U.S. federal government debt ended 2023 at a record $34 trillion. The worries are bipartisan, with both Republicans and Democrats hearing about out-of-control borrowing from their constituents. In fact, almost six in 10 Americans say reducing it should be a top priority, according to a survey by the Pew Research Center. So, it’s not a surprise that Congress is moving closer to passing a budget for fiscal year 2024 that would cap spending at $1.59 trillion, which is a bit less than the $1.7 trillion in fiscal 2023.
But many of reasons why lawmakers and voters have concerns about the size of the nation’s debt — concerns that have been around for many decades — are misguided and undermine a constructive conversation about the priorities for the country. Debt is neither inherently good nor bad. As such, the question is not what’s the right level of borrowing, but rather what’s the economic return on the borrowing or the societal goals it advances.
Take the child tax credit. When the Biden administration increased borrowing to expand the deduction to as much as $3,600 per child from its previous amount of $2,000, the child poverty rate tumbled to as low as around 5% in 2021 from almost 13% in 2019, making it easier for families to provide the basics, such as food, clothing and school supplies. When the program expired at the end of 2021, the rate shot up to 12.6%.
For an example of deficit spending that might be viewed as bad, research suggests that tax breaks for companies, which decrease tax revenue and thereby increase the budget deficit, may exacerbate income inequality rather than the intended outcome of encouraging companies to boost capital spending to strengthen their businesses and the economy.
Whenever there’s a debate about government borrowing, it’s inevitably put in the context of the financial constraints faced by households. But the correct context for how the federal government makes decisions about debt is not the same as how households make decisions about debt. Stephanie Kelton, professor of economics at Stony Brook University, rightly argues that this is one of the many ” myths” embedded in the discussion about the federal debt.