Late last week, headlines and articles such as the one
by Horsley (2026) announced that the U.S. national debt had passed the $40
trillion mark. While that is clearly a
large number worth considering very carefully, I would like to raise some
questions and provide some thoughts about this topic.
First, why did people seem to be so alarmed by the
announcement that the U.S. national debt had passed the $40 trillion mark when
there was much less attention paid to the U.S. national debt when it was
roughly $39.9 trillion or some other amount nearly as large? Was this a case of ‘sticker shock’ or
something similar, like the price of gasoline passing some even-dollar threshold
like $4.00 per gallon or $5.00 per gallon?
Clearly, for an economy the size of the United States, an extra $100
billion of national debt does not make that much of a difference in terms of
the ability of the U.S. to finance the debt.
This may also bring up an economics concept called
‘money illusion.’ In money illusion, people make decisions based on prices
measured in dollars (or units of other currencies) that have buying power that
fluctuates as prices in the economy change.
Perhaps people should make decisions based on prices measured in units
of currencies like the U.S. dollar that have constant buying power. This is the difference between nominal
variables, measured in currency with variable buying power, versus real
variables, measured in constant purchasing power currency. You might say that $40 trillion doesn’t buy
what it used to. $40 trillion represents the nominal amount of debt that the
U.S. federal government owes in rough numbers.
What is the real amount measured in constant purchasing power dollars that
the U.S. government owes? Answering that
question requires choosing a base year or a base period, but I will leave that
for another blog post.
Regarding the ability to pay back the money borrowed,
do people realize that, although not necessarily recommended, the U.S. can
simply create U.S. dollars to pay the owners of its debt. Therefore, the U.S. really shouldn’t default
on its debt. A relatively new body of
work in economics called Modern Money Theory (MMT) or Modern Monetary Theory notes
that when a sovereign nation like the U.S. pays for things, it simple creates
the funds that it uses. If my memory is correct, then the Federal Reserve Bank,
the central bank in the U.S., ‘keystrokes’ the funds into existence that it
spends on behalf of the U.S. Treasury. One source for more about MMT is Wray (2015).
MMT further observes that a sovereign nation like the
U.S. can afford to buy anything produced in the economy because it has the
power to create money. I and probably
many others would quickly point out that just because a country can afford to
buy anything that is available for sale in that country does not mean that the country
should buy everything available for sale in that country. Still, I think that this fact helps to show
that in a difficult situation, likely one with unfortunate consequences, the
U.S. should be able to make all of its financial obligations.
Would it be wiser to restructure the U.S. federal
budget so that future deficits are smaller, thus adding less to the U.S.
national debt each year? Increases in
tax revenues and/or decreases in government spending could be used to reduce
the size of U.S. deficits that go toward the U.S. national debt. However, such possible federal budget changes
can also have unfortunate consequences.
They would take buying power away from at least some in the
economy. Perhaps they would take funds
away from those who really could use the funds.
Could you use some extra money?
What if some of your current level of after tax income would be taken
away to reduce the national debt?
Do people think about what the deficits are funding? Although the U.S. deficits may have prevented
a recession at least so far, perhaps my greatest concern about the U.S. budget
deficits now is that they are not being used to stimulate the kind of economic growth
in which everyone in the economy shares.
Contrast that with what happened in the United States after World War
II. Massive deficit spending that was
part of World War II enabled the United States to finally move far away from
the Great Depression and create much needed prosperity. But the deficits greatly increased the U.S.
national debt at that time. However, depending
on how you look at it, you could say that the U.S. never paid off the
substantial amount of debt that it incurred as part of its World War II
efforts. Economic growth shot up
substantially. As the size of the
national debt compared with annual gross domestic product (GDP) shrank, the
U.S. simply refinanced its debt obligations at relatively low interest rates.
