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High Government Debt Levels Are Here to Stay. Why It Matters.

An electronic billboard at a bus shelter in Washington, D.C., displays the national debt. It topped $32.3 trillion in early July, and $32.9 trillion on Sept. 7.


Jemal Countess/Getty Images for the Peter G. Peterson Foundation

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Government debt levels in the U.S. and other countries across the globe are high and rising—and unlikely to reverse soon. Political leaders and policy makers will need to focus in coming years on how to live with this reality rather than how to fix it.

That’s the crux of a new economic research paper by Serkan Arslanalp, an economist and researcher with the International Monetary Fund, and Barry Eichengreen, an economist and professor at the University of California at Berkeley. The pair argues that the combination of polarized politics, slowing global growth, and increased federal spending, among other factors, suggests soaring debt levels are “here to stay.”

“Our message is that debt reduction, while desirable in principle, is unlikely in practice,” the authors write.

The paper, which Eichengreen presented at the Federal Reserve’s late-August economic symposium in Jackson Hole, comes as debt levels in the U.S. and elsewhere are soaring to record levels, having ballooned in recent years as governments spent copious amounts of money to manage the Covid-19 pandemic and the economic fallout it brought. In advanced economies, debt has risen from 50% to 85% of gross domestic product, on average, the paper notes, while it has climbed from 40% to 60% in emerging markets and developing economies.

In the U.S., federal-government debt held by the public totals more than 95% of GDP and is on track to rise further in the coming years, data from the Office of Management and Budget show.

The paper outlines a number of reasons why debt levels are unlikely to decline soon, not least divided politics, which means elected leaders are unwilling or unable to take the policy steps necessary to reduce spending and raise revenue.

At the same time, fiscal spending is on the rise in a number of areas. Aging populations mean governments are spending more on healthcare and entitlement programs. A rising number of natural disasters will force investment in climate-change abatement and adaptation. An increase in global conflict means more countries are allocating more money to defense.

Trying to reduce debt levels by running persistent budget surpluses is also likely off the table. The authors cite World Bank data projecting that global growth will slow to a three-decade low by 2030, in part because of weather-related disasters and rising protectionism that is inhibiting growth in global trade.

Arslanalp and Eichengreen argue that for the U.S. and other advanced economies whose debt is regarded as safe, the challenge is relatively manageable. Robust demand for those liabilities, the authors write, “gives their governments more financial room to run.”

In contrast, more low-income countries are already in debt distress, the authors note.

But all countries, they add, should be taking steps to try not to “make a bad situation worse.” That includes attempting to avoid “unproductive” public spending, considering tax increases, and working to “target” social transfers—in other words, by potentially requiring means-testing to determine eligibility for welfare or entitlement programs.

“This modest medicine does not make for a happy diagnosis,” Arslanalp and Eichengreen write. “But it makes for a realistic one.”

The implication for the global economy is that in the future, nations could be less able to spend as they did in recent years to try to cushion the blow from an economic slowdown. That could make future downturns more severe, particularly in emerging markets but also, potentially, in advanced nations, depending on ripple effects.

Central banks in particular should be on high alert for added financial stability risks, Eichengreen said in a Bloomberg podcast interview on his paper. And they should recognize that “the economy will not receive support from fiscal policy in the next downturn” in the same way it did during the Covid pandemic and the 2007-08 financial crisis, he said. 

“They have to be prepared to respond,” he added.

Eichengreen’s presentation of the paper at the Jackson Hole symposium made federal debt levels one of the hottest topics among economists and central bankers in the two-story lounge of the Jackson Lake Lodge. Not everyone agreed with the paper’s conclusion that there is little to be done: “He let the advanced economies off the hook,” said Karen Dynan, a Harvard economics professor and former Treasury Department official in the Obama administration.

The paper marks something of a next phase in the discussion over debt, which has been dominated in recent years by the idea of Modern Monetary Theory. MMT advocates argue that governments that borrow in their own currency can’t go bankrupt and therefore shouldn’t limit their spending based on the size of their deficit. Years of ultralow interest rates also made it less costly to borrow, which helped push debt levels up.

Now, economists worry that popular theories pushing away concerns over the debt will make it that much harder to address rising levels.

“The situation has changed. It’s more expensive, and it’s harder to justify taking on more debt,” said Kristin Forbes, an economist with the Massachusetts Institute of Technology. 

“Unfortunately, so many people argued the opposite over the last decade that politicians seem to think that doesn’t matter, and they can borrow more,” she said. “You’ve lost a sense of comprehension of how debt can catch up with you.”

Write to Megan Cassella at megan.cassella@dowjones.com


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