The United States is pushing headlong into uncharted fiscal territory, with rapidly growing federal debt signaling a turbulent future for the economy. Candidates Joe Biden and Donald Trump have added trillions of dollars to the national debt during their recent presidencies, putting the United States at a critical moment that requires urgent bipartisan action.
If you read this column, you know how staggering these numbers are: U.S. government debt is expected to reach a staggering 122% of gross domestic product (GDP) by 2034, far exceeding even the level during World War II. level. Not only is this a significant increase from the current 99%, but it is based on optimistic assumptions about interest rates, inflation and economic growth. The date to watch is 2038, when the rate is expected to surpass the 2020 pandemic year record.
Fortunately, so far, the United States has not paid too much for its leaders’ irresponsibility. This has prompted economists to come up with all sorts of fantastical theories about why debt doesn’t matter and why deficit hawks like me are just alarmists. But recently, the calls for deficit doves have calmed down a bit as the U.S. has experienced its largest inflation in 50 years and interest rates (which we are confident won’t rise much again) continue to rise.
Unfortunately, a slightly better understanding of the dangers of fiscal irresponsibility does not translate into the political courage to change course and act responsibly. So let me say it again, financial stability should be everyone’s top priority.
In fact, history does provide sobering lessons about the consequences of unchecked government debt. Noted historian Niall Ferguson noted in a recent article Bloomberg The column stated that his research led him to conclude that any major country that spends more on debt servicing than on defense will soon lose its great power. Whether it was the British Empire or the old French regime, excessive borrowing and spending led to economic weakness, loss of global influence, and eventual collapse.
America has crossed this ominous line. This year alone, interest payments on the national debt will reach $892 billion, more than the national defense base. By 2034, annual interest payments will reach $1.71 trillion, and the gap will widen further.
I hope lawmakers don’t think that all they need to do to fix this problem is increase defense spending. The real problem is that interest payments eat up a large portion of the budget. This is the answer to austerity.
On the one hand, high interest payments may be part of the reason why the Fed has struggled to bring inflation back to its modest 2% target. The more the Treasury borrows from the Fed, the stronger inflationary pressures become. Paying interest on debt means a further slowdown in economic activity. As the Peterson Foundation nicely summarizes, higher debt burdens affect everyone: “If high debt crowds out private investment in capital goods, workers will have fewer resources to draw on at work, which will This will lead to lower productivity and thus lower wages.”
However, in the face of the severe fiscal situation, the US political landscape is surprisingly calm. Politicians appear unconcerned that slowing economic growth or a debt crisis will hamper financing of their priorities, whether tax cuts, climate initiatives or poverty programs. They should be worried. Instead, both sides refuse to address the root causes of the debt crisis, which is a perfect storm of high interest payments and the looming bankruptcy of Social Security and Medicare. They avoid substantive discussion and action.
Which brings us to something so strange today: this is a solvable problem. The United States has successfully overcome its debt challenges, particularly in the 1990s, and the potential political rewards are enormous. There is also the risk of a crisis triggered by a credit downgrade or a loss of confidence by international lenders, which is significant and could occur with surprising speed. In addition, concerns about selling U.S. Treasuries by major debt holders such as China have added to geopolitical vulnerabilities.
As we stand at this crossroads, will the United States heed the warnings of history and take decisive action to address the debt crisis? What hangs in the balance is the future of the country’s economic strength and global leadership. If we citizens recognize the seriousness of the situation and insist on taking action, policymakers will have no choice but to work toward a sustainable fiscal future. The alternative—following the path of a fallen empire—is a fate that a great nation like the United States must avoid at all costs.
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