Soaring deficit expansion in Trump's legislation, according to certain economists, poses a significant threat.
In a concerning development, economists like Kent Smetters and Douglas Elmendorf have highlighted the potential risks of the United States continuing to accumulate large amounts of debt. This warning comes as the nonpartisan Congressional Budget Office (CBO) projects that President Donald Trump's policy measure could add $3.4 trillion to the federal deficit over the next 10 years.
The escalating debt could lead to dramatically higher interest payments, with the U.S. government projected to spend $892 billion on interest alone in 2025, equating to approximately $2.4 billion daily. Over time, interest costs could potentially double, reaching $2 trillion annually.
Kent Smetters, a professor at the University of Pennsylvania Wharton, warns that the U.S. is on an "exploding debt path" and could face severe consequences within the next 20 years if meaningful reforms are not made. He compares the situation to throwing accelerant on a burning house instead of a fire extinguisher.
One of the most significant risks is the potential for a "doom loop," where increasing debt pushes interest rates higher, making debt servicing more expensive, causing further debt growth. This vicious cycle exacerbates fiscal instability and raises the risk of a debt crisis.
If the doom loop unfolds, the U.S. could be forced into painful austerity, including dramatic cutbacks in federal benefit programs like social security and Medicaid, and sharply raising taxes. The fear is that investors will start doubting the strength of the U.S. economy and the ability of the U.S. to pay off its debt, which could kick off the doom loop.
The U.S. debt is currently at record levels, roughly equal to the size of the entire U.S. economy. Despite the U.S.'s status as the world's largest economy and the issuer of the global reserve currency, the risk of rising debt levels has felt intangible. However, bond markets showed jitters earlier this year, indicating that the intangible risk may not remain so for much longer.
It's important to note that about one in every four dollars paid in personal income taxes goes toward interest on the national debt. Elmendorf, a former CBO director, stresses the importance of taking moderate actions before the doom loop happens to avoid the negative impact on people's standard of living.
However, the exact timing of the doom loop remains uncertain, according to Elmendorf. The White House disputes the CBO's forecast, with President Trump arguing that stronger economic growth and tariff revenues would offset the cost of the bill. Many economists, however, disagree with this argument, stating that the bill is one of the most expensive pieces of legislation in generations and will lower the amount of tax revenue the country collects for decades to come.
The potential consequences of unchecked U.S. debt accumulation are far-reaching, including soaring interest costs, diminished economic growth, forced austerity or inflationary policies, and loss of global market confidence. All of these factors could have profound consequences for the U.S. and global economy.
- The escalating U.S. debt, due to policy measures, could negatively impact the economy and finance, potentially leading to higher interest payments and interest costs that double to $2 trillion annually.
- According to Professor Kent Smetters, the growing debt could create a self-perpetuating cycle, known as a "doom loop," where increased debt fuels higher interest rates, making debt servicing expensive and causing further debt growth.
- The doom loop could trigger painful austerity measures, such as spending cuts on federal benefit programs like social security and Medicaid, and higher taxes, which could harm the business sector and cause investors to lose confidence in the U.S. economy and its ability to pay off its debt.
