Passing the Buck: How the National Debt Burdens Future Generations

New Issue Brief by the Concord Coalition

WASHINGTON, June 29, 2022 /PRNewswire/ -- New economic modeling by The Concord Coalition concludes  that the "crowding out" effect of government borrowing depends on how the national debt affects individual net wealth, instead of the state of the economy. When the national debt is continuously rolled over and never repaid, the outstanding government securities become part of the net wealth of the individuals who hold them. Assuming desired wealth is the amount needed to maintain constant lifetime consumption, more debt means less investment and a lower standard of living for future generations. "The models suggest that government borrowing primarily benefits current generations at the expense of future generations," The Concord Coalition says in its new issue brief titled: Passing the Buck: How the National Debt Burdens Future Generations.

"The national debt is an asset to individuals who purchase government securities and a liability to taxpayers," writes issue brief author Steve Robinson, chief economist for The Concord Coalition. "If individuals repay their share of the national debt with higher taxes during their lifetime, then the effect of the national debt on net wealth is negligible because the asset is offset by the liability. If individuals redeem their share of the debt, consume the income, and die before their taxes go up and the debt is repaid, then the effect of the national debt on net wealth is significant because the asset exceeds the liability. To the extent individuals accumulate wealth to maintain consumption in retirement, an increase in the national debt will crowd out other savings and investment."

This analysis focuses on the share of the national debt held by the U.S. public, instead of the total (gross) debt, the shares held by the Federal Reserve, government trust funds, and foreign investors. That portion of the debt is equivalent to roughly 40 percent of the Gross Domestic Product (GDP) and according to projections by the Congressional Budget Office (CBO), it is expected to grow significantly over the coming decades. Robinson warns that this spells trouble for future economic growth. 

Economic Effects of National Debt Held by U.S. Public as a Percentage of GDP

"A larger national debt inevitably means a smaller capital stock upon which future economic growth depends," concludes Robinson. "The economic effects of less capital can be estimated with a neoclassical growth model where the output of goods and services is determined by the input of labor and capital. The results of the model suggest every ten percentage point increase in the publicly held portion of the national debt as a share of GDP reduces the lifetime consumption of future generations by about one percent." 

"All government spending diverts resources from other uses and imposes a cost in terms of forgone alternatives," writes Robinson. "This opportunity cost exists regardless of the means of finance – raising taxes, issuing debt, or printing money. Although the means of finance does not affect the value of government spending, which ranges from useful to wasteful, it does affect who benefits and who bears the burden of paying for the spending. Ultimately, the national debt primarily benefits current generations at the expense of future generations."

The Concord Coalition is a nonpartisan, grassroots organization dedicated to fiscal responsibility. Since 1992, Concord has worked to educate the public about the causes and consequences of the federal deficit and debt, and to develop realistic solutions for sustainable budgets. For more fiscal news and analysis, visit concordcoalition.org and follow us on Facebook @ConcordCoalition and on Twitter: @ConcordC

SOURCE The Concord Coalition