That brings up the concept of debt to GDP ratios. Although the current debt to GDP ratio in the
U.S. is relatively quite high, it may be sustainable. In the first quarter of 2026, the U.S. Office
of Management and Budget and the St. Louis Federal Reserve Bank (2026)
calculated that the percentage of U.S. national debt to GDP was about
122.6. That implies that the U.S. debt
to GDP ratio was about 1.226. This means
that if all of the work that is part of U.S. GDP would go into repaying the
U.S. national debt, then it would take about 1.226 years to pay off the
debt. With all of the work that is part
of U.S. GDP for a year, that seems like quite a large debt. And that 1.226 years assumes that nothing produced
is going toward food, housing, etcetera.
However, readers should note that the 1.226 figure is
below the high U.S. debt to GDP ratio of roughly 1.327 during the second
quarter of 2020, the height of the COVID-19 pandemic shutdowns. Additionally, it is quite a bit lower than
the debt to GDP ratio of Japan. Data
from the World Bank (2026) accessed from the FRED website of the St. Louis
Federal Reserve Bank imply that Central government debt to GDP for Japan was
around 2.16 in the years 2020, 2021, and 2022.
Obviously, at least to this point, things have not completely collapsed
in Japan. So, while the U.S. national
debt situation may not be wise, it seems that at least for a while if not
longer it will continue to be sustainable.
To the extent that the national debt is a problem,
what will we do about it? For two
reasons, I ask that we consider not penalizing those not as fortunate financially.
First, it is probably more equitable. People with relatively low incomes
probably miss giving up a few dollars more than billionaires. Second, those less fortunate are likely to
cut their spending more if their after tax incomes fall. This could help to
explain the decrease in U.S. money velocity that we have seen starting around
the beginning of the Great Recession. It could also help to explain downward
breaks in real GDP following recessions and perhaps also downward breaks in
employment. Readers interested in more
about money velocity and downward breaks in the trend growth path of real GDP
in the U.S. may consider sources such as Hartman (2015) and Hartman (2024).
Another insight of MMT is that when the U.S. federal
government runs a budget deficit, it is creating wealth either for the U.S.
domestic private sector or for those in other countries or both. The large budget deficits may be exacerbating
income and wealth inequality in the United States, because bond wealth is even
more highly concentrated than equity share wealth. Therefore, interest and principle repayments
made by the U.S. federal government to bondholders go disproportionately to the
more affluent. So are the deficits giving
more nominal wealth and likely also more real wealth mainly to people who do
not need it as much?
I think that according to Jim Cramer of CNBC, most of
the potential solvency issues for the United States Social Security system can
be solved at least for a while by removing the payroll tax ceiling. Does that make you think of the TV show “According
to Jim” starring Jim Belushi? You can
read a bit more about Jim Cramer agreeing with Elizabeth Warren’s proposal to eliminate
or at least to raise the payroll tax ceiling on the internet in Christy Bieber’s
(2026) piece.
With most of the benefits of the 2017 U.S. income tax
reductions that were extended in 2025 going to the top earners, what could we
have achieved as a country if we would have left the tax reductions expire
rather than extending them? How many
more needs and wants could we have satisfied with the additional tax revenue and
without widening the national debt, at least by as much as it has
widened now. In fact, Horsely (2026) points
out that the U.S. national debt has doubled since 2017, the year of the
income tax cuts. What could we have done
with the tax revenue that could have been collected if we would have let the 2017
tax cuts expire?
One concern that I have about looking at things only
from an MMT perspective is that if the U.S. Treasury does not have enough funds
on hand in its account with the Fed, then by law it must borrow to fund its
spending after approved by Congress. Although
it may be a situation of spend first and fund second, does the law impose an
important limit? Does that have an
impact on how much the federal government can spend?
Another economics concept comes to mind, this one
known as crowding out. When the federal
government borrows money, in many if not most or all cases, it has to compete with
other borrowers, perhaps including state and local governments as well as
private borrowers like households and businesses, for the use of savers’ funds. One way that borrowers like the federal
government can secure loans is by offering to pay higher interest rates. Such offers can put upward pressure on all
interest rates to rise. This makes it
more expensive for borrowers to borrow as the federal government ‘crowds out’
private spending.
Have the increasing budget deficits crowded out private
spending in the past and at the present, and will they crowd out private
spending in the future? Clearly, many if
not most (or all) believe that some goods and services are better suited to be
provided by the private sector, while other goods and services are better
suited to be provided by the public sector.
