America's government debt isn't a problem right now, but that could change
American Enterprise Institute
So the US is right in the early stages of a rather dramatic upsurge in debt beyond all historical levels. (Keeping mind, of course, that the above chart is based on projections about which there is a wide range of uncertainty.)
But is this chart, and what it represents, a problem? We are certainly not in the middle of a debt crisis right now. Interest rates are low, the US can easily make its debt payments, the debt is in dollars, and the government has room to raise tax revenue.
So here are two views on the US debt situation. The first is from JPMorgan economist Jesse Edgerton who does a pro and con:
"It is debatable how much these projections should cause immediate concern. Many (though not all) economists would agree that it can be appropriate for borrowing and debt to increase when the economy is weak to provide offsetting fiscal stimulus. Once the debt is on the books, there may be no inherent reason it cannot be serviced in perpetuity and never paid back. Even the extent to which we should be concerned about the debt placing a burden on future generations is unclear—if the debt is largely internal to the US, servicing or repayment ultimately involves some future Americans writing checks to other future Americans. And if future generations will be richer than we are due to economic growth, perhaps it makes sense to try to get them to pay for our retirement. … Despite these arguments that one could make to ignore debt growth, there are sensible reasons to aim to lower the debt-to-GDP ratio in the coming years. With the unemployment rate now at 4.4%, solidly below our 5% estimate of its natural rate, we see no reason for fiscal policy to try to boost the economy right now—in fact, it would make more sense to slow it down. And we do tend to think that high borrowing and debt levels have long run costs: they likely reduce national saving, burdening future generations with external debt, and compete with the private sector for funds, reducing capital formation. Plus, an ever-growing debt ratio brings at least some small risk that investors would eventually grow concerned about the safety and soundness of US debt, feasibly triggering a rapid and destabilizing repricing."
And this from economist Tyler Cowen:
"Critics are complaining that the budget assumes 3 percent economic growth to make the numbers work, but that suffices if 'g' remains higher than 'r.' In other words, under default assumptions about the American economy, the Trump budget is affordable, even if it balloons the measured deficit for some period of time. The tax cuts are simply grabbing a kind of free lunch (borrow at 1 percent and invest at 2 percent or more), as Samuelson had suggested, but this is a point many Democrats are now putting on the back burner. … This framework allows us to pinpoint the huge and, I would say, excessively dangerous gamble in Trump’s budget. There is no guarantee that the growth rate of the economy remains higher than the government’s borrowing rate. It is common in American history that government borrowing rates run 5 percent or higher, and the aging of the American population, or perhaps an unexpected catastrophe, such as a war, could lower the growth rate. And once a government becomes addicted to borrowing, it is hard to shake the habit, as subsequent tax increases damage economies. Maybe growth rates will remain above interest rates, as futures markets seem to be indicating, but I would not stake the future of the republic on this. It also seemed in 2004 that home prices were doing fine. … In essence, the Trump budget is proposing the biggest leveraged 'real estate development' — for all of America — in the history of this country. On one side, the critics are underestimating the possibility that this can be pulled off. But those who drew up the budget, and those who are defending it, don’t understand their own incoherence. By this point, virtually all involved seem to be wondering whether we have exactly the right CEO for a further bout of American risk-taking."
As I am fond of saying, America is not Belgium. Economic policy here matters in a way it doesn’t in other nations. America matters in a way other nations don’t. Why take big fiscal risks that are totally unnecessary? The US could pass a much smaller business tax cut that was still plenty growthy. And then policymakers could move on to other pro-growth measures including housing and labor market deregulation, and public innovation investment. Also, yes, reform Social Security and Medicare to reduce projected cost growth and, in some ways, boost economic growth.