“The national debt is an asset for individuals buying government securities and a liability for taxpayers,” writes the author of the briefing note. Steve Robinson, chief economist of the Concord Coalition. “If individuals repay their share of the national debt with higher taxes over their lifetime, then the effect of national debt on net wealth is negligible because assets are offset by liabilities. If individuals repay their share of the debt, consume the income, and die before their taxes go up and the debt is paid off, then the effect of national debt on net wealth is large because assets exceed liabilities. To the extent that individuals accumulate wealth to maintain consumption in retirement, an increase in debt will crowd out other savings and investments.
This analysis focuses on the share of national debt held by the U.S. public, instead of total (gross) debt, stocks held by the Federal Reserve, government trust funds, and foreign investors. This part of the debt is equivalent to about 40% of gross domestic product (GDP) and, according to projections by the Congressional Budget Office (CBO), it is expected to increase significantly over the next few decades. Robinson warns this means problems for future economic growth.
Economic Effects of National Debt Held by the U.S. Public as a Percentage of GDP
“A larger national debt inevitably means a smaller stock of capital on which future economic growth depends,” concludes Robinson. “The economic effects of a decrease in capital can be estimated using a neoclassical growth model in which the production of goods and services is determined by the input of labor and capital. The results of the model suggest that every ten percentage point increase in the government’s share of national debt as a percentage of GDP reduces the lifetime consumption of future generations by about one percent.”
“All government spending diverts resources from other uses and imposes a cost in terms of abandoned alternatives,” Robinson writes. “This opportunity cost exists regardless of the means of financing – raising taxes, issuing debt or printing money. Although the means of financing do not affect the value of government expenditures, which range from l ‘useful to waste, they affect who benefits and who bears the burden of paying the expenses.Ultimately, the national debt primarily benefits current generations at the expense of future generations.
The Concord Coalition is a non-partisan grassroots organization dedicated to fiscal accountability. Since 1992, Concord has worked to educate the public about the causes and consequences of the federal deficit and debt, and to develop realistic solutions for sustainable budgets. For more tax news and analysis, visit concordcoalition.org and follow us on Facebook @ConcordCoalition and on Twitter: @ConcordC
SOURCE The Concorde Coalition