National debt: The five-minute primer

@CNNMoney September 7, 2011: 3:57 PM ET
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NEW YORK (CNNMoney) -- A small, bipartisan group of lawmakers will be hunkering down this fall, negotiating ways to reduce deficits by at least $1.2 trillion over the next decade.

With the country's fiscal future coming under the microscope -- and the spin that is sure to surround the so-called congressional super committee on debt -- here is what you should keep in mind.

How much debt does the U.S. have today? About $14.6 trillion.

Nearly $10 trillion of the national debt is held by the public: individual bondholders, big investors such as mutual funds or universities, and foreign governments such as China, the United Kingdom and Brazil. The rest represents money owed to government trust funds -- primarily Social Security.

Is $14.6 trillion too much to handle? The real problem is not that the country owes $14.6 trillion today. It's that the number could grow to $23 trillion by 2021 and keep rising thereafter.

In short, if nothing is done to change its trajectory, the debt is on track to grow faster than the economy indefinitely.

Just how unsustainable is the national debt? By the end of this decade, barring any policy changes, the vast majority of federal tax revenue will be eaten up by just four things: interest on the debt, Medicare, Medicaid and Social Security. In other words, a third of the federal budget, which includes spending on defense and all other discretionary programs, will have to be financed mostly with borrowed money.

Why tax revenue must go up

Less than three decades from now, the picture worsens considerably. Tax revenue will only be sufficient to pay for interest on the debt and most, but not all, of Social Security.

Okay, but aren't jobs a much more urgent problem? Yes. And meaningfully reducing the debt won't be possible unless the economy gets stronger and unemployment falls.

At the same time, the longer policymakers wait to address the burgeoning debt, the more it could impair economic growth and put the country at risk of a fiscal crisis. If current policies continue unchanged, inflation-adjusted GDP could be as much as 10% lower by 2035 than would otherwise be the case, the Congressional Budget Office estimates.

And the longer policymakers wait, the harder it will be to reduce debt without making draconian changes. And those changes -- you guessed it -- could curtail growth.

Washington, in short, has put itself in a tough spot.

Seasoned fiscal experts say there's a way out, if only Congress would heed their advice: Support policies that bolster the economic recovery and simultaneously commit to a long-term debt-reduction plan that would phase in once the economy strengthens.

How did the debt problem get to be so big? By habit and circumstance.

The federal government has typically spent more than it collects in taxes. In fact, it has run deficits for all but 12 years since 1934.

But debt started to accrue much more rapidly in the past decade because of several rounds of tax cuts, the war on terrorism, and a Medicare prescription drug benefit -- all of which were financed through borrowing.

Then, in 2008, a gob-smacking financial crisis spurred a lot more spending to stem the pain of the downturn. That recent surge is so-called "cyclical" debt -- meaning it will stop accruing once the economy recovers.

What worries budget experts far more is the "structural" debt -- the kind that will keep growing even when the economy is strong. The gap between money in and money out will persist largely because of long-anticipated demographic changes such as the aging of the population. And borrowing to fill that gap could become much more expensive than it has been.

Why did Congress let things get so bad? Political self-interest is perhaps the biggest culprit.

Politicians know they will get more votes when they give constituents what they want. For years, that meant bringing home the bacon rather than trimming the fat. And it meant not asking constituents to pay for expensive policies.

More recently, to score political points, many on the right have demonized any suggestion that higher revenue be part of the debt solution. And many on the left have sworn that Medicare and Social Security must not be cut in any way.

And with the ascendance of the Tea Party and the destructive debt ceiling debate, many lawmakers have espoused unyielding and often impractical fiscal positions, making a compromise on serious debt reduction difficult to achieve.

What happens if the long-term debt is not addressed? The government would end up devoting ever larger portions of the federal budget to pay interest costs, which will curtail its ability to make needed investments and reduce its flexibility to respond to emergency situations.

Why entitlement spending must be reined in

What's more, growth could suffer, tamping down job creation and household income. That, in turn, could create a kind of doom loop.

Low growth ravages government revenue and increases the need to borrow. More borrowing builds debt. Higher debt increases pressure to tighten fiscal policies. And tighter fiscal policies can slow economic growth. Wash, rinse, repeat.

Won't the debt ceiling deal help? Yes and no. If everything goes as legislated it would cut deficits over the next 10 years by at least $2.1 trillion. But that's only half the cost of extending the Bush tax cuts -- which many lawmakers want to do.

What's more, fiscal experts say, the deal does more to solve a political crisis rather than address the country's biggest fiscal problems.

That's because it relies too heavily on cuts to discretionary spending, which is not the major driver of long-term deficits. And it all but ignores the need to reform entitlements and raise more revenue -- both of which are crucial to improving the country's long-term solvency.

A bevy of balanced, bipartisan debt reduction plans have been put out by various groups in the past year -- most notably President Obama's own fiscal commission.

A majority in Congress, however, has yet to back any of them. In the meantime, all eyes this fall will be on the bipartisan super committee, to see whether the 12 members will exceed their mandate to propose at least $1.2 trillion in debt reduction over the next decade. To top of page

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