With the U.S. presidential election just a week away, candidates are competing to promise tax cuts and lavish spending on social programs to woo voters. But whoever wins must confront a crisis that’s been building for decades—a crisis that, if left unchecked, will erode America’s ability to thrive in an increasingly unstable world.
Government debt as a share of GDP is now at levels unseen since the end of World War II, and it’s projected to climb even higher in the next two decades. This relentless debt surge, which kicked off in the mid-1970s, stems from a steady expansion of government spending—especially on mandatory programs like Social Security, Medicare, and Medicaid—while tax revenues have failed to rise as rapidly. Between 1968 and today, spending on these programs as a share of GDP grew by over 8 percent annually, while tax revenue as a share of GDP has remained constant.
Some economists shrug off concerns, pointing out that the dollar’s status as the world’s reserve currency allows for cheaper borrowing. But this complacency is dangerous.
First, borrowing may be cheap, but there’s a limit. The United States now spends more on interest payments than on its military—and it’s borrowing more to cover the interest. Counting on bond markets to ignore record deficits is folly, especially given today’s higher interest rates and the wild swings in Treasury yields we’ve seen over the past two years.
Second, the credibility of American fiscal policy underpins the dollar’s reserve status. A runaway debt trajectory without a sustainable plan to contain it jeopardizes that foundation.
Third, mounting debt hampers America’s ability to respond to global crises. During the Cold War, defense spending, which stood at 7 percent of GDP, consumed a larger share of the economy than it does today, at 3.2 percent. Preserving U.S. global leadership, which also supports the dollar’s reserve status as a safe haven, requires fiscal room to boost defense spending to respond to rising geopolitical threats. Right now, that space is vanishing.
There’s no shortage of proposals to put our debt on a sustainable path, and there are many examples of advanced economies that have successfully implemented fiscal reforms. Taking on such reforms can be gradual and need not cause undue pain—we’re not in a crisis demanding severe austerity. But it’s imperative to acknowledge the situation and signal to markets that the United States is serious about its fiscal responsibilities.
Once that’s achieved, any administration considering what reforms to pursue needs to reckon with two stubborn truths. First, if the administration plans on raising more tax revenue, it has to understand that it cannot do so merely by taxing the rich. American income tax revenue as a percentage of GDP is already higher than the OECD average—and over a third of that comes from the top 1 percent. Any effort to boost tax revenue would have to involve broadening the tax base, considering options like sales taxes or a value-added tax.
Second, cutting spending won’t be effective without tackling entitlement reform. Since the end of the Cold War, entitlement programs have ballooned as a share of GDP, squeezing out discretionary spending on defense and research--areas we can’t afford to neglect amid rising global tensions.
It’s time for our leaders to be honest with voters about the peril of ignoring our fiscal reality. The stakes couldn’t be higher: the preservation of America’s financial stability and military dominance is on the line. Action now is not just prudent—it’s essential.
Photo by Jemal Countess/Getty Images for the Peter G. Peterson Foundation