The United States national debt has surpassed $40 trillion, a milestone prompting concern from economists, including Jared Bernstein, chair of the US Council of Economic Advisers. Bernstein, who previously viewed the national debt with less alarm as long as servicing it remained manageable, has updated his assessment due to a combination of factors.
Evolving Economic Perspective
Bernstein explained that his stance on the national debt has evolved as economic conditions and political dynamics have changed. Previously, his perspective was that the stock of debt was less critical than the flow of annual deficits and the ability to service that debt with manageable interest rates. "As long as you’re growing faster than your interest rate payments, as long as you’re not adding too much to the debt every year, underlying economic growth can allow you to service that debt without breaking a big economic sweat," Bernstein said in a recent interview. This view, he noted, was shared by a portion of the economic community, though others expressed greater concern.
Factors Driving Concern
Bernstein identified three key developments that have altered his outlook. First, he observed a decline in Congress's willingness to act on fiscal forecasts, suggesting a diminished "reaction function" to unsustainable budget projections. Academic work has supported this observation, indicating that legislative bodies are no longer reacting to the budget outlook as they once did.
Second, Bernstein pointed to a gradual increase in interest rates. This rise in rates directly impacts the cost of servicing the national debt, a factor he previously considered manageable but now views with growing apprehension.
Third, he noted persistent budget deficits that are significantly larger than historical norms. In normal times, deficits are expected to be negative 2 to 3 percent, but recent deficits have been in the 4 to 6 percent range, which Bernstein described as "almost a recessionary-level deficit."
Addressing the Debt
Bernstein emphasized that while the $40 trillion figure is a "big distraction," the underlying issue of debt sustainability remains critical over the next decade. He stated that there is still time to address the problem and stop further accumulation of debt. "We can’t fill up the hole, but we can stop digging the hole," he said.
He suggested that reversing tax cuts for higher-income earners and corporations could be a viable policy to begin repairing the fiscal situation. Bernstein also commented on the historical role of both political parties in contributing to the current debt levels, noting that while Republicans have been prominent in advocating for tax cuts, Democrats have sometimes failed to reverse these measures during their tenures.
Debt Ratio as a Key Metric
Instead of fixating on the absolute figure of $40 trillion, Bernstein advocates for focusing on the debt-to-GDP ratio. He believes it is plausible to stabilize or even slightly reduce this ratio in good economic times if the economy grows faster than the debt. However, achieving this would likely require significant shifts in the composition of Congress and the White House. "Keep the debt in check" is his concluding advice on managing the nation's fiscal health.