How the U.S. Can Borrow Less

With their pristine debt rating from the three major agencies, 10 countries are the best borrowers:

The United States is not on the list because its Fitch grade is AA+. Just one notch below the top, the new grade indicates the U.S. will meet its financial commitments. However, the climbing debt makes it a less perfect borrower.

U.S. Sovereign Debt

In his recent Martin Feldstein Lecture on “The Fiscal Future,” Harvard Professor Greg Mankiw (the former chair of President George W. Bush’s Council of Economic Advisors) warned that, “if something cannot go on forever, it will stop.”

Referring to the U.S. sovereign debt, he explained why stopping will be tough:

1. We would need “extraordinary economic growth.” And yet, at 2 to 3%, the U.S. GDP growth rate has been respectable. For so large an economy, 6 to 8% would be a stratospheric leap into unsustainable territory.
2. A second possibility, a default, is an (unthinkable) alternative. Asked how you renegotiate a debt, President Trump replied, “You go back and you say, hey guess what, the economy crashed. I’m going to give you back half.” However, if we ever sidestep our obligations, practically and reputationally, the impact would be catastrophic. The cost of borrowing would rise while our market would shrink.
3. We could look to monetary policy for a third (distasteful) solution. By generating inflation, we would simply eliminate our obligations. Then rates would rise, growth would sink, and borrowing would be more expensive.
4. Perhaps we just need to decrease spending. The glitch is what we need to cut. We could only make meaningful reductions in the largest slices of the budget. But no one wants to reduce Social Security, defense, Medicare, or Medicaid.
5. As a final resort, we could raise taxes. However, because the Republicans don’t want to boost anyone’s taxes and the Democrats will target only the richest 1%, we are not close to the 14% tax hike we would need.

U.S. Debt To GDP Ratio

To decide if a debt is too large, I always like to start with a mortgage. Buying a $7 million house, borrowing millions would be excessive for most of us but not for Jeff Bezos or Mark Zuckerberg. Similarly, for a high income nation, when spending exceeds revenue, borrowing is relatively easy. But, unlike you and me, countries borrow by selling bonds. Investors want to buy those bonds because of the interest they earn.

However, by borrowing more, a nation’s bigger numerator increases the debt to GDP ratio.

We are approaching WW II highs:

So yes, It’s not easy to be a deficit hawk:

My sources and more: Thanks to Timothy Taylor’s The Conversable Economist for inspiring today’s post. From there, it made sense to read the transcript of Dr. Mankiw’s talk. Next, these debt details from Reuters and Sherwood, and this Seib Debt article came in handy. And finally, this econlife post perfectly pairs with all we’ve said today.