U.S. federal debt is high, whether measured in absolute terms ($38 trillion) or as a percentage of GDP (125 percent). (The Congressional Budget Office calculates debt held by the public differently and estimates it to be $30 trillion and roughly 100 percent of GDP.) However calculated, America’s debt is on a trajectory to grow much higher, as the country is running annual deficits of close to $2 trillion. The United States now spends more on servicing its debt (approximately $1 trillion in the most recent fiscal year) than it does on defense.

How did we get to this point? Unlike Hemingway’s description of how he became bankrupt (slowly, then suddenly), America’s debt has grown gradually but steadily, from around 50 percent of GDP 25 years ago to where it is now.

Another way to answer the question of how the country arrived at this place would begin with the steady and substantial growth in entitlement spending and a function of increased benefits and increased demand for benefits, much of which is tied to a significant increase in the number of Americans living longer, which translates into a greater need for medical services and retirement support. Tax cuts are also a big part of the story. Despite the predictions of proponents, they resulted in a net loss of government revenues as economic growth failed to offset the effects of lower taxes. And as already noted, the cost of servicing the debt has grown markedly as the stock of debt has gone up along with interest rates.

As this paper is meant to highlight the relationship between the national debt and national security, it is important to point out here that increased spending on national security (mostly defense, but also intelligence, diplomacy, and foreign assistance) is not a principal driver of the increase in debt. To be sure, such spending was and is significant in absolute terms — the United States now spends more than $900 billion a year in this realm, far more than any other country — but as a percentage of GDP, defense spending has gone down significantly, from above 13 percent at the height of the Korean War and above 9 percent at the height of the Vietnam War to a level at or slightly above 3 percent in recent years. It is similarly far below average levels that characterized the Cold War decades.

One can and should debate whether this money is being spent and used wisely. But what is clear from the numbers is that defense spending cannot be held responsible for the lion’s share of U.S. debt. What is more, it could be argued that decidedly less U.S. defense spending would lead to a world characterized by greater disarray, an outcome that would have an adverse impact on U.S. economic performance and growth, developments that in turn would worsen the debt situation.

The “Does Debt Matter?” Debate

But whatever the causes of the debt, the public policy question remains and is simple to pose: Does a large and increasing debt matter and, if so, why?

Those who claim it doesn’t matter or matters little put forward a few arguments. One is that the world has grown accustomed to U.S. indebtedness and will continue to live with it and to a considerable extent fund it. To be sure, as Herb Stein once noted, if something cannot go on forever, it will stop. But what might be a corollary to Stein’s law is that which has gone on for what seems like forever might well continue. The fact that the U.S. dollar remains the world’s de facto reserve currency grants the United States enormous leeway as it does not need to repay debt in other currencies, something that would leave it vulnerable to shifts in exchange rates.

There is as well an old argument with a new twist. The familiar refrain of those who are sanguine about the current and projected debt is that the United States has the potential to grow its way out of its debt problem. The logic goes, America’s economy can and will grow at a faster rate than the debt, meaning that the debt-to-GDP ratio will go down. In turn, this process will ease concerns about this country’s ability to handle debt servicing while it meets its other needs. What is new is the belief or prediction that productivity growth, in particular growth stemming from artificial intelligence, will stimulate the American economy to grow at 4–5 percent or even higher for a long period. This has the potential to more than offset projected needs to provide a safety net and education opportunities for workers sure to be displaced by AI. All of which to say the sanguine school has a new swagger, one built less on blind faith in American capitalism and more on an assessment of the likely impact of artificial intelligence, which is seen as the financial equivalent of a get-out-of-jail card.

A more speculative solution being floated is the use of dollar-backed stablecoins, with the GENIUS (Guiding and Establishing National Innovation for U.S. Stablecoins) Act seen as a way to bolster dollar supremacy and generate new demand for U.S. Treasuries. It is too soon to know whether this prediction will pan out, but again it is used to buttress the case of those who maintain that even large-scale debt poses little if any risk.

And last but not least is the view that tariffs will reduce the debt as they bring in additional revenues. The strength of this prediction is weakened, however, by the uncertain legal status of many of the tariffs. There is as well the likelihood that tariffs will increase inflation (which will make it harder to bring down rates and the costs of debt service) and slow growth, which will reduce government revenues more than what the government collects from the additional cost of bringing goods into the country.

It is impossible to prove those who hold to the “don’t worry all that much about the debt” view are wrong. But to assume they are right and therefore do nothing about the debt would be akin to forgoing fire or automobile insurance just because the odds are you will not suffer from a fire at home or an accident on the road. Later on (and to continue the insurance analogy) we will address the question of what premium might be worth paying to reduce the potential risks of accumulating so much debt. Now, however, we will look at two scenarios in which sizable debt could matter.

Cliffs & Frogs

The first scenario is the most commonly imagined or cited, namely, what we will call the cliff scenario. This would be in line with Hemingway’s comment, in that one day what had been judged to be manageable and tolerable turns out to be something else. Or to switch metaphors, the day will come when the boiling water finally kills the frog.

