How Does the National Debt Affect Competitiveness Strategy?

”National debt,” “debt limit,” “annual deficit,” “unfunded liabilities”—the language of federal fiscal policy can be as confusing as it is daunting. It’s easy, too, amidst political fights, to lose sight of some of the larger implications of these issues. In particular, how do the national deficit and debt relate to increasing policymaker concern around U.S. global competitiveness?

The Bipartisan Policy Center has long been concerned with the trajectory of the federal debt and its impact on national competitiveness and innovation. The growing national debt poses a threat to U.S. innovation and competitiveness because it could:

• Limit private investment, depress labor market productivity, and curtail public spending on critical programs necessary to drive competitiveness; and
• Handcuff our ability to respond to the next global challenge, be it another public health emergency or threat from a geopolitical adversary.

Crowding Out Investment at Home

During the past decade, the U.S. government’s debt increased at a faster rate than at any time since the end of World War II. Today, our debt is on pace to be double the size of our economy within 30 years. Interest paid on the debt already exceeds the federal government’s spending on Medicaid and is projected to exceed all defense spending by 2029. In time, this could raise borrowing costs throughout the economy, deterring private investment and slowing economic growth. Such contraction would have spillover effects into the labor market as employees ultimately bear the costs through depressed wages and lower productivity, disincentivizing their participation in the labor force and further straining the economy.

The economic theory of crowding out—that current and projected federal deficits will have a detrimental effect on private capital expenditures by consuming capital that would otherwise be used to invest—is of critical significance to analyzing the impacts associated with our nation’s debt burden.

The crowding-out effect could impact not only private investment but also federal spending. Higher interest payments owed on the national debt would eventually force the government’s hand in making difficult fiscal tradeoffs. This could greatly inhibit our ability to compete and innovate on the global stage by reducing spending on national priorities key for economic growth—like national defense, investments in clean energy, education and workforce training, and medical and scientific research—as they are relatively deprioritized against meeting our interest obligations. This could directly set back the next generation of workers and taxpayers, the most crucial component to our international comparative advantage, as competitiveness depends on a nation’s ability to employ its economic resources productively.

Threatening Our Ability to Lead Abroad

Our national debt, and therefore our strategy to manage it, is also central to geopolitical security.

In 2016, a bipartisan group of former senior government officials singled out our national debt as the “single greatest threat” to our national security. This echoed a 2010 warning by Joint Chiefs of Staff Chair Admiral Michael Mullen that “the most significant threat to our national security is our debt.”

To finance government activities, the Treasury Department must issue securities in the capital markets to various buyers—not only in the U.S., but also to private investors overseas and the central banks of other countries. As of November 2022, foreign governments and individuals held $7.2 trillion of U.S. debt, of which 12%—nearly $1 trillion—is held by China. The more federal debt that is held abroad, the larger the share of our national income and growth that accrues to those living in other countries rather than to American households. Further, rising interest costs associated with that debt could increase payments to foreign holders of U.S. debt, decreasing the nation’s net international income.

As we build and grow a post-pandemic economy, it is critical to consider the role and size of our debt in our ability to combat the next national or global emergency. The U.S. is uniquely positioned because it holds the world’s reserve currency, allowing it to carry debt more inexpensively than other countries. And while some debt-financed spending can be conducive to economic growth—such as the nearly $5 trillion of stimulus pumped into the economy during the pandemic—high levels of it can indeed undermine such a strategy, potentially deterring lawmakers from utilizing deficit financing as a prudent expansionary fiscal tool in future downturns. The nation’s competitive edge could thus be threatened if our debt continues to go unchecked and erodes confidence in the fiscal position of the United States.

The federal deficit is the difference between what the government generates in revenue (e.g., taxes, fees, customs duties) and what it spends annually. In fiscal year 2022, the federal government collected $4.8 trillion in revenues and spent $6.2 trillion, resulting in an annual deficit of $1.4 trillion.
The federal debt is the accumulation of all annual deficits—since the nation’s founding—offset by any years of surpluses, and currently exceeds $31 trillion.