December 15, 2017

Yellen: Rising National Debt Limits Our Ability to Respond to Future Downturns

In her final press conference as chair of the Federal Reserve, Janet Yellen said that she was “personally concerned about the U.S. debt situation” and how it may limit the government’s ability to respond to future recessions.

Yellen expressed these concerns in response to a question from CNN’s Donna Borak about the tax reform bill currently before Congress. Noting that the proposed legislation would add significantly to the national debt, Yellen went on to say:

“It's projected, as the population continues to age and the baby boomers retire, that that ratio will continue to rise in an unsustainable fashion. So the addition to the debt, taking what is already a significant problem and making it worse is, it is of concern to me, and I think it does suggest that in some future downturn, which well could occur just for whatever reason, the amount of fiscal space that would exist for a fiscal policy to play an active role, it will be limited, may well be limited.”

The debt-to-GDP ratio is currently at 77% — the highest it has been since shortly after World War II, and CBO projects, even before the addition of tax cuts, that the ratio will reach 150% by 2047. The Tax Cuts and Jobs Act will add an estimated $1.4 trillion dollars to the national debt over the next 10 years, as well as about $250 billion in additional interest costs.

While increasing debt can limit our ability to respond to fiscal downturns, there are many reasons why Americans should be concerned about our growing debt. Most importantly, high levels of government debt can create a drag on economic growth, thus undermining any short-term economic stimulation to be gained from tax cuts. 

Related: Panetta: U.S. Headed For a "Death Spiral" of Deficits and Debt Unless Lawmakers Act

Image Credit: Photo by Alex Wong/Getty Images

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