As of 2011, the federal government owes $10.1
trillion to people, corporations, and foreign governments and another $4.6 trillion to the
Social Security Trust Fund. This doesn’t count an additional $50 trillion or more that
the government has promised to current and future Social Security and Medicare recipients
that it will not have the money to pay. Let’s ignore unfunded Social Security and
Medicare obligations and just focus on the official debt. What does it mean for the government
to carry this much debt? The interest rate the government pays on this debt is currently
about 3 percent. That means that this year the government will rack up $440 billion in
interest charges alone. According to the Congressional Research Service,
the Iraq and Afghanistan wars cost about $140 billion per year. That is less than one-third
the amount of money the government spends on interest on the debt.
Remember that the government must go to financial markets to borrow, just like everyone else.
So the interest rate the government pays on the debt is determined by market forces. Today,
the interest rate that the government pays on its debt is the lowest that it’s been
since the 1960s. In fact, just three years ago the interest rate was 50 percent higher
than it is today. What would happen if the interest rate the
government had to pay on its debt rose? At the current debt level, a 1 percentage point
increase in the interest rate would cost the government an additional $147 billion a year
in interest charges. That’s more than the annual cost of the Iraq and Afghanistan wars.
In fact, comparing the government’s annual interest expense to the annual cost of all
the wars the U.S. has fought, we see that the interest rate on the debt costs us more
than half of what World War II cost annually. At the time, World War II was the costliest
effort the government had ever undertaken. Three years ago the government was paying
a 4 percent interest rate. Ten years ago, it was paying a 6 percent interest rate. Twenty
years ago it was paying an 8 percent interest rate. If the interest rate rises to 6 percent
again—which historically is not only likely but virtually inevitable—the interest charges
the government accrues will equal the annual cost of World War II. If interest rates rise
to 8 percent, a level we saw only a generation ago, the amount of interest the government
will pay each year will be the equivalent of waging all the wars it has ever waged combined.
There are only two direct consequences of debt: the principle payments and the interest
expense. Other consequences flow from these. The more the government pays in interest,
the less able it is to provide services that people need. This means that the government
needs to take advantage of low interest rates by paying down as much of the national debt
as it can, while there’s still time.