I Now Believe Our National Debt Is a Problem

Is America heading toward a national debt crisis? As an economic adviser to President Biden and an economist active in mainly Democratic policy circles since the late 1980s, I’ve spent most of my career dismissing arguments that any debt-ratio level signifies a “crisis.” I still think that’s true, even as our publicly held debt has reached 100 percent of our GDP. But I also now believe that if you’re not worried about this country’s fiscal outlook, you’re not paying enough attention.What changed? The national debt held by the public, about $31 trillion, is now the size of the U.S. economy, up from 39 percent of the economy in 2008 and 79 percent in 2019. For most of the country’s history, the fact that the economy’s growth rate surpassed the interest rate on the debt enabled us to keep paying our bills.But as my colleagues and I show in a policy brief for the Stanford Institute of Economic Policy Research, the fiscal outlook today is much more challenging. We concluded that the combination of higher deficits and climbing interest rates raises the risk that borrowing will become more expensive and will push government debt levels to climb relentlessly. This is a debt spiral.[Rogé Karma: The debt is about to matter again]The math is simple and unforgiving. Say both your annual income and your debt equal $100. Suppose you face a 2 percent interest rate but you get a 4 percent raise. You’ll have no problem paying your creditor their $2 in interest from your $4 in added income. But if you swap those rates around, every year puts you further in the hole.Events of the past few weeks reveal that the problem of rising interest rates is not theoretical. President Trump’s war in Iran, which is putting upward pressure on inflation, has led lenders to insist on extra compensation—that is, higher interest rates—to offset inflation’s erosion of the value of future payments. Based on the wide gulf between our spending obligations and our expected tax revenues, debt investors also k