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Fiscal (in)stability: Behind the ticking time bomb of US debt

At the 2024 SIEPR Economic Summit, leading fiscal policy experts shed light on how the U.S. could get its finances in order and avoid economic catastrophe.
Greg Ip of The Wall Street Journal, Phillip Swagel of the Congressional Budget Office and fellow panelists at the 2024 SIEPR Economic Summit probe the challenges — and solutions — to fiscal stability in the U.S.

First, the good news: The U.S. economy, as measured by GDP growth, is in decent shape — and Americans are feeling more optimistic about where it is headed.

Now, the bad news: The country’s finances are a mess, have been for a long time, and are only getting worse. Consider that rising interest rates mean that the federal government now spends more on interest payments on its debt than it does on national defense.

That state of the country’s fiscal house — and how it’s likely affecting the Federal Reserve’s interest rate decisions — was a central theme at the 2024 SIEPR Economic Summit. In introducing the event’s opening panel session, Mark Duggan, the Trione Director at the Stanford Institute for Economy Policy Research, told the nearly 530 business leaders, policymakers and academics in the audience that, fiscal stability is foundational to the range of economic issues examined throughout the daylong Summit.

“There are many challenges,” said Duggan, who is also The Wayne and Jodi Cooperman Professor of Economics at Stanford’s School of Humanities and Sciences. “Our national debt is ballooning. Social Security is facing insolvency. Our aging population and declining birth rates are posing some unique challenges, and our country’s politics are arguably more polarized than ever.”

The price of political gridlock

The session explored what could be done to ward off a full-blown fiscal crisis. The biggest threat, experts say, is if investors no longer think of the U.S. as a safe haven for their money. If that happens, the country would no longer be able to borrow to pay off its debts and other obligations.

“We totally know how to fix this,” but the problem is the lack of political will, says Maya MacGuineas of the Committee for a Responsible Federal Budget.

When could that tipping point come? asked Greg Ip, the The Wall Street Journal’s chief economics commentator who facilitated the conversation. As the ratio of U.S. debt to GDP has continued to climb, many experts thought it would have happened by now. The panelists agreed that, while no one really knows when the crisis will hit, they said it will happen unless meaningful steps are taken to shore up the country’s balance sheet.

“We totally know how to fix this,” said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget. She was joined on the panel by Phillip Swagel, director of the nonpartisan Congressional Budget Office, and William Gale, a prominent economist at the Brookings Institution.

The problem, MacGuineas said, boils down to the lack of political will to make hard choices around cutting spending and/or raising taxes. “People just have politicians telling them they can have it all and not pay for it,” she said.

And, like a homework deadline, the longer we wait to get it done, “the more difficult the assignment gets and the more unpleasant it gets,” Swagel said.

Possible solutions

The speakers didn’t lack ideas for how to repair the country’s broken finances.

MacGuineas and Ip, for example, pointed to Duggan’s ideas for Social Security reforms. Swagel highlighted the CBO’s list of 17 deficit-reduction ideas that he likened to “the fiscal equivalent of a Cheesecake Factory menu.” There was talk, too, of raising revenue through new forms of taxation, such as a carbon tax, consumption tax, or value-added tax.

William Gale of the Brookings Institution proposes a fiscal commission where Republicans pick the Democrats and Democrats pick the Republicans.

There was even discussion of how a Congressional commission could be convened to come up with proposals that could help break the political logjam in a fiscal emergency.

“I would like to see a commission where the Republicans pick the Democrats and the Democrats pick the Republicans,” Gale said. That’s because both parties know who on the other side they can work with.

“If you can get the people in the middle talking to each other, you have some chance of success,” he said.

Watch the full discussion.