I’m a finance professor at UCLA, so let’s talk finance. Which numbers are more meaningful to you?
Having $50 to $100 cash in your pocket (rough average for an American) or knowing the total U.S. currency in circulation is $2.4 trillion?
Owing $7,300 on your credit card (average balance of those who don’t pay it off every month) or envisioning the total U.S. credit card debt of $1.2 trillion?
Being $250,000 in debt on your home (average among American consumers with a mortgage) or seeing that the nation’s total residential consumer mortgage debt is $12.8 trillion?
Holding $250,000 in your 401(k) or IRA account (average for baby boomers, now old enough to need it soon) or knowing the total U.S. savings in such accounts is about $27 trillion?
Receiving a monthly Social Security check of $2,000 (the average) or considering the balance of the Social Security trust fund at $2.7 trillion?
I’ve been researching and teaching economics for more than 30 years, and still I can’t wrap my head around trillions of dollars. I’m guessing you can’t, either — and neither can our senators and representatives who determine the federal budget. And yet, our government insists on communicating with us in this unfathomable language.
Worse, even our best media outlets rarely translate the government’s incomprehensible abstractions into understandable numbers, giving us sentences like this one from the Wall Street Journal: “President Trump’s tax-and-spending megabill would increase budget deficits by $2.4 trillion over the next decade, compared with doing nothing, according to a Congressional Budget Office estimate released Wednesday.” (By the way, that figure has been revised to $2.8 trillion as of June 18 — as if the human mind could comprehend the difference between those boggling figures.)
And so I want to help people understand both our federal budget deficit and the resulting national debt, as well as our government’s free-spending ways. (Both parties are to blame; no need for politics here.)
The national debt today stands at about $37 trillion. This means that each of our 347 million people is on the hook for about $110,000, or about 2.75 years the median income of $40,000 per year.
Of course, not every U.S. resident earns income or pays income tax. With “only” 154 million taxpayers, this means that the average taxpayer’s piece of the $37-trillion federal debt is about $240,000, or six years of the median income.
Think of this as your share of our federal debt. The government may have borrowed it, but ultimately you are on the hook for it. Feel better now? Probably not. For most people, learning that you owe $240,000 is a lot more concerning than hearing that the national debt is $37 trillion.
And your piece of our collective problem is still growing. Each year, our federal government takes in about $35,000 per taxpayer ($5 trillion) and spends about $45,000 per taxpayer ($6.75 trillion). Lawmakers are currently not paying down our debt but adding about $10,000 per taxpayer every year to our already outstanding balance of about $240,000.
Unfortunately, we have another problem. Our outstanding debt was issued at low interest rates (around 2.3% per year). This is about to change. When it comes due, refinance interest rates will likely be more like 4% per year. Federal spending on interest will rise from the current level of about $6,000 a year per taxpayer to more like $10,000.
Back to the “One Big Beautiful Bill Act” that the Wall Street Journal was reporting on. Roughly speaking, over 10 years, the Congressional Budget Office estimates the legislation would add a total deficit of $18,000 per taxpayer. Whatever debt balance we expected to reach in about 10 years, under this new budget, we would be expected to reach that debt in nine years.
In itself, debt isn’t so bad. For instance, as your home’s value grows, the mortgage percentage shrinks. If your income rises, that helps, too. Our 25-year-old business school students, who have no current income but take on a six-figure debt, can typically comfortably pay off their debts and support a nice lifestyle, too.
Unfortunately, not so for our federal malaise. Our income and tax bases are growing nowhere near as fast as our obligations.
With growing deficits and rising interest rates, we are instead accelerating our obligations. Today, we are spending about $850 billion a year on our military, or about $5,500 per taxpayer. Interest payments are just about to exceed that.
Adding in our running deficits, even if we assume that we can greatly increase our economic output, tax base and tax intake, and that there will be no recession, and that tariffs will cover about one-third of our deficits (a combination that few economists believe), we are still heading straight for a date with a metaphorical bankruptcy judge. Fortunately, this is legally impossible.
So what can possibly happen?
First, we could get exceedingly lucky: Economic growth could reach higher than it has ever been. Maybe we can all collectively become more innovative (and less hamstrung by our abundant self-inflicted inefficient policies, rules and regulations). I wouldn’t count on it.
Second, our politicians could raise taxes, curb spending or do both. However, we have no collective appetite for this. (Those actions could slow growth to the point that they become counterproductive.)
Third, we could “print” money. However, this would leave us in a fiscal situation similar to that of many developing nations, with galloping inflation and untrustworthy currency. Who would then lend us money? It surely wouldn’t “make America great again.”
Living beyond our means is not a Republican or a Democratic problem. Our parties may disagree about what to spend the money on, but both show by their actions that they agree spending more is better than spending less. Politicians are reflections of their electorates, and we the people are not ready for any pain. If our voters can begin to comprehend our problem, we’ll be on our first step toward a solution.
Ivo Welch is a professor of finance and economics at the Anderson Graduate School of Management at UCLA.
