Budget hawks have fretted for decades about America’s deficits and debt, repeatedly advising our government to embrace greater fiscal austerity. And for just as long, budget doves — myself included — fought this narrative, repeatedly arguing that austerity often does more harm to our economy than good.
No longer. I, like many other longtime doves, am joining the hawks, because our nation’s budget math just got a lot more dangerous.
If we continue to ignore the unforgiving trajectory we are on, we are inviting a debt shock, a kind of crisis that periodically hobbles lower-income and developing countries. If our government is forced to address spiraling debt either by quickly and aggressively cutting spending or by raising taxes, it would seriously damage the economy and lower the living standards of everyday people.
The sooner we take action, the better chance we have to avoid this fate.
The sustainability of our nation’s debt is determined by three variables: the size of our annual deficits, the rate of interest on the debt, and how fast the economy is growing. As shown by Olivier Blanchard, one of the most influential thinkers in this area, a government can sustain modest budget deficits so long as its economy is growing faster than the interest rate on its debt.
It’s similar to what happens when college-bound students take on loans to pay for their education. So long as they haven’t borrowed too much, and their income after graduation is rising faster than their student loan bills, they can make their monthly payments without breaking a sweat.
Conversely, though, if they borrowed to the hilt — and if their student loan debt starts growing faster than their income — they can quickly get in trouble. And that’s where our country is right now.
For decades, the interest rate America paid on its debts was low relative to its growth rate. As a result, the likelihood of some dangerous event, like lenders suddenly insisting on much higher interest rates, was also low. This is why doves like myself pushed back on demands that our country needed to strive for a more balanced budget.
But as this chart shows, the interest rate our country pays on its debt has increased sharply, driven in part by government spending during the pandemic and by higher inflation. It’s shot up so much that it is now equal to our growth rate. That’s a potential game changer for debt sustainability.
Why “potential?” Because no one knows for sure where interest rates are headed. But this is where President Trump’s economic policy comes in. His trade war, along with the domestic policy bill he just signed, push all three critical variables — interest rates, growth rates and budget deficits — in the wrong direction.
Let’s start with his tariff regime. While we cannot know where tariff rates will ultimately settle, the effective tariff rate, which is calculated by weighting official country and sector rates by their import shares, is 15 percent — the highest it’s been since the 1930s. A new study I conducted with the economists Adam Shaw and Daniel Posthumus for the Stanford Institute for Economic Policy Research about our deteriorating budget math suggests that tariffs this high will lower economic growth while raising inflation and interest rates over the next few years.
The second blow is the new policy law, which significantly increases our debt load and is thus likely to raise the interest rates we must pay to service it. We believe there’s a good chance the legislation could raise the ratio of debt to the G.D.P. by 30 percentage points over the next decade, driving interest rates six-tenths of a point higher than they are now.
Finally, there is the magnitude of the deficit itself. While interest rates have been lower than growth since at least the mid-2000s, the ratio of our debt to our economy has more than doubled through 2019 (after which the pandemic caused a further large increase). Even under favorable growth and interest rate conditions, large deficits (5 percent to 6 percent of G.D.P. versus 1 percent to 2 percent) can quickly push up the debt.
It’s not just that Congress won’t stop digging us deeper into debt. It’s that it has moved from shovels to excavators.
To turn this around, we suggest a three-part plan for Congress: Come up with specific “break-glass moments” that would force a response; calibrate fiscal adjustments that respond to these triggers; and work with policymakers to set up binding responses to these crises.
Of course, triggers and spending constraints set up in the past have not only failed at their goals but also led to unintended consequences. In the 2010s, Republicans used the debt ceiling as a weapon to threaten the social safety net. And just last week, in a cruel twist of fiscal fate, the reconciliation process, which was designed to restrain deficit spending, was manipulated to avoid the filibuster and pass the Republicans’ bill.
But we still have to try to raise the alarm, and perhaps the fact that we doves are fretting will help elevate the issue. It’s either that, or cross our fingers and hope that rates drift back down, growth drifts back up and expected deficits fail to appear. According to our research, that’s a risk that no one should be willing to take.
Jared Bernstein was the chair of President Joe Biden’s Council of Economic Advisers from 2023 to 2025 and is a distinguished policy fellow at the Stanford Institute for Economic Policy Research.
Source photograph by Peter Spiro, Yuji Sakai/Getty Images.
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