Dealing With Fiscal Debt: A Policy Road Map

The public debt of the US government is primed for a cataclysm. Even if interest rates remain at historic lows, the debt will exceed its highest level ever relative to our GDP just 10 years from now—and then will double that record in just the next 20 years. 

Worse still, debt is a slippery slope. The more debt, the more that higher interest rates drive up debt service costs, and therefore the greater the risk that lenders will demand higher interest rates. Already the public debt has grown so large that it has enormous leverage on the budget. If interest rates grow faster than the baseline forecast by only 0.05 percent per year, net interest cost will approach total revenues in 30 years. This is unthinkable and will shock the financial markets into extreme reactions. 

Even before a debt tsunami, though, out-of-control debt will cripple the economy. Essential government functions (federal, state, and local) like infrastructure, research, education, and the maintenance of law and order will be choked by extreme budget cuts. Social Security and Medicare will be threatened. Low-income households will be hit the hardest. 

Business (and therefore economic growth) will be hurt as well. Ballooning federal government credit demands will upend the financial markets, chilling business risk-taking and investment. New, small, technologically innovative business will be the most adversely affected because of fear that their new products and services might not be created and delivered before interest rates could spike higher. Venture capital funds will shy away, stunting innovation, global economic leadership, and prosperity.