Biden’s Chief Economist Warns of Growing Debt Crisis Threatening U.S. Economy

For decades, fiscal conservatives have warned about the growing dangers of the United States’ deficits and national debt, advocating for stricter budget controls. Meanwhile, many economists, myself included, have long argued against austerity measures, cautioning that such policies often harm economic growth more than they help.

That stance is changing. Increasingly, former critics of fiscal restraint are now acknowledging that the nation’s debt situation has become far more perilous.

Ignoring this escalating trajectory risks triggering a debt crisis similar to those experienced by lower-income and developing countries. Should the government be forced to respond by abruptly cutting spending or increasing taxes, it could severely damage economic stability and reduce the living standards of everyday Americans.

Taking decisive action sooner rather than later is essential to mitigating these risks.

The sustainability of the national debt hinges on three key factors: the size of annual budget deficits, the interest rates on government debt, and the rate of economic growth. As demonstrated by influential economist Olivier Blanchard, a government can maintain moderate deficits if its economy expands faster than the interest it pays on debt.

This relationship resembles a college student’s management of student loans. Provided the debt isn’t excessive and their income grows faster than their debt payments, they can comfortably meet monthly obligations.

However, if borrowing reaches unsustainable levels and debt grows faster than income, financial trouble quickly follows. Unfortunately, this is the precarious position in which the country currently finds itself.