In the latest episode of Power and Consequences, we (Gary Gensler and Simon Johnson) discuss US federal government debt, its current level and likely future trajectory. Should you be concerned about US government deficits and the debt’s path? Is the growing debt unsustainable? Could some kind of “debt crisis” occur? What could be done to put American public finances onto stronger footing?
For the first 200 years of US history, while we had a long history of borrowing to finance our way through crises (particularly wars), the goal was to pay down that debt once circumstances were more favorable (i.e., during peacetime). Over the last 25 years, though, this no longer has been the case. Since 2001, publicly held US government debt has increased steadily in both good economic times and during difficult times. It now weighs in at 100% of GDP — the highest since just after WWII, tripling from just 32% of GDP in 2001.
Much has happened during this time to shift fiscal policy and results — multiple tax cuts during the Bush and two Tump administrations, the 2008 financial crisis, COVID 19 pandemic, multiple US engagement in wars, and an aging population. For many of these years, particularly after the financial crisis, the US Federal Reserve also pursued monetary policies which kept Treasury borrowing costs close to zero.
While rating agencies have downgraded US debt, to date domestic and global investors have continued to readily buy the vast supply of newly issued Treasury debt. But how long will this last?
In the last four years as inflation returned, interest rates on government debt rose. Further, regardless of administration rhetoric, deficits have continued to run annually at about 6% of GDP.
What would it take to boost revenue or lower spending to balance the US fiscal picture? Though there are alternatives to raise taxes or cut spending, there has not been a ready political path forward to do so, particularly as 2/3rds of spending is mandatory spending, including for social security and Medicare. If we can boost economic growth significantly, perhaps our fiscal picture will take care of itself — but is that truly a realistic possibility?
Simon and James Kwak published a book on US fiscal questions: White House Burning (a reference to the war of 1812). For a more recent take, see also Fiscal Policy and Debt Sustainability by Antonio Fatas and Ugo Panizza, published in a CEPR volume last year (which Gary and Simon helped edit).