A cliff scenario could be acute, triggered by bond markets struggling to cope with more global supply of debt than demand for it, or by the decision of one or more foreign governments who hold about a quarter of U.S. debt to unload it or declare they were not prepared to acquire more. This circumstance could arise as a reaction to additional signs of U.S. political and financial irresponsibility, be it an unwillingness to increase the debt-ceiling, attacks on the independence of the Federal Reserve, doubts about the accuracy of government-released economic data, worse-than-expected economic performance, or concerning debt projections.

There could also be a foreign policy element to a cliff crisis. In this easy-to-imagine scenario, a confrontation over Taiwan triggers China, the third largest external holder of U.S. debt after Japan and the United Kingdom, to announce it will no longer buy U.S. debt. Even worse, China could sell what it has to pressure the United States not to go to bat for Taiwan. Those who believe that China would never weaponize its debt position as it would lose financially ignore the reality that Chinese leaders would be willing to place a high price on getting the United States to back off support for Taiwan. In the end, the United States is far more vulnerable to a U.S. debt crisis than China.

If a cliff moment arrives for whatever reason, it would require that the Federal Reserve raise rates, not to cool an over-heated economy, but to attract needed financing. Higher rates, though, promise to make a bad situation worse, as they would slow the economy, thereby reducing growth and government revenues. Again, though, such a day may never come. Or if it does, the optimists hold it is possible that the arrival of the crisis would generate the up-to-now absent political will to do something meaningful at both ends of Pennsylvania Avenue to address the debt issue by raising taxes, reducing government spending, or both, placing the country on a manageable trajectory. History, however, suggests that any such compromise would be difficult to engineer, even in a crisis.

The alternative scenario is something altogether different. It is a version or, more accurately, extension of the status quo, where debt continues to grow in both absolute terms and relative to GDP without triggering a cliff event. This is hardly the stuff of science fiction; to the contrary, it characterizes where we are. What is more, it constitutes the most optimistic foreseeable future in that there is no discernable willingness to tackle the debt as it stands, much less as it grows. This is likely to remain the case, as debt falls in that category of crisis most difficult for governments and, in particular, for democratic governments, to deal with, namely, slow-motion crises, better understood as challenges (contending with climate change is another) that can require swallowing some medicine or at least changing one’s ways before the life-threatening disease hits, something few of us tend to do. That one of us (Haass) testified before the Senate Committee on Foreign Relations on precisely this subject a decade ago, warning of the adverse consequences of a large and growing debt for U.S. national security, reinforces this contention that the absence of urgency works against effective political action.

Our larger point, though, is something different and central to the argument being advanced here. Avoiding the so-called cliff scenario described above is not to avoid a crisis. It is only to avoid one form of crisis, the sudden one. The argument here is that the United States is already in a crisis, one that will only grow more acute if action is not taken.

Debt and its National Security Impact

This judgment stems from several factors. To begin with, there is the financial cost of servicing the debt. Closely related is the classic “crowding out” phenomenon. Money spent on borrowing is by definition money not available for more productive purposes, from discretionary domestic spending to defense. Defense spending is almost certain to feel the pressure because so much else of what the government spends is either unavoidable (in that the cost of defaulting would cause enormous problems for this country) or is supported by an overwhelming majority of the American people. Here of course we refer to entitlements. Defense spending (like non-entitlement domestic spending) is at the end of the day discretionary, which is a fancy way of saying it can be reduced more easily than other forms of spending. The fact that sizeable factions of both political parties now favor a reduced American role in the world and less extensive use of military force increases the likelihood that defense spending will be viewed as an account to draw upon to ease financial struggles rather than being seen as relatively sacrosanct as it often was during the Cold War.

Some might say this doesn’t matter, in that we are already spending a great deal on national security and thus defense cuts would have a negligible impact. But as noted above, such a perspective ignores that we are spending around 3 percent of GDP on defense, far below the Cold War average. And, were the Pentagon to cut its budget, the timing couldn’t be worse; this is a moment in which the United States finds itself confronting great power challenges across multiple geographies and in a range of situations, from classic conflict with medium and great powers to something very different in the counterterrorism realm. Plus, as is vividly being demonstrated in recent wars in the Middle East and Europe, it is a time of dynamic innovation and adaptation. New weapons such as drones are taking on a much larger role; large expensive platforms are more vulnerable (or less useful) than they were. There is as a result a case to be made that we need to be spending more on defense, as well as spending what we do spend differently.

A high and growing level of debt in normal times presents national security headaches in moments of crisis. The government has little dry powder should a pressing need to spend more arise to stimulate the economy out of recession, as was the case during the Covid-19 pandemic. More relevant to the geopolitical landscape facing America today, the already stretched debt position the country finds itself in means a weaker ability to fund a major military effort (for example, a conflict with China over Taiwan). In simpler terms, we are guilty of spending our rainy-day fund in sunny weather.

