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Listener William Wells asks:

Is the national debt good or bad?

America’s total national debt stands at over $36 trillion, worrying voters and lawmakers about the swelling size of the country’s budget. 

When the United States spends more money than it takes in annually, it raises that money by issuing debt or government bonds, said Reilly White, an associate professor of finance at the University of New Mexico.

“That means we go to the marketplace and we – depending on the prevailing interest rate and what people are willing to accept – give them a return, an interest payment, in exchange for their money,” White said 

The debt held by the public is nearly $29 trillion, and represents debt securities like U.S. Treasury bonds, which are bought by banks, insurance companies, state and local governments, foreign governments and private investors. The remaining $7 trillion debt consists of intragovernmental holdings, or debt the government owns itself. Some federal trust funds invest in Treasury securities, in effect lending money to the U.S. Treasury. 

As to whether it’s good or bad, the answer is: It can be both. If the U.S. spends money to help stimulate the economy, having debt can be helpful. For example, in the event of a recession, countries might take out debt and provide financial assistance to new businesses, helping them grow, White explained.

“If I took out a loan for 4% and was able to put it in something that generated a 10% return, debt can be a really good thing. It's a very useful tool,” White said.

In a crisis like the COVID-19 pandemic, the federal government can issue stimulus checks to help those who are struggling financially, said Joao Gomes, a finance professor at the University of Pennsylvania’s Wharton School.

Having too much debt can be risky, though. America’s debt-to-gross domestic product ratio is currently more than 120%. “Our total debt that we owe the world is more than the size of our economy is in a given year. And that's a really substantial debt,” White said. 

The U.S. has to pay interest on its debt, which takes up a larger and larger amount of its annual finances, White said. That makes it harder for the government to spend on education, infrastructure and social programs, White said. 

And if a country’s share of debt grows too large, it may be more difficult for it to borrow money since it’s perceived to be at risk of defaulting. 

“If your credit score goes down and you're no longer able to purchase cars, banks will only give you money if they give you a really, really high interest rate. That’s what happens in the debt market too,” White said.

Investors will charge a country higher interest rates. And as bond rates increase, so do other rates that affect the average consumer. Interest on federal student loans, for example, are based on the 10-year Treasury yield. 

Meanwhile, the federal government may cut back on funding education, infrastructure and social programs, White said. 

“To stabilize the debt, the government has to raise taxes or cut services. Either way, individuals feel the pinch,” White said. 

The biggest telltale sign that the U.S. has accumulated too much debt is if the yields on government bonds really go up, especially for the longer-term bonds, Gomes said. Bonds began to spike in early April, although they’ve now stabilized, Gomes said.

“But there was clearly a sign there that some people are having some doubts about the credibility, the commitment of the federal government, to really continue to pay the debt,” Gomes said. 

The U.S. hasn’t hit a “panic point” yet, since the demand for U.S. Treasuries remains high, White noted. 

The debt-to-GDP ratio was much smaller in the 1990s, and grew following the 2008 financial crisis as the government stepped in to inject cash in the economy, Gomes said. The debt ratio then began to rise amid the COVID-19 pandemic, when the government began spending trillions in relief funds. 

The federal government also spends trillions on Social Security and the military. “Because we have all of these needs we’re trying to service with a limited amount of tax revenues, we've been spending more each year than we've been taking in,” White said. “And because our economic growth has not often exceeded our growth in our debt load, that debt-to-GDP ratio has been rising.”

The U.S. can try to balance its budget through higher tax revenues and lower expenses, or  ensure that the U.S. economy is growing faster than its debt load, White said. 

“This is a very political question, and different people have vastly different opinions as to what we need to spend money on and what we don't need to spend money on, depending on their political background and personal preference,” White said. 

Investing in infrastructure could be one way to stimulate economic growth. “If we spend $1 in infrastructure, we can return double that in GDP if it's done well,” White said. 

The U.S. can also try to expand educational opportunities for people and give them opportunities to hone their workforce skills, White said. 

“The economy is nothing more than its people. The economy grows when people grow,” White said.

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