The U.S. is inviting a debt shock if it continues on its current trajectory, which is starting to look like unsustainable student loans, according to Jared Bernstein, who previously served as the chair of President Joe Biden’s Council of Economic Advisers.
In a New York Times op-ed on Wednesday, he acknowledged that he was once a longtime dove when it came to budget deficits and previously argued that fiscal austerity often does more harm than good.
“No longer. I, like many other longtime doves, am joining the hawks, because our nation’s budget math just got a lot more dangerous,” Bernstein wrote.
In particular, he pointed to the math around economic growth versus debt interest. Governments can sustain budget deficits if GDP expands faster than the interest rate on their debt, Bernstein explained, citing research from economist Olivier Blanchard.
That’s where the student debt analogy comes in. College graduates can keep up with monthly payments as long as they haven’t borrowed too much and their income is rising faster than their loan bills.
“Conversely, though, if they borrowed to the hilt—and if their student loan debt starts growing faster than their income—they can quickly get in trouble,” Bernstein said. “And that’s where our country is right now.”
It’s an ominous warning given that delinquency rates have soared among student loan borrowers, resulting in seized wages and credit scores plummeting.
That’s after the number of Americans with debt from federal student loans more than doubled from 21 million to 45 million between 2000 and 2020, according to the Brookings Institution. Meanwhile, the total amount owed more than quadrupled from $387 billion to $1.8 trillion during that time, growing faster than any other form of household debt.
When it comes to the federal government’s finances, America’s debt costs relative to income used to be more benign. Since the early 2000s, the inflation-adjusted yield on 10-year Treasuries was below the running 10-year forecast for economic growth.
But that changed recently, with the two now converging at just above 2%, due in part to government spending during the pandemic and higher inflation—which forced the Federal Reserve to hike interest rates aggressively, dragging yields higher.
“That’s a potential game changer for debt sustainability,” Bernstein said.
He didn’t mention that the Biden administration added trillions to the debt with expansive spending that also stoked inflation.
Instead, he pointed to President Donald Trump’s economic policies, namely his trade war and the tax-and-spending bill that he signed into law last week.
High tariff rates will lower economic growth while boosting inflation and interest rates. At the same time, tax cuts will increase debt and likely to raise the interest costs for servicing it, he added.
To help avoid a debt shock that forces the government to precipitously slash spending or raise taxes, Bernstein suggested Congress pre-determine “break-glass moments” and binding fiscal responses.
The U.S. already pays more in interest on its debt than it spends on Medicare and defense. Those interest payments will hit $1 trillion next year, trailing only Social Security as the government’s biggest outlay, according to the Committee for a Responsible Federal Budget, a think tank.
Meanwhile, Trump’s tax cuts and spending are expected to add trillions to the deficit in the coming years, with the total debt-to-GDP ratio surpassing the post-Word War II record soon.
“But that path remains unsustainable: The primary deficit is much larger than usual in a strong economy, the debt-to-GDP ratio is approaching the postwar high, and much higher real interest rates have put the debt and interest expense as a share of GDP on much steeper trajectories than appeared likely last cycle,” Goldman Sachs said in a note last month.
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