USA’s National Debt: Causes, Effects & Solutions

USA’s national debt isn’t a ‘new kid on the block’. Fact: The United States of America has been running a national debt since its inception. Let’s start with what the national debt actually is…

The national debt is the total amount of money owed by the federal government at any given point in time. It includes all the money borrowed by the government, plus interest. It is often expressed as a percentage of a country’s current annual Gross National Product (the total value of all measurable economic output).

At the time I am writing this article, the US national debt is just shy of $37 TRILLION and continues to rise at a staggering pace. How staggering? By a further $1 million every 15 seconds!

Right now, that national debt equates to $107,751 for every US citizen. More importantly, it is $323,050 of debt per US tax payer.

To put this debt into perspective, let’s travel back to 1980. Ronald Reagan (R) has just won a landslide victory over Jimmy Carter (D). Reagan inherited a national debt of just 34.59% of GDP. He claimed to lead a government of fiscal conservatives but when he left office in 1989, the national debt had risen to 50.6% of GDP!

By the year 2000 – after the Bush and Clinton administrations, that debt had increased further to 57.75%. It gets worse… much worse.

Today, it stands at 122.88% of GDP!

This article explores the causes of the national debt, historical context, economic and political effects, and potential solutions, while also taking a closer look at how both major political parties have contributed to its growth and, in doing so, widened wealth inequality.

Causes of the US National Debt

There are several factors that have contributed to the US national debt. A primary cause is the federal government’s chronic overspending. Year after year, the government spends more than it collects in revenue, creating budget deficits that are financed through borrowing. This adds to the national debt.

A major driver of spending is entitlement programs such as Social Security, Medicare, and Medicaid. These safety nets support millions of Americans but come with rising costs due to an aging population and increased medical expenses.

Defense spending is another significant contributor. The US consistently outspends every other nation on military operations and readiness, which adds pressure to the budget.

Tax cuts also play a substantial role. They reduce government revenue, which can make budget deficits worse unless matched with equal spending cuts. Spoiler alert: they rarely are.

Tax cuts have also consistently benefited wealthy Americans at the expense of the bottom 80% of workers. Trump’s latest round of cuts are a further example of the totally disproportionate distribution of those tax ‘savings’ (more on this below).

Examples of Legislation That Increased the Deficit

It’s not just about spending too much or taxing too little—specific decisions by both Democrats and Republicans have turbocharged the debt.

Republican Examples:

• The 2001 and 2003 Bush Tax Cuts (EGTRRA and JGTRRA): These reduced income and capital gains taxes. While they stimulated short-term economic activity, the long-term cost was about $3.3 trillion over a decade.
• The 2017 Tax Cuts and Jobs Act (TCJA): Championed by Republicans, this significantly cut corporate tax rates and temporarily lowered individual tax rates. The price tag? Around $1.9 trillion over ten years. While intended to spur investment, much of the benefit flowed to corporations and the wealthy.

Democratic Examples:

• The Affordable Care Act (ACA): Though partially offset by new taxes, the ACA expanded Medicaid and introduced subsidies for private insurance, contributing hundreds of billions to the long-term federal outlay.
• COVID-19 Relief Packages (2020-2021): These included bipartisan support, but Democrats led the charge on the $1.9 trillion American Rescue Plan in 2021. While essential in responding to the pandemic, it also deepened the deficit and, ultimately, lead to asset inflation which, in turn, benefited the wealthy and penalized the rest of America.

How These Policies Reinforced Wealth Inequality

Many of these fiscal decisions have unintentionally (or, some argue, quite intentionally) reinforced wealth inequality:

• Tax Cuts for the Wealthy: The Bush and Trump-era tax cuts disproportionately benefited high-income individuals and corporations. Lower capital gains and corporate tax rates meant wealth grew faster for the rich, while wage growth for everyday workers stagnated.
• Reduced Investment in Social Services: With more money spent on debt interest and defense, there’s less available for education, affordable housing, and public health—services that benefit lower- and middle-income Americans.
• Inflationary Stimulus: Some pandemic-era stimulus measures helped temporarily but also contributed to inflation. Rising prices hit low-income households hardest, eroding the short-term gains many Americans saw from direct checks or expanded unemployment benefits.

