Debt Matters

This paper is part of a new initiative from the Peterson Foundation to help illuminate and understand key fiscal and economic questions facing America. See more papers in the America's Fiscal and Economic Outlook series.

By Dana M. Peterson and Dr. Lori Esposito Murray

Nov 8, 2021

The public debt is growing unsustainably and, despite the growing refrains to the contrary — Debt Matters. The nation’s fiscal health was deteriorating even before COVID-19 struck. In 2019, the year before the pandemic, the deficit was $984 billion. In 2020, with the cost of the response to the pandemic, it ballooned to $3.1 trillion. And by the end of 2020, the debt held by the public (not counting money that one part of the government owes to another part of the government) exceeded $21 trillion. At 100.1 percent of gross domestic product, that debt is slightly more than the size of the economy (GDP). The debt is on schedule to reach its highest level ever, the 106 percent of GDP of 1946 (the end of World War II), within the next 10 years. It would more than quadruple the subsequent minimum level of the debt burden at 23.2 percent at the end of fiscal year 1974. And that was before the government spent $5.3 trillion to fight COVID-19 and its catastrophic economic and public health effects.

Although the pandemic clearly added to the debt, it is by no means its primary driver. And even more importantly the nation has no looming economic boom to ease the burden, as it did immediately after WWII. Instead, with slowing labor-force growth from the retirement of the baby-boom generation, population aging generally, and trends to lower birth rates, long-term growth fundamentals are unfavorable. Indeed, by 2031 there will only be 3 working aged persons (ages 15-64) per retired person (ages 65 and over) and by 2041 just 2.8. These ratios are compared to 3.7 in 2011 and 5.4 in 2001. At the same time, the share of the total population aged 65 and over will rise from 17 percent presently to 22 percent a decade from now. Meanwhile, birth rates have already fallen from just above 2 children per woman a decade ago to roughly 1.8. This rate is expected to be unchanged for the foreseeable future. Also, the Congressional Budget Office anticipates that roughly 1.1 million immigrants may enter the US per year over the next 10 years, based upon historical trends. Still this pace is not expected to offset the shrinking natural increase (i.e., births minus deaths) in the population: with 1.0 million net births per year by 2030, compared to 1.4 million births currently.

The daunting demographic outlook points to a shrinking number of persons to support the tax base required for funding expanding annual federal budget deficits and mounting public debt. The primary drivers of the growth of debt, prior to the pandemic was the spending on Medicare and Social Security, as well as net interest on the public debt. These pressures on the US fiscal situation are expected to intensify as more baby-boomers retire, interest rates rise, and Social Security and Medicare l exhaust their trust funds in 12 and four years, respectively.

Having the debt grow so much faster than the economy out of which it must be serviced is obviously unsustainable. The nation never in years generally characterized by peace experienced the debt explosion that we have had since 1981. High debt levels that are rapidly rising as a percentage of GDP slows the growth of economic output and recovery. A growing debt burden could undermine confidence in the U.S. dollar, challenging the US global leadership role and making it more costly to finance public and private activity in international markets. Debt must be serviced. The larger the debt, the larger the amount of debt service and the greater the risk to the lender — a large proportion of whom are foreign lenders — that adverse developments will render that debt-service obligation difficult or impossible to meet. Servicing the debt is already one of the biggest trouble spots in the national budget with net interest projected to be the fastest growing part of the budget. This year, servicing the debt will be nearly 9 percent of the federal budget — approximately $300 billion.

Presently, participants in the Fed’s FOMC and many economists anticipate some increase in interest rates over the next three years. Indeed, the federal funds rate — the basis for most interest rates in the US — might start rising towards the end of 2022 or early 2023. These expectations are embedded in the FOMC’s Summary of Economic Projections, as well as in surveys of market and academic economists. Those interest rises are accompanied by slower real GDP growth compared to 2021’s near 6 percent annual pace. Still, expectations are for economic growth at or above 2.5 percent over the medium-term — the pace of growth that prevailed just before the pandemic struck the US.

However, if interest rates were to rise sooner or more rapidly — whether because of expectations of more rapid inflation, concerns about the ability or willingness of the federal government to meet its debt-servicing obligations, merely a return to rates that prevailed before the financial crisis, or any other reason — the huge debt will give those interest rates even greater leverage on the budget bottom line, ultimately risking a vicious cycle of rising deficits, debt, and debt-service costs. And if the economy were to grow more rapidly — the usually cited solution for our deficit-and-debt woes — that faster growth would directly lead to higher interest rates, which would erode the expected budget benefits from a stronger economy.

