The CBO estimates that it would add $3.4 trillion to the deficit over the next decade.
Fiscal hawks have warned for decades about the terrible repercussions of the United States’ rising debt.
However, analysts warn this time is different: the debt is now so big that adding to it as part of President Donald Trump’s massive tax reduction and spending measure might send the country into a downward spiral.
“It’s like the house is burning down and we’re throwing in some accelerant instead of some fire extinguisher,” said Kent Smetters, a professor of economics and public policy at the University of Pennsylvania Wharton. “Without this bill, our fiscal house is on fire…” “We are not too big to fail.”
Smetters warns that even without this bill, the United States was already on an “exploding debt path,” giving the government only around 20 years to implement real reforms before the implications become severe.
“If we don’t, the consequences are serious. Bond markets can be extremely disciplined,” Smetters added.
The present argument centers on Trump’s comprehensive policy proposal, which the impartial Congressional Budget Office (CBO) estimates will add $3.4 trillion to the federal debt over the next ten years.
The White House opposes the CBO’s forecast. Trump has claimed on social media that faster economic growth, combined with tariff income, will cover the bill’s cost. “Our country is about to erupt with rapid expansion… This bill puts us on track for enormous prosperity in the new and wonderful Golden Age of America,” Trump tweeted.
However, many economists disagree.
Trump’s package is one of the most expensive pieces of legislation in centuries, and it would reduce the country’s tax revenue for decades.
Even without this bill, the government debt is at a historic high, approximately equivalent to the size of the whole US economy. It is estimated that one out of every four dollars paid in personal income taxes goes to interest on the national debt.
Economists told MSN News that larger federal deficits entail higher interest rates. According to Douglas Elmendorf, a Harvard Kennedy School professor and former economist at the White House Council of Economic Advisers, this means higher mortgage and car loan rates, as well as a reduction in corporate investments that would increase worker productivity.
Furthermore, they argue that having more debt leaves less room to respond to crises.
“It’s like a family using all of their credit cards and then having an issue with their roof. You want to have some wiggle room in case something awful happens, and we’re running out of that,” Elmendorf explained.
The United States managed the 2008 financial crisis and the COVID-19 outbreak by enormous federal government spending. That debt was never paid down, so the government will have fewer options in the event of another catastrophe.
The risk of rising debt levels has felt intangible since the United States is the gold standard, and the expectation has been that the world will continue to buy US debt. As the world’s largest economy and the issuer of the global reserve currency, the United States has traditionally enjoyed high demand for its debt. But this is not certain; the bond markets were jittery earlier this year. The danger is that investors may eventually begin to distrust the US economy’s health and ability to repay its debt.
Economists are concerned that this may set off a doom loop in which the debt causes interest rates to rise, making it even more difficult for the United States to sell off its debt, thereby ballooning the debt.
“This bill will raise interest rates, increasing the likelihood of falling into a doom loop. But economists still don’t know when we’ll enter the doom loop,” Elmendorf added.
If that scenario plays out, the United States may be forced to implement tough austerity measures.
“If we fall into a doom spiral, the United States will have to dramatically reduce federal benefit programs such as Social Security and Medicaid while substantially raising taxes. That will have a significant negative impact on people’s living standards. That’s why it’s critical to take moderate steps before that happens,” Elmendorf said.