Explaining the national debt, how we got here and what it means for future generations

Amna Nawaz:

Republicans in Congress are hashing out a new tax cut and spending bill that's projected to add trillions to the national debt. We will get to some of those specifics in just a moment.

Geoff Bennett:

But, first, let's take a step back and explain a bit more about our already ballooning national debt, how we got here and what it means for our economy and future generations.

Here's economics correspondent Paul Solman.

Paul Solman:

When we were there the other day, the debt clock that's been in Manhattan since 1989 said our country owed $35 trillion, $903 billion, $414 million.

The number's the total of every dollar the U.S. government has borrowed to cover the difference between what it spends and the revenue it collects. That collective debt has long fueled anxiety about how it will burden future generations. Take this ad, which appeared on TV a few years before the clock went up, time so long ago that it's barely video-worthy.

Actor:

You owe the United States government in round numbers $50,000.

Paul Solman:

The estimated projection for a baby born today, four times as much. Scary?

Natasha Sarin, President, Budget Lab at Yale University: The size and the sort of trajectory of our fiscal path is making a lot of people understandably nervous.

Paul Solman:

To cover the gap between what the government spends and what it collects, we sell IOUs, call them bonds. About a fifth of our debt is held by different parts of the government itself, while the rest is held by the public, which includes foreign governments, investors and folks like you and me.

We rely on this debt to help fund the government. In 2024, that included about $4 trillion on benefit programs like Social Security, Medicare and Medicaid, and nearly $2 trillion defense and basically everything else. In all, the U.S. spent $1.8 trillion more than it took in, contributing to a national debt that we have been building on and off since the country's founding.

Lin-Manuel Miranda, Actor:

Welcome to the present. We're running the real nation.

Paul Solman:

Before he was a Broadway star, our first treasury secretary, Alexander Hamilton, called the young nation's debt the price of liberty and, in the aftermath of the Revolutionary War, advocated for the federal government to take over state debts to cement the colonies into the United States.

Lin-Manuel Miranda:

If we assume the debts, the Union gets a new line of credit, a financial diuretic. How do you not get it?

Paul Solman:

The pace of borrowing has ebbed and flowed with peaks due mostly to wartime spending, though, generally, the borrowing ebbed after a crisis was over. But in the aftermath of spending on the war on poverty and Vietnam back in the 1970s, spending again started to rise and hasn't stopped.

Kenneth Rogoff, Economist, Harvard University:

Our debt relative to our income has doubled in the last 20 years. It has quadrupled since 1980. We borrow very promiscuously, particularly during the financial crisis and during the pandemic.

In fact, as things stand now, we owe about as much as all the other large advanced economies put together.

Paul Solman:

But what's been happening lately?

Natasha Sarin:

Our society is becoming older, and so more people are Social Security beneficiaries and are getting their Social Security checks. And we haven't scaled up our revenue collection in ways that match that.

Paul Solman:

And there have also been tax cuts, including during President Trump's first administration in 2017.

Donald Trump, President of the United States: It's the largest tax cut in the history of our country.

Paul Solman:

Those cuts cost about $1.9 trillion over just a decade.

Natasha Sarin:

Tax reform, or cutting taxes, cutting the revenues that we collect, without raising commensurate revenue to be able to cover the cost of that lower tax burden, and the result is we have every year higher deficits.

Paul Solman:

So the yearly deficits pile up and keep the total debt swelling? But so what? Today, our debt is approaching levels not seen since the end of World War II. At least so far, our economy sure hasn't collapsed. Far from it.

Kenneth Rogoff:

If we have problems — we could have another pandemic. We could have a financial crisis. God forbid we could have a war of some type. And we will want to borrow a lot. And the fact our debt is starting so high, it's a risk. It gives us less flexibility for dealing with these things.

Paul Solman:

Economists say we have gotten a pass because the dollar is the reserve currency, meaning it's the most widely used currency in the world. But that dominance could be slipping.

Kenneth Rogoff:

Everybody sees, even if we don't, that we are likely to have a problem. And it's not the end of the dollar. It's not going to collapse. But maybe they want to be a little more diversified. Maybe they want to do other things.

That further pushes up our interest rates. That makes it more painful. And we're in the thick of this right now.

Paul Solman:

Look, our IOUs are not free. We pay interest. And the rate on it, it's been rising. In fact, interest is the fastest growing part of the federal budget pie, making up about 13 percent of spending in 2024. That's more than we spent on defense. And the interest pie slice is more than twice what it was just three years before.

Natasha Sarin:

It's not just that deficits are going to rise and debt levels are going to be higher. What I actually worry about is what it crowds out in the future, because I think that's going to constrain you from things like investing in future generations and children in early childhood education or dealing with the climate crisis that faces us today.

Paul Solman:

But our debt hasn't stopped investors from buying it. And the idea that the U.S. would stop paying entirely and default seems pretty unlikely.

On the other hand, defaults have happened in other countries throughout history and recently after the financial crisis.

Natasha Sarin:

We have seen sovereign debt crises across Europe, where questions about the viability of debt in countries like Greece were raised, and the sort of drag on those countries, not from just those moments, but from what drawing into question your integrity and your security and stability is a place to lend really, what that means to the economy. And these aren't short-lived impacts.

Paul Solman:

In Greece, a budget crisis forced the government to cut spending and raise taxes, contracting the economy. Unemployment reached 27 percent in 2013. It's a crisis that took years for the country to recover from.

So is the U.S. nearing the point that it can't pay its debts?

Kenneth Rogoff:

We're not going to literally tell them that we're not going to pay the debt, but there's, of course, a threat of inflation, the — which makes the debt work less. You get paid back in dollars that don't buy as much as when you lent them. By the way, that just happened with the excess inflation that we had in the post-COVID years.

Paul Solman:

And if our dollars are worthless, the interest lenders would demand to buy our new IOUs would go up, and the more we'd have to borrow to pay the interest.

Natasha Sarin:

That interest rate won't just be the interest rate that the government owes people who lend to us. It will also trickle down to be the interest rate that you have to pay on your mortgage or the interest rate on your car loan or on your student debt. And all of that matters to households in a way that I suspect we're going to start to feel and we're already really feeling differently now than a decade ago.

Paul Solman:

So the future of our debt really matters. And how much debt we're about to add is being determined in Congress right now.

For the "PBS News Hour," Paul Solman.