Comment: Wishful thinking won’t solve U.S. debt crisis

By Clive Crook / Bloomberg Opinion

The budget plan taking shape in Congress is likely to add some $4 trillion to the national debt over the next 10 years. The ratio of public debt to gross domestic product is already close to 100 percent, about as high as at the end of World War II, and rising steadily. Even without new tax cuts now on the table, the debt-to-GDP ratio is on track to exceed 160 percent over the coming few decades.

A lot of economists aren’t much concerned about this. In a new paper, Wendy Edelberg, Benjamin Harris and Louise Sheiner of the Brookings Institution join the ranks of the calmly complacent. Their argument is far from reassuring.

Their main point is that if a full-blown fiscal breakdown should happen, the cause will be “political missteps,” not too much borrowing. Even at much higher levels of debt than today’s — 150 percent, 200 percent, whatever — there would be no sound economic reason for buyers of debt to panic, and plenty of things that policymakers could do to calm them down if they did. The risk is not so much fiscal excess as political incompetence.

The authors say the policy changes needed to stabilize the debt ratio at any foreseeable level are quite manageable. They calculate, for instance, that waiting until 2054 to stabilize the debt ratio at the currently projected 166 percent would then require tax increases and/or spending cuts equivalent to 3 percent of GDP. “Even if all of the adjustment were done on the revenue side,” they say, “the resulting tax burden as a share of GDP would still be lower than the OECD average. Seen in this context, the U.S. has more than sufficient taxing capacity to finance deficits under current law through the next 30 years, and then stabilize the debt.”

Well, if the gap between U.S. taxes and average OECD taxes is a measure of readily available tax capacity, then why act so hastily to stabilize the debt mere decades from now? Let the debt ratio keep rising through the end of the century, by all means. And why take the OECD average as the benchmark? Scandinavian countries seem pretty well run; using their tax rate as the benchmark gives the U.S. another 10 percent of GDP in additional fiscal space. It’s just a matter of sharply raising taxes if or when the need arises; many, many years from now.

This reasoning strikes me as absurd. The authors must have noticed how difficult it is to raise taxes in the U.S. The longer fiscal correction is delayed, the bigger the needed tax hike; and the stronger the resistance. Perhaps the authors would say America’s entrenched dedication to low taxes is not their concern, because this is a political constraint not an economic one. To which I’d say, so what?

This question keeps coming up. The authors agree that a fiscally related financial panic could indeed start in many ways, but they argue in all cases that policymakers can avoid this, and, if a panic should nonetheless get started, can suppress it before much harm is done. The argument always turns on this distinction between (exaggerated) economic vulnerabilities, on one hand, and “political missteps” on the other.

For instance, the paper discusses the danger of so-called fiscal dominance; meaning that the Federal Reserve comes under pressure to let inflation rise to reduce the real value of the debt. This would alarm investors and raise real interest rates, worsening the fiscal position and causing a vicious circle that could end in hyperinflation. But the Fed understands all this and has operational independence, says the paper, so it would never happen. The central bank “would have to pursue a strategy that was bound to fail. We do not foresee such a crisis unless our political system undergoes major changes.” And what are the chances of that, right?

The paper also wonders about investors pricing in a higher risk of eventual debt default; which would push up interest rates, worsen the fiscal outlook, add to fears of default and so on in another vicious circle. Again, the authors argue, what’s the problem? “Congress could respond by moving credibly toward tighter fiscal policy.” The authors see the recent financial meltdown in the United Kingdom as exemplary. Then-Prime Minister Liz Truss announced big tax cuts, sidelined the Office of Budget Responsibility (the main fiscal watchdog) and set aside her predecessor’s fiscal rules. The result was financial turmoil. Truss was forced to resign, her policies were reversed and stability was restored.

You might see this episode as demonstrating that fiscal irresponsibility is dangerous and best avoided. The Brookings scholars, however, see it as proof that such errors are not just correctable but essentially self-correcting: A government makes a political misstep, brief panic ensues, wiser politicians step forward and everything is all right. Precisely because the costs of a full-scale financial collapse are horrendous, policymakers will “act preemptively to restore financial discipline and avoid collapse.”

Summing up this line of thinking: Much higher levels of public debt than today’s are perfectly sustainable in economic terms, so there’s no good economic reason to worry about them; if political missteps lead investors to be alarmed, policymakers will act promptly to assuage their fears; the panic will soon subside, allowing rapid accumulation of public debt to safely resume. The chance of an extended fiscal crisis from debt accumulation over the next few years is “quite low,” the paper concludes, “so long as the U.S. maintains its strong institutions and a fiscal trajectory that isn’t vastly worse than the one currently projected.”

When I look at Washington these days, I don’t think “strong institutions.” I also see a fiscal trajectory that’s about to get substantially — even if not “vastly” — worse. Forgive me for stating the obvious, but politicians make mistakes. Whether you call them economic errors or political missteps doesn’t much matter. Correcting these mistakes can be difficult, and fixing fiscal-policy errors, in particular, gets ever harder as the ratio of debt to GDP gets bigger.

I was quite concerned about the U.S. fiscal trajectory before I read this paper. The thought that policymakers might be guided by it is downright frightening.

Clive Crook is a Bloomberg Opinion columnist and member of the editorial board covering economics. Previously, he was deputy editor of the Economist and chief Washington commentator for the Financial Times. ©2025 Bloomberg L.P., bloomberg.com/opinion.