Has the US finally borrowed too much? With Jason Furman

Episode Summary

Executive Summary: Jason Furman argues the US debt level is high but still manageable if it stabilizes; the deeper concern is the large and persistent deficit, especially with rising interest rates and real debt-service costs. He says a 2% of GDP fiscal adjustment could work under optimistic forecasts, while 5% may be needed if assumptions prove too rosy, and that politics—not economics—will likely force action.

Main Topics: US debt versus deficit (Priority: 5/5): Furman distinguishes the existing debt stock from the ongoing deficit, arguing that the current debt level is not automatically alarming, but the pace of new borrowing is unusually high by international standards. Why borrowing has risen (Priority: 5/5): He attributes the deterioration to decades of downward-ratcheting tax cuts plus some front-loaded spending tied to industrial policy and the Inflation Reduction Act. How to judge fiscal sustainability (Priority: 5/5): Rather than focusing only on debt-to-GDP, Furman prefers real debt service as a share of GDP, emphasizing inflation-adjusted interest costs and the need for debt stabilization. Risks from higher rates and short-term borrowing (Priority: 4/5): Rising interest rates make debt service more expensive and increase vulnerability, especially because the US relies heavily on short-term borrowing compared with other rich countries. Crowdout and investment effects (Priority: 4/5): He argues that higher rates and government borrowing are beginning to crowd out other investment, even as subsidies increase certain targeted investments like manufacturing structures. MMT and credit ratings (Priority: 3/5): Furman dismisses modern monetary theory as a political movement rather than a coherent theory, and says rating downgrades are not new information but can act as focal points that shift market perceptions. How the debt could be reduced (Priority: 5/5): He says a sustainable path would likely require a 2% to 5% of GDP fiscal adjustment, mainly through broader tax increases rather than spending cuts, but political constraints make this difficult.

Key Arguments: The US debt level is high but not by itself disastrous if it stabilizes relative to GDP. The real problem is the large annual deficit, which is unusually high even in a strong economy with low unemployment. Lower revenue from repeated tax cuts has been a major long-run driver of the fiscal gap. Some current borrowing funds investments or demand support, which can be justified, but not all borrowing is productive. A useful sustainability test is whether real debt service stays below about 2% of GDP and is stable. Higher interest rates make the fiscal outlook more fragile, and the Fed may be too optimistic in assuming rates will fall back quickly. Short-term borrowing increases vulnerability to future rate spikes; longer-term borrowing can reduce that risk. MMT has not held up well to recent inflation and rate increases, and Furman sees it as less a theory than a political agenda. A fiscal correction will likely come only after a political or economic forcing event makes previously impossible reforms feasible. Most deficit reduction, in Furman's view, should come from the tax side, including broader taxes rather than only higher taxes on the rich.

Data Points: US debt-to-GDP ratio: over 100% - Current US debt stock excluding debt the government owes to itself US deficit (IMF standardized estimate, last year): 8.8% of GDP - Deficit level cited as unusually high for the US Euro area deficit (IMF standardized estimate, last year): 3.5% of GDP - Comparison showing US deficit is much larger than peers US unemployment rate: about 3.5% - Deficit was this high despite a very strong labor market US economic growth: about 3% - Shows the deficit remained large even with healthy growth Real debt service now: about 0.5% of GDP - CBO-based estimate of current real debt-service burden Real debt service in a decade: about 1.5% of GDP - CBO forecast if assumptions hold Nervousness threshold for real debt service: below 2% of GDP - Furman's preferred benchmark for fiscal sustainability Illustrative debt service example: 100% debt-to-GDP and 5% interest rate implies 5% of GDP interest - Used to explain how debt-service burden works Illustrative inflation offset: 2% inflation - Example used to show inflation erodes real debt burden Required fiscal adjustment (optimistic forecast): about 2% of GDP - Estimated reduction in borrowing needed to stabilize debt Required fiscal adjustment (more pessimistic): about 5% of GDP - Adjustment needed if assumptions worsen Historical adjustment in 1990: about 2% of GDP - George H.W. Bush and Democrats agreement cited as precedent Historical adjustment in 1993: about 1.5% of GDP - Clinton-era deficit plan cited as precedent Long-term interest rate example: 4.5% - Rate Furman would prefer to lock in via long-term borrowing Potential market borrowing cost: 5.5% to 7% - Higher rates that could face borrowers if market conditions worsen

Pivotal Quotes: "The debt is the stock of all the deficits we've ever run in the two hundred plus year history of our country." — Jason Furman: Defines debt as the accumulated result of past deficits "We're literally on an unsustainable course." — Jason Furman: States the long-run fiscal path cannot continue indefinitely without change "The problem we have right now, if we talk about what's feasible, it's impossible we're going to raise taxes on the bottom 99% of Americans... It's also impossible that our debt is going to continue indefinitely on the course it's on." — Jason Furman: Explains the political impossibility of current options and why change is inevitable

Implications: Listeners should take away that the US fiscal challenge is gradual but real: no immediate crisis is assumed, yet persistent deficits, higher rates, and political gridlock make a future correction increasingly likely. Policy changes will probably come only after a forcing event.