Because items such as national defense and roads may possibly be better
provided at least in part by the public sector due to things like the free
rider problem (where people could receive essentially all of the benefits of
these goods called ‘public goods’ provided without paying their share), a clear
role for the public sector exists. But
again, since some items may be better produced at least in part by the private
sector, if crowding out occurs, then it could be a serious problem.
Is it more concerning that so much of the 2017 income
tax reductions benefitted the top earners without producing a large gain in
real GDP? Did policymakers get it ‘bass
ackwards’ in the vernacular by increasing federal budget deficits during times
when the economy was growing, albeit more slowly than at times before? Should the deficit spending have been better
designed to put buying power in the hands of people who will increase their spending,
creating additional income for others in the economy, who in turn will likely
spend part of their new income, and so on?
If the federal government increases tax revenues and reduces government
spending to try to reduce the national debt then all other things equal, what
will happen to after tax incomes and real GDP?
At least one of my earlier blog posts (Hartman (2026))
discussed the job guarantee (JG) proposal or the employer of last resort (ELR)
proposal of MMT. Does the federal
government have a responsibility to ensure that people who want to work have an
employment option for them to consider, particularly if they are having
difficulty finding employment? Given
that many needs and wants unfortunately go unsatisfied, think of the additional
needs and wants that could be met with a working JG program. Also, given that this blog post is mainly
about the U.S. national debt and U.S. budget deficits, remember that the cost
of such a JG or ELR program would probably be relatively small compared with
the overall size of the economy most of the time.
Returning to a question that I posed earlier, what
should we do about the U.S. national debt?
I certainly don’t have a definitive answer. In addition to what I have written so far, is
it worth pointing out that it may be quite a challenge but a worthwhile
challenge to try to reduce the annual U.S. federal budget deficits when the
economy is growing in a way that (1) is politically feasible and (2) much less
likely to reduce economic growth? Any ideas?
Please realize that subsequent data revisions may
impact the analysis and conclusions covered in this blog post.
REFERENCES
Bieber, Christy.
(2026). “Jim Cramer Says this
Controversial Social Security Solution Could Be the Best Fix.” Posted April 20, 2026. Access online August 27, 2026 at https://finance.yahoo.com/economy/policy/articles/jim-cramer-says-controversial-social-203958849.html
Hartman, Harrison C. (2015).
It’s Velocity, Stupid! Is the
Velocity of Money the Forgotten Variable of Macroeconomics? Infinity Publishing, West Conshohocken,
Pennsylvania.
Hartman, Harrison C.
(2024). Bad Breaks in Real GDP
and Employment: Exploring the
Persistence of Aggregate Demand Shocks in the United States. Palgrave Macmillan, New York.
Hartman, Harrison C.
(2026). “Is It Soon Time for a JG
Program in the US?” Posted July 3, 2026
at https://harrisonhartman.blogspot.com/2026/07/is-it-soon-time-for-job-guarantee-jg.html
Horsley, Scott. (2026). “3 Things to Know about the
$40 Trillion Federal Debt.” August 20,
2026, accessed online August 27, 2026 at https://www.npr.org/2026/08/20/nx-s1-5939473/40-trillion-federal-debt
U.S. Office of Management and Budget and Federal
Reserve Bank of St. Louis. (2026). Federal Debt: Total Public Debt as Percent
of Gross Domestic Product [GFDEGDQ188S], retrieved from FRED, Federal Reserve
Bank of St. Louis; https://fred.stlouisfed.org/data/GFDEGDQ188S, August 26,
2026.
World Bank. (2026). Central government debt, total (%
of GDP) for Japan [DEBTTLJPA188A], retrieved from FRED, Federal Reserve Bank of
St. Louis; https://fred.stlouisfed.org/series/DEBTTLJPA188A, August 26, 2026.
Wray, L. Randall. (2015). Modern Money Theory: A Primary on Macroeconomics for Sovereign Monetary Systems, Second Edition. Palgrave Macmillan, New York.
