Federal-government debt that exceeds 100 percent of GDP is wildly irresponsible.
This week’s downgrade of the United States by Fitch Ratings is both absolutely merited and totally absurd. It’s absurd because ratings are fundamentally about default risk and the United States has no foreign currency debt, and it has a central bank capable of creating money to pay back sovereign debt; so actual default is unlikely. Moreover, the prominence of the 14th Amendment during recent negotiations to raise the debt limit underlined that outright default would probably be unconstitutional and thus legally impossible.
At the same time, the downgrade is absolutely merited, because the debt dynamics of the United States are becoming increasingly untenable amid Washington’s wildly reckless overspending. While the bipartisan Fiscal Responsibility Act to raise the debt ceiling curtailed a small amount of deficit growth, the Congressional Budget Office still expects federal-government debt held by the public to reach 115 percent of gross domestic product in a decade, up from the current level of 93 percent. Treasury’s own projections indicate debt reaching around 250 percent of GDP by the middle of the century, and almost 600 percent of GDP by its end; compounding interest works great for savers but horribly for borrowers. These are nearly incomprehensible levels of indebtedness, and unless we tax the economy into oblivion, they’d end up requiring almost all revenues to be dedicated to interest payments on the debt, leaving nothing left for government functions. For context, debt was about 35 percent of GDP on the eve of the Global Financial Crisis, and it was stable at around 75 percent until the pandemic.
Continue reading the entire piece here at National Review Online (paywall)
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Stephen Miran is an adjunct fellow at the Manhattan Institute, co-founder of asset manager Amberwave Partners, and a former senior adviser for economic policy at the U.S. Treasury, 2020–21.
Photo by James Leynse/Corbis via Getty Images
