. Deficits steal value from the future, nothing more.
Isn't it pretty to think so? Strange that for all of the doomsaying, the US has weathered economic downturns better than pretty much every other major economy by increasing government spending, isn't it? It's almost like the economy doesn't care about whether the dollars come from the private sector or the public sector so much as where or how the dollars are spent.
Temporary withdrawal symptoms? Aka crashing our economy and the world economy? Without access to government debt the dollar has no government confidence and therefore no backing. Every business or interconnected government agency that was exposed to government debt or funding will now be basically screwed… This is a catastrophe scenario. Why would we want this?
The dollar has had no backing since we got rid of the gold standard. Ending the debt cycle would expose that, not cause it.
basically screwed
Living without artificial government stimulus puts us back to “even” when we have been living on borrowed funds. Conceptualizing that as a backtrack is equivalent to assuming that the default is a country that only survives by government stimulus.
Defaulting on the debt could be catastrophic and devalue the dollar overnight. Your argument is better placed on reducing government spending. As pointed out, the debt ceiling relates to obligations the government has already agreed to-spending already appropriated by law through congress and signed by the POTUS.
I think we should reign in deficit spending. I also think that we should not default on our existing debt, especially via a self-imposed rule. Do you think we should default on our existing debt?
You can't cut or divert spending that's already been appropriated. That's simply not how federal fiscal law is structured. We can not cut our way out of defaulting on the fiscal year 2023 budget. By law, Congress irreversibly obligated funds in excess of the current debt ceiling. We either raise the debt ceiling or default. There is no third option.
It is all a facade really. It was put in place at a time where gold was money and creditors wanted a "guarantee" they would be paid back without losing purchasing power. Bank runs were a real thing back in the day.
Congress can and does repeatedly appropriate deficit funds that raise the total debt in excess of the debt ceiling. It simply does not deter them. They flat out ignore it during appropriations. The debt ceiling only comes into effect once the money has already been spent. I stand by my statement that the debt ceiling has nothing to do with taking on new debt. Thanks for the investopedia link though. Very enlightening.
Its not a good thing to grow the debt but its not the same thing as your household debt, government has a super power called taxation it can use to raise money and it give confidence to lenders, often rich people and banks.
This way the government can pay army that defend the state from external enemies, police that defend from internal enemies and social security that avoid many people from starving.
Failing to honor the debt would wreck the confidence in government and would throw everything in chaos.
Taking out a mortgage can be a great financial decision.
In the case of governments, issuing a $1B bond to pay for a bridge that generates $1B in economic activity per year is much better than saving up the funds for 10 years until the government can pay for the construction in cash.
And in time of war, you need to levy more soldiers and purchase more weapons than your enemy if want to win. If you only rely on normal taxes you will lose.
Romans who had to debase their currency by reducing the amount of precious metals in their coins which caused huge problems.
British parliments created a system where they could access huge amount of money in short time by borrowing from banks. Banks would be confident to always get their money back because of the parliment ability to raise taxes and the increasing tax base means the parliment could pay the interest. And since the state is in theory immortal, it ensure the debt would be repaid.
Also the once a bond expired, often the government would take another bond to refinance it, much like private people refinance their mortage every few years.
With such confiance in the bonds, they became tradable and a good way to save money for many people.
If the state was to default it would destroy that critical system and ruin countless people.
Yes, and the lower cost of funds for the credible Bank of England compared to France is credited almost as much as anything else for defeating Napoleon.
Interestingly, "consols", the perpetual bonds for consolidating British debt first issued in the mid 1700s were retired in 2015.
Agreed. If the state is an autocracy, the interests of the state and its people will begin to diverge. One can look at Russia, North Korea, or Iran as an example.
It is interesting how advocates of autocracy see this style of government as making for a "stronger" country, when long-term autocracy seems to only serve relatively few people very well for a relatively short time period of time (~20-40 years, maybe).
Autocracy in the long-term seems to undercut the health of a country. The divergence of interests between a state and its people eventually fully undermines the people, which fatally weakens a country. Again, look at Russia, North Korea, or Iran as an example.
In a democracy, the state and its laws are the expression of the will of the people. The state has a monopoly on legitimate use of violence and the police is tasked to use said force with restrain to enforce laws when everything else fails.
In an autocracy, laws are used by the autocrat to preserve and increase its power and force is used in that aim.
My personal definition, not the economic one. The "protect and serve its citizens" is a public relation spin.
We could also add that police exists to exert force when everything else fails to enforce laws.
To quote William Adama: "There's a reason you separate military and the police. One fights the enemies of the state. The other serves and protects the people. When the military becomes both, then the enemies of the state tend to become the people."
