The National Debt Is Making Us Poorer

Many Americans are unhappy about years of higher-than-normal inflation that have sapped buying power and reduced standards of living.

Now, the Congressional Budget Office (CBO) demonstrates that a difficult culprit will make you feel poorer over the next few decades: The nearly $35 trillion (and growing) national debt.

At its current trajectory, the rising national debtand the increasing burden of making interest payments on itwill reduce Americans’ future income growth by 12 percent over the next 30 years, the CBO projects in a new report. That means the average person will earn about $5,000 less annually than they would in a scenario where the debt was not growing.

“This is the result ofcrowding out, whereby a higher national debt reduces private investment and slows income growth,” explain the number crunchers at the Committee for a Responsible Federal Budget (CRFB), a nonprofit that advocates for reducing the federal deficit. “With additional debt, income growth would slow further.”

If the national debt grows faster than the CBO currently expectssomething that could happen due to wars, pandemics, or simply because lawmakers in Washington can’t cure their addiction to borrowingthe average person could miss out on $14,000 annually in future income gains that won’t materialize, the CRFB predicts.

That crowding-out effect is a serious threat to future economic growth. There are a finite number of dollars in the economy in any given year, and each dollar that has to be taxed away to make an interest payment on the debt is a dollar that cannot be invested, spent, or paid to an employee.

The costs of rising debt can be a bit difficult to understand because we don’t see reductions in potential earnings as obviously as we see price increases at the grocery store. Still, the effect is pretty similar. Americans’ experience with inflation in recent years is helpful in understanding how the cost of the national debt depresses living standards.

In the CBO’s baseline model, average earnings are expected to climb from about $84,000 this year to $123,000 in 2054, 30 years from now. That sounds great, except for the fact that average earnings would have climbed to about $128,000 by 2054 in a scenario where the national debt was stable and not growing.

To someone living in 2054, that $5,000 won’t feel real because it never existed. But it would have existed, if not for the poor decisions by federal officials in the 2010s and 2020s.

Or think about it like this. If a politician in 2054 proposed a tax increase that drained $5,000 from the average earner’s paycheck, he or she should expect a loud, negative backlash. But by hiking the national debt to its current levelsand by having no plan to stabilize or reduce the debt over the long termpoliticians today are doing exactly that to Americans living 30 years from now. This is a hidden tax increase on the future.

It’s a bit like how wages have increased dramatically in recent years, but people feel worse off because inflation has undermined (or canceled out) those increases. Anyone who has lived through the early 2020s knows that the amount of money you earn can increase even as your standard of living decreasesand the national debt will create a similar dynamic over the next few decades.

Any estimates like this should be taken with a grain of salt since the future is inevitably unpredictable, but the economic fundamentals underpinning the CBO’s projections should be taken seriously. The national debt will soon eclipse $35 trillion, and the days of pretending that endless borrowing has no consequences are behind us.