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When talking about dangers of rising US government debt, I’ve found that at least some people who are concerned about the large debt want to hear a “sword of Damocles” story: that is, the federal debt is poised above our economy, held only by a thread, and even a small change could cause it to fall and wreak havoc on us all. In less picturesque terms, these folks want a plausible story about how the US economy is about to follow in the path of Argentina or Greece.

The converse is that if you don’t have “sword of Damocles” story, then others will argue concern about federal debt is overrated. This view seems based on a belief that if there isn’t the immediate threat of a dire catastrophe, then the problem can be ignored for now.

But of course, there are lots of real-world problems that come upon a person, or a nation, more slowly. You can spend a decade or two not exercising and overeating, often with no catastrophic effects in that time–but the negative consequences for health are nonethless real. A nation can spend a few decades underperforming in some area, perhaps K-12 education or national defense preparedness, and while the effects may not be catastrophic in the near-term, negative consequences over time will be real as well.

In this spirit, the costs and dangers of rising federal debt can be divided into the ordinary and the extraordinary. Wendy Edelberg, Benjamin Harris, and Louise Sheiner provide such a perspective in “Assessing the Risks and Costs of the Rising US Federal Debt” (Economic Studies at Brookings, February 2025).

For perspective, here’s the standard figure showing the trajectory of the US government debt/GDP ratio. It’s now approaching the previous all-time high, which was the level of debt to finance World War II, and it’s projected to keep going up. Looking at data for the last couple of decades, you can see the jump in debt in response to the Great Recession, and also in response to the pandemic recession. The baseline for the future path of debt is based on current law–that is, it doesn’t include an event like an economic, health, or political crisis in the next two decades that leads to an additional surge of deficit spending.

The ordinary dangers of high and rising debt happen because higher government debt leads to higher consumption and less saving. The Brookings authors explain:

Deficits are costly to future generations to the extent they reduce national saving. A reduction in saving can reduce private investment, leaving a smaller capital stock (known as “crowd out”), higher interest rates, and lower GDP in the future. A reduction in national saving can also induce an influx of foreign capital; these foreign flows offset the impact of deficits on the domestic capital stock, GDP, and interest rates but increase the foreign ownership of U.S. assets. In either case, deficits mean that national wealth (and the net present value of future national
income) is lower than it otherwise would be. … Put differently, much of today’s government borrowing benefits current taxpayers at the expense of future ones.

If these lower levels of national saving also bring with them a lower rate of productivity growth, then the economy will grow more slowly for this reason as well. The result of growing, say, 0.5% slower each year over a period of 20 years means that the US economy would continue to grow, but at the end of that period it be about 10% smaller than otherwise.

To put that percentage in more concrete terms, that the equivalent of several trillion dollars not available for some combination of higher pay to workers and additional government programs. Also, if other countries in the global economy don’t make the same mistakes, then the US economy will be relatively smaller compared to its competitors a decade or two down the road.

I would also add that sustained high levels of government borrowing can feed the problems as well. The high levels of government deficits during the pandemic were one of the causes feeding the surge of inflation in 2021-22. The high interest payments on past borrowing reduce future budgetary flexibility: for example, what the federal government pays in interest on past borrowing already exceeds what is collected from the corporate income tax, and in a few years will probably exceed the defense budget.

The extraordinary consequences of high government debt involve scenarios of a crisis. Edelberg, Harris, and Sheiner write:

What could spark a fiscal crisis? We see four main sources of risk. …

1. Market disruptions unrelated to default: Demand or supply of Treasuries could abruptly shift for reasons unrelated to inflation or default risk such that interest rates spike, causing financial market disruptions that the Federal Reserve is unable to mitigate.
2. Political brinkmanship and missed payments: Investors may fear the U.S. Treasury will miss payments due to political gridlock or brinkmanship, leading to a loss of credibility and default concerns.
3. Loss of inflation control: The Federal Reserve could be perceived as abandoning its mandate to preserve price stability and instead allowing for hyperinflation.
4. Strategic default amid a dramatic deterioration in the fiscal outlook: The long-term fiscal outlook could deteriorate so significantly and so sharply that investors abruptly worry about some form of strategic default, leading them to abandon Treasuries until policymakers make conditions more stable.

As we discuss below, we think that these scenarios are unlikely to occur, but it would be foolhardy to suggest that they couldn’t happen. In each case, the depth of the resulting crisis would depend critically on the ensuing response of policymakers.

As the Brookings authors point out, the mighty US economy is not Argentina (where the national economy is about the same as the US state of Virginia) or Greece (where the national economy is about the same as the US state of Nevada). For me, the ordinary costs of high budget deficits, including risks of moderate inflation and lack of budgetary flexibility, are sufficient reason to believe that a gradual effort to moderate and phase down the projected rise in the federal debt/GDP ratio is a good idea.

But I would not be too quick to dismiss more extraordinary and extreme scenarios. If you had asked me circa 2000 or 2005 if the US economy would experience a near-meltdown in September 2008, I would have put an extremely low probability on such an event. But a low probability at any given time, especially over a period of decades, doesn’t mean the risk can be prudently ignored.

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