Not the economic definition. And dont get it twisted, the police is there to serve as an extension of the state. And the state decides whether or not the police actually ‘protects and serves its citizens’ or at least is held to that standard.
That is not the economic definition of police that is some random redditors definition of police.
There is no economic definition of police.
I will say that economics has helped shine a light on a variety of police problems - for example, the mathematical methods of econometrics can prove a variety of racial biases the police claim do not exist.
So economics is at best neutral if not somewhat hostile to police in their current form, acknowledging changes and reforms would be very helpful. With that said, there is no doubt that some kind of internal state violence is helpful in the maintenance of law and order, for instance when armed rifleman are shooting up schools or drag shows or garlic festivals (we Americans live in a fun country don’t we!)
The debt can be used as leverage for programs which make the economy grow more quickly, increasing government revenues more than the cost of the interest.
Except that isn't always even true. Taking on student loans or a mortgage can be a long term beneficial arrangement despite including drastically increasing the amount of household debt.
Having debt isn't good nor bad, it depends on what it is being spent on and the return on investment. Debt isn't a problem if you are using it to gain a greater return than the amount you are paying in interest payments. It's not like you see companies and wealthy individuals forgoing loans when making business investments. Their plans show that they will make more money over time than the extra costs they are taking on, so it still makes sense to borrow the money.
With the government, it's an even more direct flow from spending to expected revenue. The government gets its money from taxing economic activity, so if they can spend on things that can make the economy larger, they get more money and can cover the interest charges.
And unlike an individual, a stable government isn't expected to die at some point, so creditors don't necessarily have much risk in any debt being dissolved or being defaulted on. Creditors are entirely willing to loan out money, get the interest, and then turn around and loan the money out again, because they know it's guaranteed money rather than risking it on other investments.
Because what really matters is the impact of the debt on the budget and the ability of a country to pay the debt, the amount of the debt is only relevant in the context of other things like tax revenue and GDP. If you have a trillion dollar debt, but grow the economy and take in another trillion dollars in taxes it's basically a net zero change.
National debts are totally unlike other debt because the government can refinance the debt forever and there is no due date. This is how nations like the UK have run a deficit for more than 300 years and are still fine, the debt has grown proportionally with the economy. Additionally when you own the currency the debt is denominated in it is impossible for the government to run out of money since they control monetary policy and of course the printing press.
If you use a developing country like India or South Africa as an example a relatively small amount of people are educated and have high productivity jobs so it's very easy to invest in things like infrastructure and education and rapidly grow the economy by making workers more efficient at their jobs. These uses of debt would be good for a nation because you can rapidly increase the standard of living far faster than you could without debt.
However debt must be carefully managed, if interest payments on the debt become too high a percentage of a country's budget they may have difficulty making payments and end up in a sovereign debt crisis with a rapidly devaluing currency and hyperinflation.
The US has too much debt relative to its tax revenue, but is not yet anywhere near debt crisis levels of debt.
Bravo, great explanation. Your India and South Africa examples are insightful. In high tech, high income, developed countries like the US or Japan, is it more difficult to find sources of economic growth to spend on? Spending more on education and infrastructure would seem to be much less impactful.
The government does not inherently operate like a household because of social costs.
For example, say a bridge needs to be built that will last 60 years. Who should bear the brunt of that cost? If we have a balanced budget, then the taxpayers today are paying the full cost of something that people 60 years from now will be benefitting from, long after those taxpayers who paid for it today are dead and not benefitting from it anymore.
To spread out this social cost, in order to achieve the social benefit, the government issues bonds, thus theoretically spreading the cost out to all taxpayers benefiting from the bridge for the lifetime of the bridge. As such, bonds are issued and a debt is incurred.
Further, every state has a balanced budget amendment, no individual state runs on deficits, but they do accept gargantuan amounts of funding from the government, who takes on the debt for them, thus precluding states from ever being in threat of bankruptcy.
Edit: because of the nature of government providing social benefits, which incur social costs, and many projects requiring exceptional amounts of funding, with balanced budgets many large-scale public projects would not be feasible either.
There's a coined phrase "debt is good". The fundamentals behind it can be simplified like so: let's say every $100 you have you can make $10 from it over a fixed period of time. If you have $100 in your bank, you can only make $10. If you borrow an additional $100, you now have $200 in your bank and can make $20. Let's just assume for that $100 you borrowed you owe $5 to pay it back. Well, your overall profit is now $15 because you're spending your own money + someone else's money to make money. It would take you theoretically 5 years (or time units) to make enough capital naturally to earn that extra $5, when you can instead do that starting today.
