The Exchange

The United States Has a Credit Problem

The Exchange

By Gordon Gray, Director of Fiscal Policy at the American Action Forum

The Treasury Department has confirmed that the national debt exceeded $16 trillion at the end of August. This figure is so large as to be almost an abstraction, a figure divorced from any tangible context. However, under current fiscal policies, this unprecedented degree of national indebtedness is only expected to grow, both in absolute terms and as a share of the economy.

The national debt is the net effect of all past economic policies — the accumulated difference between all past revenues and outlays. Prospectively, a rising debt necessarily reflects a persistent excess of outlays relative to revenues, or put another way, a shortfall of revenues relative to outlays. Any policy approach that would close this gap must therefore reduce outlays in the form of government benefits or services, increase revenues in the form of higher taxes, or some combination of the two. Any policy choice to address the broader debt or future deficits will therefore ultimately be borne by taxpayers. The abstraction becomes personal.

By the Numbers

As of Friday, August 31st, the debt stood at $16.016 trillion. Since the president took office, that number has increased by $5.389 trillion. To the extent that this increase in debt burden under the president is ultimately borne by individuals, it is reasonable to apportion the national debt increase on a per capita basis. This amounts to $17,146 per person.

The United States must pay interest on its debt obligations. At present, the average interest rate paid on U.S. debt is 2.62 percent. This rate represents interest owed not only to U.S. creditors in the public, but also to non-marketable securities, such as federal trust funds. The relatively low rate reflects low interest rates set by the Federal Reserve and the global perception of Treasury securities as a virtually riskless investment, which keeps yields at bay. This rate compares quite favorably to consumer credit rates. For example, as of the end of August the average variable-rate credit card APR was 14.52 percent.

Is a Pay-Off Even Possible?

Thus any individualized analysis of the recent increase in federal indebtedness depends heavily on interest rate assumptions. Both the low-bound assumption (the current low average federal borrowing rate) and the high-bound assumption (the average credit card rate) reflect a sufficiently high increase in indebtedness under the current administration to require over a decade to fully pay off. Indeed, using the Federal Reserve's pay-off calculator that includes standard assumptions about minimum payment requirements, assuming an individual debt balance of $17,146, and the low-bound interest assumption of 2.62 percent, it would take 18 years to fully repay the debt increase under President Obama, with an initial minimum payment of $343. This payment would diminish over time to reflect a lower principal balance. Under the high-bound interest assumption, it would take an individual 36 years to repay $17,146 in debt with an initial minimum payment of $343.

The bottom line is simple: if an American put $17,000 on her credit card, she would face over 35 years of the burden of repaying. In the past four years, the President has done exactly that.

Gordon Gray currently serves as the Director of Fiscal Policy at the American Action Forum (AAF). Prior to joining AAF, Gray served as senior policy advisor to Senator Rob Portman and as policy director on the Senator's campaign. Gray has also worked for the Senate Budget Committee as professional staff and before that was deputy director of domestic and economic policy for Senator John McCain's presidential campaign. Gray also spent several years with the American Enterprise Institute.

View Comments (220)