In addition, as more of the federal budget is consumed by debt service, nondefense programs that underpin national security, including cybersecurity, infrastructure, public health, and counter-extremism initiatives, face spending pressures. So too will much-needed homeland security programs designed to bolster resilience against flooding, fires, and more frequent violent storms. Over time, underfunded prevention and resilience programs leave the United States more vulnerable to terrorism, cyberattacks, pandemics, extreme weather, and grid failures. In this way, debt doesn’t just weaken the United States abroad; it hollows out the internal capacities that protect the homeland, turning fiscal strain into a direct threat to national security more broadly and arguably more accurately defined. And if these domestic needs are not adequately met, it is all but certain pressures will grow to cut defense spending as it will be argued the country does not have the resources or the luxury to maintain security abroad while it suffers at home. Isolationism is always present in the American body politic, and this is just the sort of scenario to bring it out into the open.

Unaddressed debt will raise reputational concerns for the United States, starting with questions about American financial stewardship. It also makes it difficult if not impossible for this country’s representatives to lecture others on their profligacy when we are guilty of it ourselves. Worst of all these externalities, concerns over the debt could accelerate a move away from the dollar, something already happening in reaction to what is widely seen as excessive weaponization of the dollar through excessive use of financial sanctions. Also reinforcing a move away from the dollar is its secular weakening, something the Trump administration is encouraging so as to improve the U.S. trade balance. Defaulting on the debt or attempting to inflate our way out of it by printing dollars would only accelerate the international shift away from the dollar.

After 80 years of dollar dominance as the backbone of global trade, debt, reserves, and safe haven for investing, the future of dollar supremacy is now a question. If sovereign investors and central banks diversify away from the dollar, U.S. borrowing becomes that much more expensive, further eroding America’s fiscal foundation and compounding the near-intractable debt dilemma it already faces. With this cycle in full swing, national security will inevitably be affected as U.S. influence and leverage will decline.

The geopolitical stakes of de-dollarization would be enormous beyond the resource implications of the United States taking on exchange rate risk. The dollar system has served as a glue that held together allies and adversaries, creating interdependence that raised the costs of direct conflict. In addition, domination by the dollar undergirds U.S. sanctions power. Nearly all cross-border transactions run over dollar rails, giving Washington influence over governments as well as terrorists or criminals involved in illicit finance. But as more countries pilot China's CIPS network, pay for energy trade in renminbi, or explore central bank digital currency corridors, this reach is eroded. The erosion also weakens U.S. financial intelligence, one of the underappreciated pillars of national security.

Taking on the Debt

There is a powerful case for addressing the debt now so that issues during crises do not cause serious long-term damage to the United States. To be clear, what is required to fix the debt is not to eliminate it altogether, which would be impossible and even inadvisable over less than a multi-decade time span. In fact, it is desirable but not even essential that it be reduced. Instead, a credible level of success would be reducing the rate of growth of the debt to a level below that of GDP growth. It has already been demonstrated that such a (relative) level of debt can be managed.

What makes it all so frustrating is that there are any number of available remedies to do so, including means testing Social Security, raising the Social Security retirement age, increasing the corporate tax from 21 percent to say 25 percent or 26 percent, adjusting Medicare, reducing or eliminating farm subsidies, increasing user fees for select infrastructure, indexing the federal tax on gasoline and diesel, taxing carried interest as ordinary income, and reining in tariffs, which have the effect of slowing economic growth (reducing government revenues in the process) but also increasing inflation, which makes it difficult if not impossible for a responsible central bank to lower interest rates. As a rule, the need to contemplate politically difficult tax increases goes up if meaningful entitlement reform is ruled out and the costs of servicing the debt continue to rise.

An additional option is to increase the capacity of the Internal Revenue Service. Tax avoidance is one thing; tax evasion is altogether different. The reduction of IRS funding and staffing by a reported 25 percent, which will inevitably increase tax evasion, is a textbook example of penny-wise, pound-foolish behavior.

There is another reason not to be defeatist here. Steps to reduce the rate of growth of the debt would make it easier to reduce interest rates, which would accelerate economic growth, which in turn would bring in more revenue assuming there was an IRS in place to encourage and, if need be, enforce compliance with the law. It will be interesting to see whether figures in one or both of the major political parties advocate for a comprehensive approach that would put the debt on a sustainable trajectory and, if so, how they fare politically.

Let us end with a recent success story. For some 60 years the United States consumed more energy than it produced, with the difference made up by imports. Starting some seven years ago, however, the United States became not just energy self-sufficient but a net energy exporter. The transition, made possible by new technologies (above all, fracking) that increased production of oil and gas coupled with greater efficiencies, contributed to the country’s energy and national security alike.

We appreciate the fundamental differences between what was required to bring about energy self-sufficiency and the sort of political compromise and courage that will be required to meet the debt challenge. But the point remains that public policy turnaround is possible amidst a slow-motion crisis. That said, turnarounds don’t just happen. They require that the problem be recognized and serious remedies adopted. Government will have a major role to play in addressing the problem it has done so much to create. The question is whether it and we are up to it.