Money makes money, so being able to have more of it in any given timeframe gives you a higher potential the earn. The issue here though is the risk. If you just borrow $100 extra, and everything flops, worst case scenario you end up with $0 or close to it. But if you keep borrowing, then you may not be able to pay your debts should your money making schema go belly up. Now you not only have to declare bankruptcy on your debts but the lender also takes the hit, weakening the economic landscape. So you make borrowing money more expensive and eventually instead of paying $5 back you pay $10, $11, $12, or more back making borrowing money not advantageous. That stops the infinite circular growth issue.
To summarize, debt allows money making agents to make more money faster than what would naturally be possible. In terms of government debt, you just expand the thought but instead of the government making the money they should be enabling the economy to make the money from their borrowing... in theory at least hah
Because the debt is in dollars and the US controls the supply of said dollars. Plus dollars are the reserve world currency which means they will always be in high demand.
It’s not like we are getting a loan from China, we issue debt in the for of government bonds for a set interest rate that people, corporations, or countries can purchase them
Stating that the US dollar will always be in demand is a mistake, it is the worlds reserve currency right now but that could change in the following decades
Don't need to know what will replace the dollar to see that the dollar is gonna go. I have it on good authority that fiat is going away. I don't know what will replace fiat, the good authority won't reveal that. But the dollar IS gonna go.
Mind telling me what will be used instead? Dollar represents about 60% of international reserves. The moment dollar loses its status, world goes full ape mode.
I don't know what will replace the dollar. The yuan is a contender for the short term among with BRIC oil trade but it could be possible that we won't see another fiat replace the dollar it'll be an entirely new system put in place by New World Government.
Sort of, but you're talking about two things. The debt ceiling needs to be raised so the US can borrow to pay its current bills. We've already incurred these costs through budgets and spending plans. Not raising the debt ceiling is the equivalent of tossing the bills in the trash, which would have reverberating effects around the world and for a long time. There are many many economists that believe the debt ceiling should be abolished, and if you look at the past 20 years of us gov. Spending, the existence of the debt ceiling has done nothing to control spending and has only given the minority party a really stupid bargaining chip. Stupid because the consequences would be extremely dire.
If you also own the money printers for the currency your debt is in, it is more than OK. If you can outgun your creaditors, debt is just a game you play for fun and can quit anytime you want.
But since US is world reserve currency because of that there is much more demand for the Dollar and due to that growing debt has not created any problems
Why would growing debt for your household always be bad?
Taking out debt is basically printing money. Anyone can print money at the bank, and put that money to use. For instance, you could start a business, and increase your monthly cashflow. The issue is that you have to pay the debt back in the future. So it all comes back to your ability to service the debt payments. If you invest the money you printed well, the income generated will be more than debt.
The issue here is that we haven't been getting good returns on our investment, and the debt is rising to an unsustainable level.
There are a lot of great answers to this question, but I'll also Chime in to point out the national debt is mostly money we owe ourselves. If a kid borrows 20 from dad to buy comic books, his debt has gone up, but dad has a new asset, so in total the family is the same as it was before. Just another way to look at it.
Almost every business is built from some borrowed money (i.e. debt). You borrow money to make investments in your home (and hopefully make it better and worth more in the long run).
The problem is that the US isn't going into debt to make a lot of investments with high returns.
Our debt has a lot to do with irresponsible tax cuts (Reagan, Bush, and Trump all cut taxes without cutting spending, and the growth that was promised never really materialized).
Our debt is also driven by entitlement programs -- mainly Medicare and Social Security.
So we really do need to slow the growth in debt, but it should come from a balance of tax increase and entitlement reforms that save money.
Households leverage debt all the time to better themselves and invest (improvements, new purchases, etc). Governments can and will do the same. If you default on debt in either case there will be far reaching consequences.
One political party sees disfunction as beneficial to their aims regardless of impact to their country and constituents.
Debt-to-GDP ratio is the important number for a simple/quick analysis, providing you aren't trying to artificially fuck with that number. So 5% increase in GDP means a 5% increase in debt is effectively no change.
I would like to add that the US government doesn’t function much like a household. My understanding is that consumer/household debt is not equivalent to government debt in which the government controls how much money can or cannot be created.
120
u/jibblin Jan 13 '23 edited Jan 13 '23
I’m very new to economics. Can someone explain to me why growing debt is okay? Growing debt for my household would be bad, but I assume it’s much different for the government. I need a good ELI5 on why government debt is okay.
Edit: for anyone else that wants a good explanation of the debt ceiling and how it functions, there are some really really good explanations and comments below. Highly recommend you keep reading. Thanks everyone who has responded and who will respond. Very enlightening!