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You probably know a new tax law is coming. You probably also heard it will add an absurd amount to the federal deficit — anywhere from $1 trillion to $2.2 trillion, depending on whom you ask. And you may have wondered: What even is the deficit — and why should I care?
The government goes into deficit when it spends more than it takes in, just like you may have this Christmas. And just like when you spend more than you make, there's consequences. Those consequences often fall on the Americans who fund the government through taxes in the form of higher interest rates (more on this in a minute) and more government spending on debt rather than priorities like roads or health care.
When the government is in deficit, it adds to the national debt, another term you probably heard while following news about the GOP tax law. When the government is spending more than it takes in, it has to borrow money to meet those spending requirements. The federal government has borrowed a lot over the years. The national debt is more than $20.6 trillion, according to USDebtClock.org, which tracks the stat in real time.
Debt isn't necessarily a bad thing. People take on debt all the time to buy cars or houses or use their credit cards. It becomes a problem when you don't have enough income to pay off that debt.
The new tax law adds to the deficit, but Republicans believe cutting taxes will increase economic activity and actually boost the government's income. That's unlikely, said Ted Joyce, a professor of economics at Baruch College. The unemployment rate hit 4.1% in November and has little room to fall further, while the gross domestic product, a sum of all the goods and services produced over a given time, is growing by about 3% a quarter, which will also be tough to top.
"Few economists believe we're going to get much more economic activity than we're going to get right now," Joyce said.
Meanwhile, the national debt has reached unprecedented levels: $20.6 trillion is a hard figure to wrap your mind around, but that's more than the gross domestic product. If you asked each U.S. citizen to pay that debt back right away, every man, woman and child would have to shell out a little more than $63,000.
On the plus side, the U.S. is the biggest economy in the world and has the most ability to pay back its debt. That's why people feel comfortable lending us so much money. But our lenders may stop trusting us if the debt gets too high, Joyce said.
"Increasing debt endlessly is not a healthy way to approach the economy," he said.
When the government needs money, it has to find people to borrow that money from. To entice those lenders, the government offers interest. And the more it borrows, the higher interest the government must offer.
When the government raises its interest rates, other borrowers have to offer higher interest rates to compete. That means your savings account will earn more, but you'll also have to pay more to take out mortgages and car loans.
In addition, as the debt gets bigger, interest payments become a bigger part of the budget. That leaves less money to spend on other needs, Joyce said.
"There's less money for health care, education, infrastructure, etc., because you're spending more and more to service your debt," he said.
Joyce believes growing the deficit is the first step toward cutting the major drivers of government spending: Medicare, Medicaid, Social Security and the military. Cutting the first three social programs has long been a goal for Republicans.
"If you want to cut those programs you create a deficit that forces you to make those cuts," Joyce said.
All this borrowing while the economy is growing makes it difficult to act if a recession hits. A government in debt, saddled with high interest payments, has less money to stimulate a struggling economy, Joyce said.
The U.S. started the millennium in a surplus, if you can remember that far. But a combination of unfunded tax cuts under former President George W. Bush, plus a pair of wars, plus a recession plunged the budget into a deficit that reached $1.4 trillion in 2009. The national debt more than tripled from $5.8 trillion in only the last 17 years.
The U.S. national debt is currently about as high as the value of the gross domestic product. The last time it's been so high compared to the GDP was after World War II. The country paid down that debt, but don't expect that to happen any time soon.
As we said, the new tax law is expected to add at least $1 trillion to the deficit over the next decade. It will likely fall to a different Congress, and a different group of taxpayers, to start reducing the deficit and paying down the debt.
Images: Weekend Images Inc.
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