Understanding California’s 2020 Solar Mandate
Government debt is not new in the US but today’s levels put many economists on high-alert. The current pace of spending is unsustainable without an accompanying rise in revenue and threatens to inhibit longer-term economic growth. What is debt and why does it matter?
To understand the problem, we must first understand the basics. The current US debt is the total amount the government has borrowed. In other words, the sum of all annual deficits. Every year the government spends more than it has, the debt increases. Government debt falls into two categories:
When a government uses expansionary fiscal policy, meaning increased spending, lowered tax rates, or when new programs are introduced, the national debt increases. Theory suggests that in good times, economic growth offsets increased spending. The peculiar thing today is that we are on the longest expansion on record, and yet our debt-to-GDP ratio is approaching levels not seen since the 1950s.
The most effective time for the government to take on greater debt is during a period of slow economic growth. As the country loses tax revenue and increases spending on unemployment benefits, exercising expansionary fiscal policy often makes sense. This is because:
There’s also a confidence component. If the market is slower and the government shows a willingness to assist, the psychological factor can drive investment.
For years pundits have said that at some point:
And the reality is, at some point, high levels of government debt could hurt growth either through increased risk of a fiscal crisis or hindering our ability to respond to future downturns. Beyond the aforementioned fears, here are the primary concerns about government debt:
The fears of rising debt are not new but today’s levels are important to monitor, especially as the population ages. While the consequences may feel distant, if left unchecked, economic growth will suffer. Higher tax rates or a cut to services may eventually be the solution, but that puts the burden on future generations.