How America Can Get Its Debt Back Under Control

With its $33.7 trillion of debt and trillion-dollar budget deficit, the US’s deteriorating fiscal situation is impossible to ignore. To simply balance the budget, a 29% across-the-board cut in spending would be necessary, even if the tax cuts enacted by Trump administration are allowed to expire at the end of 2025.

Rising interest rates have made the situation even worse. Analysis by Bloomberg Economics’ Maeva Cousin and David Wilcox shows that what appeared to be a sustainable debt situation just a few years ago has become thoroughly unsustainable. No wonder Fitch Ratings joined S&P Global Ratings in stripping the US of its AAA credit rating, and Moody’s Investors Service warned last week it may do the same.

Exploding Higher

But while everyone is focused on the spending side of the equation, perhaps the way out of this debt quagmire is on the economic side. In that sense, the years immediately following World War II offer some valuable lessons. Like now, America’s ratio of debt to gross domestic product stood at around 120%. But by 1951, it had dropped to a more comfortable 73%. The decline came not through massive spending cuts and forced debt reduction but rather with policies that fostered stronger and faster economic growth averaging 4.1% from 1947 to 1957.

Highest Since the 1940s

In many ways, the economy today is in a better position to achieve above-trend growth than it was some 80 years ago. A quick back-of-the envelope calculation suggests that — all else being equal — the economy would need to grow at a sustained pace of 4.25% to get America’s debt-to-GDP ratio down to 97% over the next 10 years. That kind of growth may seem like a stretch, especially given the very sluggish recovery that followed the financial crisis, but it’s not out of the question even with the Congressional Budget Office forecasting 2.4% baseline growth per year over the next decade. How? For one, achieving the required performance would mostly require Washington to get out of the economy’s way. But more specifically, at least three areas have potential for massive growth.