Debate over record-high US national debt's impact

By Al Mayadeen English
Source: Agencies
21 Sep 2023 11:01

Economic experts in the US are divided in their assessments of the potential implications of the United States' record-high national debt.

The US Department of the Treasury building is seen in Washington, DC, January 19, 2023. (AFP via Getty Images)

The United States witnessed on Monday its gross national debt surpassing the milestone of $33 trillion for the first time in its history, serving as a clear indicator of the nation's shaky financial situation.

Sputnik talked to expert economists about their opinions regarding the record $33 trillion national debt and the approaches to address this situation.

Dimitri Papadimitriou, who serves as the president of the Levy Economics Institute at Bard College, expressed optimism about the United States' outlook when asked whether the United States might find itself in a scenario where it needs to issue additional debt to cover interest payments on its existing debt, which potentially lead to more inflation and higher interest rates.

"In my view, the US does not need to worry about its national debt, irrespective of the amount. The US debt is issued in dollars, which, as the sovereign currency, is not limited in its amount, including the interest costs. There is no danger of a vicious circle," Papadimitriou said.

Drawing from the Modern Money Theory (MMT), a macroeconomic framework that challenges conventional beliefs about debt and inflation, Papadimitriou further explained that inflation occurs only when a government directs its funds toward unproductive and unnecessary endeavors.

"The recent inflationary pressures [on energy and food] are due to exogenous factors, i.e., the Russian-Ukrainian conflict, and continuing supply chain disruptions from both the war and the COVID-19 pandemic," Papadimitriou added.

Regarding the potential for reducing debt, the economist suggested that the United States has the option to decrease its debt by increasing taxes. According to the economist, this approach could also help alleviate inflation if it is triggered by excessive corporate profits.

"Spending is usually necessary, so I would be careful with the immediate recipe of spending cuts. Let’s remember that a sovereign nation using its sovereign currency can never go bankrupt," Papadimitriou concluded.

US close to huge fiscal cliff

Conversely, John Merrifield, who leads the Institute for Objective Policy Assessment and holds the position of retired professor of economics at the University of Texas in San Antonio, expressed apprehension regarding the current economic path of the United States.

"Even the most highly educated people are largely unaware of how close we are to a huge fiscal cliff. Since it will be very difficult to achieve a soft landing, we better develop a Plan B for an optimal crash landing, where we seize the opportunity to cut the least important federal functions and avoid national security risks," Merrifield said.

The specialist observed that due to the debt refinancing and increased interest rates, the United States is on track to allocate nearly a third of its current revenue toward servicing its debt.

"If we cap spending growth, we can use mineral rights asset sales to pay off the debt, but we need to do a lot of research on how to derive maximum revenue from the sale of federal mineral rights. Capping spending growth will also reduce the interest rate on the national debt," Merrifield hinted.

Elsewhere in his remarks, he also advocated for speeding up economic growth, acknowledging that achieving this would involve significant political efforts.

Regarding the potential to generate more revenue by increasing tax rates, Merrifield referred to his own simulation model, which doesn't inspire much confidence that such a strategy would significantly increase the amount of additional funds collected.

In late August, the White House asked for funding to address the federal government's requirements, while discussions on a complete budget for fiscal year 2024 are underway. To prevent a shutdown and ensure the federal government continues to operate, the short-term funding bill needs to be approved by September 30.