Is America heading toward a national debt crisis? An economic adviser to President Biden and a longtime Democratic policy insider has spent most of his career telling people not to worry about debt ratios. He still thinks that's true, even with publicly held debt hitting 100 percent of GDP. But now he also believes that if you're not worried, you're not paying enough attention.
Here's what changed: The national debt held by the public now stands at about $31 trillion - the size of the entire U.S. economy, up from 39 percent in 2008 and 79 percent in 2019. Historically, the economy grew faster than interest rates on the debt, making the bills manageable. But a new policy brief from the Stanford Institute of Economic Policy Research shows a grimmer picture: higher deficits plus climbing interest rates risk a debt spiral where borrowing becomes more expensive and debt levels climb relentlessly.
The math is simple and unforgiving. Imagine your annual income and debt both equal $100. With a 2 percent interest rate and a 4 percent raise, you can easily pay the $2 interest. Swap those rates, and every year you fall further behind.
Recent events prove this isn't theoretical. President Trump's war in Iran has pushed up inflation, leading lenders to demand higher interest rates to offset erosion of future payments. With trillions in new debt expected, the government will have to offer higher rates to keep creditors interested. Those higher rates ripple into mortgages, auto loans, business loans, and home-improvement loans. Borrowing costs, it turns out, are a cost-of-living variable.
Creditors are already demanding higher 'term premiums' - extra compensation for buying U.S. debt. Higher rates mean higher debt service, and net interest is already the fastest-growing part of the budget. That's a feedback loop nobody wants.
Then there's the political problem. Policymakers have learned that deficit spending delivers goods to donors and constituents with no political cost. Ronald Reagan's tax cuts for the rich were supposed to pay for themselves; they just grew the deficit. From the mid-1980s to early 2000s, Congress actually worked to reduce deficits when forecasts worsened. But by George W. Bush's first term, the political cost had vanished. When Treasury Secretary Paul O'Neill warned Vice President Dick Cheney about deficits from tax cuts, Cheney reportedly said, 'Reagan proved deficits don't matter.'
Public debt isn't all bad - borrowing for productive infrastructure makes sense, just like a family borrowing for college. But deficit-financed tax cuts are more like borrowing for a Vegas weekend. Advocates have long claimed tax cuts pay for themselves; they never have. Research by Bobby Kogan of the Center for American Progress shows that Bush and Trump tax cuts are precisely to blame for driving up the debt ratio. As Kogan puts it, 'Had the Bush and Trump tax cuts never been enacted, debt/GDP would be declining indefinitely instead of rising.'
Profligacy can produce devastating results - see the U.K. in 2022, when international creditors dumped bonds, sending interest rates soaring and currency values tanking. But the dollar is different. As the world's main reserve currency, other countries need dollars and hold U.S. bonds, making the market for U.S. debt far larger than any other country's. That gives America more leeway to deficit-spend, but not infinite leeway.
Now consider the politics: Any politician promising spending cuts and higher taxes is at a sharp disadvantage against an opponent offering the fiscal equivalent of eating ice cream all day without gaining a pound - cutting waste, fraud, and abuse, and growing out of the mess.
A fiscally and politically responsible platform would point out that decades of tax cuts put us on an unsustainable path. Offsetting them by cutting health and nutritional support for the poor is shameful and exacerbates affordability crises and inequalities without doing much for the budget.
Given that we're moving into an AI world generating trillions in tech-sector wealth mostly out of the IRS's reach (because the tax code taxes realized income, not asset growth like stocks), we need to think about taxing wealth. Polls show most Americans agree the system is rigged when rich people don't pay their fair share. The Biden administration proposed a tax on high-end 'unrealized' capital gains. Lawmakers may worry about alienating donors, but it's essential when high-end wealth accumulation is accelerating.
Unfortunately, the politics of getting on a sustainable track are miserable. With midterms approaching, even this economist isn't suggesting Democrats run as the party of fiscal responsibility and eating spinach. He may have flipped from dove to hawk, but this moment requires a nod to Saint Augustine: 'God, guide us toward fiscal sustainability… just not quite yet.'
Instead, those worried about the debt path have a responsibility to help Americans understand the link between shortsighted fiscal policies and ballooning household costs. If we're smart, we can at least stop digging.