Debt & Deficits

Economic Consensus: “debt does not avoid hard choices. It only delays them” N. Gregory Mankiw , NYTs March 26, 2011

This is a strange subject to cover because economists have warned policymakers for decades that incurring large federal deficits year after year is “unsustainable”. Yet, our currency has not been debased, nor has private sector investment been severely ‘crowded out’ or economic growth severely inhibited as predicted, and the U.S. federal government—even after adding ~$3 trillion to the debt in 2020– can still borrow at around 1 percent per year. Our collective common sense knows this cannot continue forever but prophecies about the timing of the inevitable reckoning have been way off.

Despite all indications to date of U.S. deficits providing a free lunch, the public policy debate is not about whether to change policy. There is consensus in economics that a) we must do something, and b) whatever we do, the policy adjustments must support economic growth. There’s the rub: addressing the debt while supporting growth requires some combination of the following: 1) higher taxes to reduce debt, 2) higher taxes to pay for more government investment , 3) less government spending, 4) selected tax reductions, and 5) some inflation to pay down existing debt with devalued dollars. However, any of these these medicines can slow economic growth if not properly implemented. The economic policy debate is about which combination will promote economic growth and reduce the relative debt burden on future generations.

This topic has 3 sections:

  1. Debt & Deficit Basic (Primer part 1), covering the basic concepts and definitions about the federal debt and deficits.
  2. How Economists Measure the Risks of Continuing Down the Current Borrow-Spend Path (Primer Part 2)
  3. The Policy Debate: What Policies Will Reduce the Debt Burden and Not Inhibit Long Run Economic Growth?


The Policy Debate: What Policies Will Reduce the Debt Burden & Promote Economic Growth

Left-leaning: Grow economy and improve fiscal sustainability with mix of private sector incentives, and government investments, selected tax increases Right-leaning: Grow economy and improve fiscal sustainability through tax cuts, investment incentives, and slowing government spending Comprehensive Plans to Address the National Debt ( Collection of studies from 7 think tanks across spectrum: American Action Forum,…

focus photography of person counting dollar banknotes

The Risks of Continuing To Borrow & Spend

Debt & Deficit Primer (part 2). Measuring the risks of prolonged debt- financed government spending. The important concept here is “fiscal sustainability”, which basically says that if the interest rate on the debt is less than nominal GDP growth, the relative debt burden is improving. From Professors Cecchetti & Shoenholtz: “Ultimately, debt sustainability requires that…

fan of 1 US dollar banknotes and coins on beige surface

Debt & Deficit Basics

Debt & Deficit Primer (part 1). Recent visuals of US government debt and deficits over time, with explanation. Debt & Deficit Charts, COVID Relief Spending, Breakdown of Federal Spending & Tax Revenues (Visual Capitalist) Debt Clock & Reasons for US Federal Debt Growth (Peter G Peterson Inst) Lesson in Measuring Federal Debt (Federal Reserve) Interest…