The American economy is still the largest and most important and innovative economy in the world and the American economy still regularly outperforms its peers in Europe and Japan. Through its reserve currency status, the dollar receives extra legitimacy in the eyes of domestic users, currency traders, and participants in international transactions and the fiscal weakness of the rest of the world has kept our fiscal problems from looking less troubling to the rest of the world. Nonetheless — as a recent IMF study warns about running large deficits--fiscal-policy crises that push interest rates sharply higher tend to come out of nowhere, even when rates are low--market expectations can turn quickly and abruptly. Though increased spending on infrastructure, education, social welfare, and the environment may be wise, and rising deficits may make sense some of the time, we really cannot borrow ceaselessly without risking real harm.

While the Administration and Congress should not focus on eliminating the deficit to the exclusion of solving other problems, Americans can and should expect leaders who can address both. This is especially true today. The global pandemic has had catastrophic impacts on the economy and the lives and livelihoods of all Americans. It has shown a spotlight on many needs in this country including access to healthcare, education, job training for an advanced economy, childcare, eldercare, climate, and infrastructure, to just name a few. But it has also lifted the veil on the disproportionate vulnerability of the underserved and underprivileged.

The answer to how to address the multitude of challenges and their disproportionate impact is to pay for it — set priorities and ensure there is revenue to meet those priorities — not through smoke and mirrors or budget gimmicks. This not only protects the nation from a fiscal crisis, it also makes the economy stronger and American lives better and more prosperous. The Congressional Budget office and Penn Wharton Budget Model both have estimated that paying for new investments over time will do more to boost wages and income than borrowing for investments. And that is how fiscal policy can directly confront and conquer the core challenges facing the nation and ensure that capitalism continues to provide prosperity and, most importantly, an equal opportunity for all Americans to share in that prosperity.

Also, it is important to emphasize that spending more and more money on a problem is not always the best solution. Reforms of current programs or expanded programs to ensure resources flow to meet the objectives of those programs, is at times as important if not more important, whether it be education, health care, job training, or the roll-out of infrastructure modernization programs.


The nation needs a renewed awareness of the budget problem, and to apply that awareness in a serious and thorough legislative process. The next steps must include:

Make fiscal responsibility a priority.

It need not be the only consideration, but it should get its due along with the others addressed in the budget. Deficits and debt matter, and if uncontrolled they will eclipse the other benefits of the Administration’s infrastructure policies. The net savings necessary to make our debt grow more slowly than our economy (instead of vice-versa) and ultimately reverse the growth of the ratio of the debt to the GDP, should be tallied alongside the cost of new spending in budget bills.

No gimmicks.

Be realistic and honest about costs instead of, for example, minimizing them by building in unrealistic end-dates for programs. Similarly, identify real budget savings, not just unspecified future spending cuts.

Set priorities.

Like any household or business, the nation must address its needs and wants in the context of a sustainable budget. Not everything will fit, so leaders will have to transparently prioritize. While the challenges are many, key among them is job training and upskilling to get Americans back to work with skills that can meet the demands of the advanced post-pandemic economy. Also, any increase in program funding should be accompanied by reforms of the delivery of those programs to make sure that regulations are streamlined, and programs are, in fact, achieving their objectives.

Leverage the private sector for collaboration.

The bi-partisan infrastructure bill serves an example that seeks to leverage more than previously, private-public collaboration in this much needed modernization effort. Similar leverage of the private sector is applicable to many areas of public policy including healthcare, childcare, job training, among others and cannot only help regarding budget constraints but also can improve efficiency and effectiveness of government funding.

Don’t just raise taxes, reform them.

Simply raising tax rates only increases the burden on those who already pay. Instead, use the opportunity to simplify and clean up the tax code. Tax neutrality also yields the most efficient allocation of both capital and labor, and therefore the strongest and most sustainable economic growth. A budget bill that pushes tax yields to the limit now while worsening the deficit problem will ensure a future budget crisis. Rising interest rates and inflation would quickly crowd out both public and private investment, and growth — wiping away economic benefits. And we would have used up all the tools (the budget savings) that could solve the problem.

