For decades, fiscal hawks have warned about the devastating consequences of ballooning U.S. debt.
But economists say this time around is different: The debt is now so large that piling more on top of it as part of President Donald Trump’s massive tax cut and spending bill could set the country on a dangerous path.
“It’s like the house is burning down and we’re throwing in some accelerant instead of some fire extinguisher,” said Kent Smetters, professor of economics and public policy at the University of Pennsylvania Wharton. “Even without this bill, our fiscal house is burning … we’re not too big to fail.”
Smetters warns that even without this bill, the U.S. was already on what he calls an “exploding debt path,” giving the government perhaps 20 years — at most — to make meaningful reforms before the consequences become severe.
“If we don’t, the ramifications are pretty serious. Bond markets can be really, really disciplinary,” Smetters said.
At the center of the current debate is Trump’s sweeping policy measure, which the nonpartisan Congressional Budget Office (CBO) projects would add $3.4 trillion to the federal deficit over the next 10 years.
The White House disputes the CBO’s forecast. Trump has argued on social media that stronger economic growth, coupled with tariff revenues, would offset the cost of the bill.”Our country is going to explode with massive growth … This bill sets us on course for enormous prosperity in the new and wonderful Golden Age of America,” Trump wrote.
But many economists disagree.
Trump’s bill is one of the most expensive pieces of legislation in generations, while also lowering the amount of tax revenue the country collets for decades to come.
Even without this bill, the federal debt is at record levels — roughly equal to the size of the entire U.S. economy. It’s estimated about one in every four dollars paid in personal income taxes goes toward interest on the national debt.
Americans should care, economists told ABC News, because bigger federal deficits mean higher interest rates. That means more expensive mortgages, car loans, and it crowds out business investments that would make workers more productive, according to Douglas Elmendorf, professor at Harvard Kennedy School and former economist at the White House Council of Economic Advisers.
Plus, more debt means less room to respond to crises, they say.
“It’s like a family that taps out its credit cards and then has a problem with the roof of their house. You want to have a little room to maneuver in case bad things happen, and we are running out of that room,” Elmendorf said.
The U.S. navigated the 2008 financial crisis and COVID-19 pandemic with massive federal government spending. That debt never came down, which means the government will have fewer options in the face of another crisis.
The risk of rising debt levels has felt intangible because the U.S. is the gold standard, so the expectation has been that the world will continue buying U.S. debt. As the world’s largest economy and the issuer of the global reserve currency, the U.S. has long benefitted from strong demand for its debt. But that’s not guaranteed — the bond markets showed jitters earlier this year. And the fear is that investors will at some point start doubting the strength of the US economy and the ability of the U.S. to pay off their debt.
Economists fear this could kick off a doom loop: the debt makes interest rates higher, which then makes the debt even bigger, making it even harder for the U.S. to sell off its debt, thus ballooning the debt even more (hence the doom loop).
“This bill will make interest rates higher and makes the risks of falling into a doom loop higher than it would be otherwise. But economists still don’t know when we’d hit the doom loop,” Elmendorf said.
If that scenario unfolds, the U.S. could be forced into painful austerity.
“If we fall into a doom loop, then the U.S. has to make dramatic cutbacks in federal benefit programs like social security and Medicaid and sharply raise taxes. That will be really bad for people’s standard of living. That’s why it’s important to take moderate actions before that happens,” Elmendorf added.
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