America’s Growing Debt (Part III - Final)

The Cost of Carrying Debt and the Generational Impact

The story of America’s national debt is not just about how much has been borrowed—it’s also about the rising cost of maintaining that debt. As interest payments grow, they represent a significant and often underappreciated burden on the federal budget, with far-reaching implications for today’s economy and future generations. In this final part of our series, we’ll examine the historical and projected costs of servicing the debt, compare the U.S. experience with other nations, and explore the generational and policy challenges that lie ahead.

The Rising Cost of Interest Payments

The United States has always paid interest on its debt, but the size and share of these payments have changed dramatically over time. In the post-World War II era, interest payments were manageable thanks to high economic growth and relatively low debt levels. However, as the national debt has grown, so too has the cost of servicing it.

• Current Interest Payments: In 2023, the U.S. paid approximately $600 billion in interest on its debt—more than the budget for national defense or Medicaid.

• Projections: If current borrowing trends and rising interest rates continue, annual interest payments could exceed $1 trillion by 2030, according to the Congressional Budget Office (CBO). At that point, interest payments could outpace Social Security as the largest federal expenditure.

A Historical Comparison: How Interest Payments Have Evolved

Post-World War II (1950s–1960s): Managing Debt with Growth

After World War II, the U.S. faced historically high debt levels, with the debt-to-GDP ratio peaking at 120%. However, the post-war economic boom—fueled by industrial expansion, the GI Bill, and rising consumer demand—allowed the economy to grow faster than the debt. Interest rates remained low, and robust tax revenues helped manage debt payments.

• Key Lessons: Economic growth can reduce the burden of debt over time, but it requires disciplined fiscal policies and strategic investments.

1980s: High Interest Rates Amplify Debt Costs

The 1980s marked a turning point in U.S. debt management. Rising inflation in the late 1970s prompted the Federal Reserve to implement aggressive interest rate hikes. As rates soared, the cost of servicing the national debt grew substantially. By the end of the Reagan administration, interest payments consumed over 15% of federal spending, compared to around 6% today.

• Key Lessons: High interest rates can make existing debt far more expensive, limiting a government’s ability to invest in other priorities.

2000s: Low Rates, High Borrowing

In the early 2000s, low interest rates allowed the U.S. to borrow heavily to fund post-9/11 wars, tax cuts, and other expenditures without immediately facing high debt-servicing costs. However, this period also saw the debt-to-GDP ratio rise significantly, setting the stage for fiscal challenges in later decades.

• Key Lessons: Low rates provide a temporary reprieve but do not eliminate the long-term burden of growing debt.

2020s: A Perfect Storm of High Debt and Rising Rates

Today, the U.S. finds itself in a precarious situation: record-high debt levels combined with rising interest rates. Unlike the post-World War II period, economic growth has slowed, and structural deficits—driven by mandatory spending on Social Security and Medicare—make it harder to pay down debt.

• Key Lessons: Without strong economic growth or significant fiscal reforms, rising interest payments could crowd out other critical spending and increase the risk of a fiscal crisis.

Case Studies: Lessons from Other Nations

Debt can have different implications depending on a country’s economic position, borrowing capacity, and fiscal management. Comparing the U.S. to other nations provides valuable insights:

• Japan: A Model of Stability Despite High Debt
  Japan’s debt-to-GDP ratio exceeds 260%, the highest among advanced economies. However, the majority of its debt is domestically owned, and its central bank maintains ultra-low interest rates, making debt servicing manageable. Despite this, Japan faces long-term challenges due to its aging population and stagnant growth.

  • Takeaway for the U.S.: The global reserve currency status of the dollar offers similar borrowing advantages, but dependence on foreign creditors and rising interest rates could limit flexibility.

• Greece: A Cautionary Tale of Austerity
  Greece’s debt crisis in the 2010s illustrated the dangers of excessive borrowing without strong economic growth. When investors lost confidence in Greece’s ability to repay its debt, borrowing costs skyrocketed, forcing the country into severe austerity measures. The result was a prolonged economic contraction and widespread social unrest.

  • Takeaway for the U.S.: Maintaining investor confidence is critical to avoiding sharp increases in borrowing costs and economic instability.

• The U.S.: Resilience but Rising Risks
  As the issuer of the world’s reserve currency, the U.S. has enjoyed low borrowing costs and strong demand for Treasury securities. This advantage has allowed the U.S. to finance large deficits without immediate crises. However, with interest payments now consuming a growing share of the federal budget, the margin for error is shrinking.

  • Takeaway: The U.S. must balance its unique fiscal advantages with disciplined long-term planning to avoid the pitfalls faced by less-resilient economies.

The Generational Impact: Borrowing Today vs. Paying Tomorrow

Debt accumulation raises questions about fairness across generations. While borrowing has funded critical investments and stabilized the economy during crises, future taxpayers will bear the cost of repayment and rising interest obligations.

Today’s taxpayers already contribute a significant portion of federal revenue to interest payments, leaving less for education, infrastructure, and other priorities. Without changes to fiscal policy, younger generations could inherit a fiscal situation where debt servicing dominates the budget, reducing opportunities for new investments or crisis responses.

Policy Challenges and Potential Solutions

Managing the growing burden of interest payments requires bold action and long-term planning. Here are some potential paths forward:

1. Reforming Mandatory Spending Programs: Social Security and Medicare are the largest federal expenditures. Gradual reforms, such as raising eligibility ages or adjusting benefits for high-income individuals, could reduce fiscal pressure.

2. Optimizing Tax Policy: Increasing tax revenues—whether through higher rates for certain groups or closing loopholes—could help reduce deficits without stifling economic growth.

3. Investing in High-Multiplier Projects: Focusing on infrastructure, education, and research can boost economic productivity, increasing the government’s ability to manage debt sustainably.

4. Balancing the Budget in Stable Times: Running surpluses during periods of economic growth, as the U.S. did in the late 1990s, can help reduce debt levels and prepare for future crises.

Conclusion: Debt Management for the Future

The cost of carrying debt is no longer just an abstract number—it is a growing reality with implications for every American. Interest payments are rising, the economy is slowing, and the balance between borrowing and repayment is becoming more delicate. As the U.S. navigates this challenge, policymakers must prioritize fiscal discipline, strategic investments, and intergenerational fairness.

The story of America’s debt is one of ambition, resilience, and complexity. While debt has fueled growth and stability, its management will define the nation’s economic future.

Sources:

• Congressional Budget Office: Interest Costs and Federal Spending Projections

• Investopedia: U.S. National Debt and Interest Trends

• World Bank: Debt Dynamics Across Nations

• Peterson Foundation: Fiscal Challenges of Rising Debt

• National Taxpayers Union Foundation: Government Spending in Context