Deal with the pandemic debt.

Handling the COVID-19 pandemic has cost the nation roughly $6.5 trillion in relief spending plus the recession’s impact on the budget. Instead of simply tossing that debt into the existing ocean of red ink, we could create a separate federal financing authority and establish dedicated revenue sources to service and retire the debt.

Forbid the use of reconciliation to increase the deficit.

Reconciliation was created to help Congress take painful steps to reduce the deficit. The budget law should be amended to make explicit that reconciliation may be invoked for deficit reduction only. After undertaking such a reform in the budget rules, Congress should renew its commitment to the budget process, including timely budget resolutions that, as they were originally intended, call attention to the nation’s fiscal situation, and plot a course to stability. Also, Congress should undertake a serious annual appropriations process, with 12 separate bills that allow true oversight of the federal agencies, enacted on time, without a long series of continuing resolutions until well after the beginning of the fiscal year.

Empanel a new fiscal responsibility and reform commission.

Sometimes Congress needs a helping hand in the form of experts beyond the reach of politics who can point them in the right policy direction.

While flawed, capitalism is the greatest economic system in history. It has incented massive innovation, created wealth, raised standards of living, and lifted more people out of poverty around the world than any economic system in history. For capitalism to continue to deliver on its promise of providing equal opportunity to share in prosperity, we need to address today’s outsized challenges by starting with our fiscal foundation. It will require tough choices and discipline, but that is the essence of leadership. If our elected officials rise to the moment, they can set the country on a path to a holistic recovery and sustain capitalism to benefit of generations to come.

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About the Authors

Dana Peterson is the Chief Economist & Center Leader of Economy, Strategy & Finance at The Conference Board. Peterson joins The Conference Board from Citi, where for many years she served as a North America Economist and later as a Global Economist. Her wealth of experience extends to the public sector, having also worked at the Federal Reserve Board in Washington, D.C. Dana’s wide-ranging economics portfolio includes analyzing global economic themes having direct financial market implications, including monetary policy; fiscal and trade policy; debt; taxation; ESG; and demographics. Her work also examined myriad US themes leveraging granular data. In addition, Dana conducted multi-asset research and wrote publications with other Citi research teams — both US and global — including strategists covering rates, equities, credit, foreign exchange, commodities, political analysis, and asset allocation. Peterson's research has been featured by US and international news outlets, both in print and broadcast. Publications and networks include CNBC, FOX Business, Bloomberg, Thomson-Reuters, the Financial Times, and the Wall Street Journal. She is the1st Vice Chair of the New York Association for Business Economics (NYABE), and a member of NABE, and NBEIC. She received an undergraduate degree in Economics from Wesleyan University and a Master of Science degree in Economics from the University of Wisconsin-Madison.

Dr. Lori Esposito Murray is President of the Committee for Economic Development of The Conference Board. Murray brings to CED extensive experience at the highest echelons of domestic and international policy. She most recently served as an adjunct senior fellow at the Council on Foreign Relations’ (CFR). Prior to her role at CFR, she held the distinguished national security chair at the US Naval Academy. She also is president emeritus of the World Affairs Councils of America, the largest nonpartisan, nonprofit, grassroots organization dedicated to educating and engaging the US public on global issues. Murray's work in government crosses political parties and extends to both ends of Pennsylvania Avenue. Her multiple roles have included serving as special advisor to President Clinton on the Chemical Weapons Convention and as the assistant director for multilateral affairs at the State Department’s US Arms Control and Disarmament Agency. Prior to that, Murray worked as executive director of the Department of Defense’s Federal Advisory Committee on Gender-Integrated Training in the Military and Related Issues. She also headed the congressionally mandated US-China Security and Economic Review Commission, and was a consultant to President George W. Bush’s Commission on Weapons of Mass Destruction and US Intelligence Capabilities. Murray worked for almost a decade as national security advisor to Senator Nancy Landon Kassebaum (R-KS), a senior Republican member of the Senate Foreign Relations Committee. Her responsibilities included the full spectrum of US national security: foreign policy, defense, intelligence, and trade issues. Earlier in her career, Murray served as the professional associate to the National Academy of Sciences, Committee on International Security and Arms Control. Dr. Murray received her BA from Yale University and her PhD from The Johns Hopkins School of Advanced International Studies.

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