The national debt is an issue debated not only in Congress, but by the public as well. Some believe that deficits contribute to economic growth, high employment, and price stability. Based on what you have learned about economics, what do you think?[1]
The government is very conscious of who actually bears the burden of the national debt and keeps track of who holds what bonds. If only the rich were bondholders, then they alone would receive the interest payments and could end up receiving more in interest than they paid in taxes. In the meantime, poorer people, who held no bonds, would end up paying taxes that would be transferred to the rich as interest, making the debt an unfair burden to them. At times, therefore, the government has instructed commercial banks to reduce their total debt by divesting some of their bond holdings. That’s also why the Treasury created savings bonds. Because these bonds are issued in relatively small denominations, they allow more people to buy and hold government debt.
The national debt also affects private investment. If the government raises the interest rate on bonds to be able to sell them, it forces private businesses, whose corporate bonds (long-term debt obligations issued by a company) compete with government bonds for investor dollars, to raise rates on their bonds to stay competitive. In other words, selling government debt to finance government spending makes it more costly for private industry to finance its own investment. As a result, government debt may end up crowding out private investment and slowing economic growth in the private sector.
Adapted from Gitman, Lawrence , Carl McDaniel, Amit Shah, Monique Reece, Linda Koffel, Bethann Talsma, and James Hyatt. “Introduction to Business.” OpenStax, September 19, 2018. https://openstax.org/books/introduction-business/pages/1-5-achieving-macroeconomic-goals. ↵