Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers.* A shorter version was published by Project Syndicate. 

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November 30, 2025 — US debt in the hand of the public now stands at 99 % of GDP.  The Congressional Budget Office [CBO] projects that it will reach 107% of GDP by 2027, thereby surpassing the longstanding record from the end of World War II.  The projections of the ratio of debt to GDP show an ever-upward path, the definition of unsustainability.

Discussions of the US national debt are often launched via an old quote from Herb Stein (CEA Chair under Nixon): “If something cannot go on forever, it will stop.”  But what form will the stop take?  There are six ways that an unsustainable debt path can come to an end: faster economic growth, lower interest rates, default, inflation, financial repression, and fiscal austerity.  In the US case, one is tempted to scratch all six off the list, one by one.  But that would leave us in violation of Stein’s Law.

1. More rapid growth

 

Presidential candidates at least since the time of Ronald Reagan have claimed that, if they are elected, growth will accelerate and will lift tax receipts as a result. The point of the rosy forecast is to appear able to reconcile promises of large tax cuts with promises of reduced fiscal deficits.  But reality seldom cooperates: Ms. Rosy Scenario fails to appear.

Unfortunately, a substantial acceleration of growth does not look especially likely now. The reason is that the US labor force has stopped growing and is now shrinking, as families have fewer children, baby boomers retire, new immigrants are blocked, and workers unlucky enough to be caught in ICE sweeps are deported. This means the rate of growth of total GDP will be lower here on out.  (Although it is GDP per capita that matters when measuring prosperity, total GDP is what matters when considering the tax base for servicing the debt.)

One hears critics of immigration say that the US can’t afford to support immigrants.  This ignores the reality that immigrants are net contributors to social security, Medicare, and other social programs.   The US debt would be more sustainable if the tax base were spread over a wider set of workers.  In other words, debt worries are a reason to favor immigration, not to oppose it.

Parenthetically, and ironically, the balance between taxes paid and benefits withdrawn is even more favorable to the US budget if the immigrants are illegal.  That is because payroll taxes are often withheld from their paychecks; yet they are reluctant to apply for benefits out of fear they will be deported.

 

Possibly offsetting the reduced immigration is the new AI boom.  It is impossible to say what AI will do for growth.  But it seems likely that there is a bubble component in the expansion of the tech companies, at least in the stock market.

CBO’s estimate of long-term growth is 1.6 %.  Optimistically, an AI bonanza might take it to 2.0 %.

2. Near-zero interest rates

For the 13 years that followed the 2008 Global Financial Crisis, interest rates were very low.  As a result, and as recently as 2020, the interest bill paid annually by the Treasury was only 2.4 % of GDP. But that time is gone.  Zero interest rates are not coming back. Interest payments by the federal government are now 3.8 % of GDP.  They rank behind only Social Security as a component of government spending, and are now ahead of either Medicare, military spending, or non-defense discretionary spending.

Now, we are getting to the less favorable outcomes.

 

3. Default

 

US creditworthiness has been downgraded, in part because the rating agencies can see that Washington politics are worse than gridlocked.  Treasury securities may no longer be the safe haven asset to which we had long become accustomed.  Even the mighty US may confront the constraints that other debtor countries have long faced.   Market reaction to Trump’s “Liberation Day” in April was a suggestive hint of evidence.  Trump has described himself as the “King of Debt,” stirring memories of the repeated defaults of his business career — or renegotiations of the debt, as he might prefer to describe them.

It is said that investors do not fear default from a country that borrows in its own currency, which the US certainly does.  The logic is that, if worse comes to worst, it can always print the money to pay investors.  Trump himself has said this.  But international investors could eventually seek to curtail the ability of a country to borrow in its own currency, as many developing countries have experienced.

Needless to say, default would not be an attractive solution. Rather, that the possibility of default is raised at all puts more pressure on the ability to fund the debt at low interest rates.

 

4. Inflation

To say that the government can always print the money to pay investors is to say that it can always inflate away the real value of its debt. This is what the Continental Congress, which lacked the power to tax, did with the debt incurred during the America Revolution.  Inflation also brought US debt/GDP down a little in 2022.  But inflation would be as bad a solution for the federal government as explicit default.

 

5. Financial repression

 

Many developing countries, or others with weak financial sectors, engage in financial repression: They use heavy-handed financial regulation to force domestic banks to swallow government bonds at artificially low interest rates .  These measures are sometimes accompanied by capital controls to prevent money from leaving the country.

Some close to Trump have discussed the possibility of (1) charging “user fees” to foreign central banks that hold U.S. debt, or (2) enacting a more general tax on foreign investment in the US, putting sand in the wheels or (3) forcing foreign central banks to hold 100-year US bonds without coupon payments, in place of the Treasury bills that they now hold. This would constitute a restructuring of the US debt. That is a pretty drastic step to propose, essentially equivalent to default.

 

6. Extreme fiscal austerity

 

Let us say, optimistically, that nominal growth is 5.0 % (= 2 % real growth + 3 % inflation) and the long-term interest rate is 5.0 %.  In this case, to achieve a sustainable path for its debt the US would have to precisely eliminate its primary deficit (that is, eliminate its budget deficits aside from interest payments), The primary deficit is currently running over 3 % of GDP, taking into account Trump’s recent legislation extending permanently the 2017 tax cuts that had been set to expire.

  This would be exceedingly painful. It is currently out of the question politically, even more so than the other options.  To illustrate, it would require eliminating almost all defense spending (at a time when there is increased need it) or else almost all non-defense discretionary spending.  It won’t happen in the foreseeable future. But eventually, in the unforeseeable future, it may be the most likely of the six possible outcomes.

 

We all have known about this problem for many years.  There was a time when a bipartisan solution seemed within reach, modeled along the lines of the Greenspan Commission that in 1982 tinkered with Social Security and postponed the date at which the Social Security Trust Fund would run out of money. The idea is that Republicans and Democrats in Congress choose a small team to represent them in negotiations behind closed doors. When the team reaches agreement on a package of spending cuts and tax revenue raisers, they ask their colleagues to vote it up or down.

It never happened.  Bill Clinton did eventually restore sustainability – indeed, achieving budget surpluses in 1998-2000. (His approach was a renewal of what George H .W. Bush had done in 1990: a combination of raising taxes a little, slowing the rise in spending, and enforcing PAYGO provision – “Pay As You Go”.)  But Clinton did it with no help from the Republicans in Congress.

Then, in 2001, George W. Bush decided to emulate Reagan rather than his own father.  He immediately threw away the hard-earned surpluses that he had inherited, on new rounds of tax cuts and increased defense spending.  This immediately put the country back onto the unsustainable path.

It is hard now to imagine that a Democratic leader, even if retaking control of the government, would choose to sacrifice spending on treasured programs, knowing that it could enable a Republican successor to once again give the savings to the rich as new tax cuts   And  a Republican leader is not likely to allow an increase in taxes or even willingly expose himself to charges of cutting Social Security and Medicare.

It will probably take a serious fiscal crisis to jolt the American system into making the necessary reforms. The later the day of reckoning, the more drastic will the eventual adjustment need to be.

*  Sohaib Nasim provided valuable research assistance.

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This post written by Jeffrey Frankel.