According to top economist Barry Eichengreen, America's $38 trillion national debt isn't primarily a result of poor calculations or fiscal management. It's not necessarily due to interest rates, an aging demographic, or unchecked expenditures either.
TL;DR
- Economist Barry Eichengreen blames political polarization for America's $38 trillion debt.
- Polarization hinders consensus, stability, and effective policy for debt reduction.
- Past debt reduction successes relied on growth, low rates, and political consensus.
- The U.S. must fix its politics to restore fiscal sustainability and manage debt.
The issue lies with us. Or, more precisely, as he explained to Coins2Day during an exclusive interview, it's a divided political landscape that mirrors and then magnifies our societal rifts.
“The United States has forgotten the importance of fiscal discipline,” the Berkeley professor of nearly 40 years told Coins2Day. “Neither party is serious about trying to cut the budget deficit. There is lots of hand-waving and rhetoric, but very little meaningful action.”
Eichengreen elaborated in a discussion with Coins2Day about his recent Peterson Foundation essay, which chronicles 24 consecutive years of increasing U.S. Federal debt—currently standing at $38 trillion, exceeding 100% of GDP—and asserts that political polarization is the limiting factor hindering any viable fiscal plan. He cautioned that the U.S. Bears a closer resemblance to the heavily indebted, politically fractured economies of southern Europe than Washington policymakers care to acknowledge.
“The comparison between the United States and Italy or Greece… those parallels are closer and more alarming today than at any point in my lifetime,” he said. “The politics become more and more polarized over time, and fiscal policy becomes trapped.”
None of the old debt-reduction playbooks work anymore
According to Eichengreen, the U.S.'s two significant periods of success, following World War II and during the 1990s, were built upon three foundational elements: robust economic expansion, advantageous interest rates, and the political ability to achieve primary budget surpluses.
“Everything has changed” in the 2020s, he said.
First – absent the markets’ “AI hopes,” Eichengreen said, growth on the whole is weaker. Second, we’re no longer in the era of ultra-low interest rates that helped previous debt consolidations; rates now are structurally higher, relative to growth. Third, the political system is unable to produce sustained surpluses: that might be a historical artifact relegated to the 20th century, he suggested.
The problem though, is not a failure of economic imagination, Eichengreen argues. It’s a failure of political capacity.
“Political polarization i s higher in the United States than in any other advanced country for which we have comparable data,” he said. “It is deeply debilitating in terms of our ability to achieve consensus and stability and productive policy results.”
Eichengreen stated his research indicates that nations which have effectively managed substantial debts, even those causing hardship, possess a common characteristic: cross-party consensus. “Low polarization is the only factor robustly correlated with successful debt consolidation,” Eichengreen commented. “We [the United States] simply do not have that.”
There’s supporting evidence in the literature. A report from the Manhattan Institute, Getting to Yes, analyzes 14 major U.S. Deficit-reduction negotiations since 1980 and finds that successful fiscal deals require at least two conditions: a painful “penalty default” if no agreement is reached, broad public support for deficit reduction, and genuine bipartisan trust among negotiators.
According to Eichengreen, most of these components were available in the 1980s and 1990s but have diminished in the 2000s due to increased partisanship. The report contends that heightened polarization, reduced public worry over deficits, and the protected status of entitlements now render significant fiscal adjustments considerably more challenging than they were previously.
The math is bad. The politics are worse
Eichengreen stated that the two most direct ways to lower our debt-to-GDP ratios, namely reducing expenditures and increasing revenue, are currently politically intractable.
“We’ve learned in the last year that cutting government spending is very hard,” he emphasized. “There are pressures for defense spending. There are entitlements that are politically impossible to cut.”
President Donald Trump attempted to reduce some expenditures with assistance from the world's wealthiest individual and acquaintance-turned-rival, Elon Musk, during the short-lived “DOGE” initiative. Musk stated that they managed to reduce the federal budget by $160 billion; while substantial, this figure fell significantly short of the administration's $2 trillion objective. Furthermore, specialists now estimate suggest that the disruption caused by the DOGE reductions might cost taxpayers $135 billion this year due to diminished tax revenue and productivity.
Three-quarters of federal spending is locked into Social Security, Medicare, and defense, none of which have bipartisan support for reform.
Meanwhile, proposals for tax increases, though historically modest relative to other rich economies, are treated as off-limits.
“The U.S. Remains a low-tax country,” he said. “There is scope to raise revenues by about 3% of GDP, which would cut the deficit in half. But the political system is unable to do it.”
Polarization, in other words, turns straightforward arithmetic into an unsolvable equation.
The U.S. Won’t fix its debt until it fixes its politics
Eichengreen stressed that there is no “magic number” at which debt crises suddenly erupt. But he argues the country is slowly moving toward a scenario in which bond markets lose confidence, much like the UK’s 2022 Liz Truss episode.
In 2022, the ex-prime minister sparked a financial crisis after her administration introduced a substantial, unfunded tax reduction strategy that investors deemed financially irresponsible. This led to a sell-off of U.K. Bonds, a sharp decline in the pound's value, and necessitated intervention by The Bank of England to avert the collapse of pension funds, ultimately resulting in Truzz's resignation.
“It wasn’t that Britain was about to default,” he said. “It was a sudden loss of confidence in the government’s ability to act as a reliable financial steward.”
A comparable sudden change in views of U.S. Capability, prompted by a botched auction, a political upheaval, or a blow to the Federal Reserve's autonomy, might necessitate a fiscal adjustment much sooner than anticipated in Washington.
But even that, he emphasized, would be a political crisis before a fiscal one.
“Every day that passes makes me feel the situation is more urgent,” Eichengreen said. “But without addressing polarization, there is no path to restoring fiscal sustainability.”