Stagnant Real Wages

Since the 1970s, real (inflation-adjusted) wages for many American workers have seen minimal growth. For example, the average hourly wage in January 1973 had the same purchasing power as it did in 2018! In other words, many workers had not received any benefit of a growing US economy over a 45 year period. Real wages simply stagnated as shown in the folowing graph. The blue line shows the purchasing power of wages.

Historical Perspective on the National Debt

As discussed above. the national debt began its steep climb in the 1980s, during President Reagan’s administration. Tax cuts, increased military spending, and a recession triggered major borrowing. Since then, the debt has ballooned under nearly every administration.

The 2008 Great Recession was another major turning point. Emergency spending to stabilize banks and stimulate the economy, combined with falling tax revenues, sent the debt soaring. The COVID-19 pandemic created another sharp rise, as the government unleashed trillions in relief.

Effects of the National Debt on US Economy

The national debt impacts the economy in many ways:

• Higher Interest Payments: The more the government owes, the more it has to pay in interest—hundreds of billions annually. That’s money not going to schools, roads, or innovation.
• Crowding Out Effect: When the government borrows heavily, it competes with private businesses for capital, potentially raising interest rates and slowing economic growth.
• Risk of Inflation: If investors fear the US can’t manage its debt, they may demand higher interest rates or dump US bonds, driving up prices across the board.

Impact of National Debt on the US Government

Debt limits the government’s flexibility. In times of crisis—whether a pandemic, war, or climate disaster—having trillions already on the books makes new borrowing riskier and politically toxic.

It also places a burden on future generations. If the government doesn’t raise revenue or cut spending, younger Americans will inherit both the debt and the bill.

Global Implications of US National Debt

Because the US dollar is the world’s reserve currency, global markets keep a close eye on our finances. If international investors lose faith in America’s fiscal stability, it could trigger a global economic shake-up.

A weaker dollar would make imports more expensive and could reduce demand for US assets. Countries may look to diversify away from the dollar, reducing US economic influence.

Potential Solutions to the US National Debt

There is no silver bullet, but there are options:

• Raise Revenue: This could include reforming tax codes to close loopholes, increasing taxes on high incomes or capital gains, and ensuring corporations pay their fair share.
• Smart Spending Cuts: Rather than across-the-board austerity, targeted cuts to outdated programs and efficiency improvements could help.
• Economic Growth: Boosting productivity and employment through investment in infrastructure, education, and clean energy could grow the tax base.
• Entitlement Reform: Gradually adjusting eligibility or benefit formulas for Social Security and Medicare could help ensure long-term solvency.

Importance of Addressing the National Debt

Failing to address the debt risks a future where interest payments dominate the budget, crowding out everything else. It means future generations inherit a government that can’t invest in their success.

But addressing the debt requires balance—raising revenue without crushing growth and cutting spending without harming vulnerable Americans. It demands long-term thinking in a political world addicted to short-term wins.

Role of Congress in Managing the National Debt

Congress is where the magic (or mayhem) happens. It passes budgets, sets tax policy, and controls the purse strings. The debt problem won’t be solved without bipartisan agreement and responsible decision-making.

Unfortunately, fiscal responsibility often takes a back seat to political point-scoring. Real change will require leaders who prioritize the country over their next campaign ad.

Political Implications of the National Debt

Debt debates are a reliable political football. One party may push for tax cuts without offsetting reductions in spending, while the other may support new programs without figuring out how to fund them.

Each side likes to blame the other, but the truth is, both have added to the debt. Accountability, not finger-pointing, is what the country needs.

Challenges to Managing the US National Debt

This is a tough nut to crack. Real solutions require tough choices—raising taxes, cutting spending, or both. These moves are rarely popular and often politically risky.

The US economy is complex, and the impacts of fiscal policy can take years to play out. That makes it easy for politicians to kick the can down the road.

Wrapping it up…

The US national debt is a high-stakes issue that affects everyone. It touches everything from your future tax bill to the strength of the US dollar and the government’s ability to respond to crises. Tackling it won’t be easy, but it’s necessary.

The good news? The problem is man-made, which means it can be unmade—with vision, courage, and maybe a little less cable news dogma and ‘Truth Social’ shouting. Let’s hope our leaders are up to the task.