Will Debt Sink the American Empire?
After growing for decades, this year the U.S. debt will roughly match its GDP. Throughout history, nations that blithely piled up their obligations have eventually met unhappy ends.
America
is cruising into an uncharted sea of federal debt, with a public
seemingly untroubled by the stark numbers and a government seemingly
incapable of turning them around.
In the presidential race, there’s not much partisan difference or advantage on this subject. Donald Trump
and President Biden have overseen similar additions to the nation’s
accumulated debt—in the range of $7 trillion in each case—during their
terms. The national response to both has been, by and large, to look the
other way.
History, however,
offers some cautionary notes about the consequences of swimming in
debt. Over the centuries and across the globe, nations and empires that
blithely piled up debt have, sooner or later, met unhappy ends.
Historian Niall Ferguson
recently invoked what he calls his own personal law of history: “Any
great power that spends more on debt service (interest payments on the
national debt) than on defense will not stay great for very long. True
of Habsburg Spain, true of ancien régime
France, true of the Ottoman Empire, true of the British Empire, this
law is about to be put to the test by the U.S. beginning this very
year.” Indeed, the Congressional Budget Office projects that, in part
because of rising interest rates, the federal government will spend $892
billion during the current fiscal year for interest payments on the
accumulated national debt of $28 trillion—meaning that interest payments
now surpass the amount spent on defense and nearly match spending on
Medicare.
Washington has been adding to the national debt at an alarming pace. Not so long ago—beginning in the late 1990s—the federal government’s budget was actually in surplus, at least for a time. This year, it will be some $1.9 trillion in the red, the Congressional Budget Office forecast just this week.
Only a dozen years ago, the aggregate government debt amounted to about 70% of the nation’s gross domestic product. This year, it will be about equal to the entire gross domestic product (and by some measures higher when additional government accounts are included). By 2028, it is forecast to reach a record 106% of GDP, matching the record hit during the heavy spending to finance World War II. By 2034, barring changes in tax and spending policy, it is projected to hit 122% of GDP, the highest level ever recorded.
This red ink can have painful, if hidden, consequences. The CBO projects that the weight of the debt will reduce income growth by 12% over the next three decades, as debt payments crowd out other investments.
There is nothing inevitable about this path or its consequences. This year’s deficit actually would have been higher without the spending limits and policy changes put in place in the much-maligned Fiscal Responsibility Act the Biden administration pushed into law last year. More broadly, frequent past warnings about crises emerging from rising debts have proven unfounded. There’s even an economic theory—Modern Monetary Theory—that maintains that worries about the consequences of debt are misplaced, because countries that control their own currencies can always create more money and therefore never go broke or be forced to default.
Still,
a look back at history is not reassuring. “Even if a country issues the
leading reserve currency, even if a country is the dominant
geopolitical power, that just doesn’t bail countries out,” says J.H.
Cullum Clark, director of the Bush Institute-Southern Methodist
University Economic Growth Initiative. “They do lose that status.”
Clark,
who has written about history’s lessons on debt and international
power, points to the Roman Empire as an early cautionary tale. After
establishing their empire as the world’s most powerful, Rome’s leaders
began spending lavishly on imperial administration and the army in the
third century. Emperors financed the resulting debt by debasing the
currency, which generated high inflation. That weakened the empire’s
stability and defenses, leading to its demise in the fifth century.
After establishing a foothold in the New World, Spain financed its military adventures and globe-spanning empire with extensive borrowing from abroad and high taxation, eventually losing its status as Europe’s greatest power. In their look at the history of international financial crises, “This Time Is Different: Eight Centuries of Financial Folly,” economists Carmen Reinhart and Kenneth Rogoff note that Spain “managed to default seven times in the 19th century alone, after having defaulted six times in the preceding three centuries.”
France
traveled much the same path and defaulted frequently on its debt.
Ultimately, profligate borrowing and spending by the court at Versailles
caught up with the royals, producing deindustrialization and fiscal
crises that led to the revolution of 1789.
China’s Qing Dynasty went through a similar cycle and encountered a similar fate. It was a leading world economic power, but spending and foreign borrowing in the 19th century led to damaging underinvestment in the infrastructure needed to keep advancing.
Great
Britain may offer the most compelling parallels. It oversaw the world’s
most far-flung empire through the 18th and 19th centuries before war
spending, including the fight against the American Revolution, produced
high debt. It recovered but by the 20th century found that it could no
longer afford the spending required to both maintain an army and navy to
police the empire and to finance rapidly growing social programs. Debt
began crowding out other investments, and economic weakness sapped the
strength of the British pound. The pound ceased being the world’s
leading reserve currency, and the British Empire soon declined.
Clark
says that, in the current environment, the event triggering a debt
crisis could be a downgrade of America’s credit rating or the refusal of
international financiers to continue lending. The U.S. isn’t in that
position yet. Treasury Secretary Janet Yellen said in a recent CNBC
interview that if debt could be “stabilized” at current levels, “we’re
in a reasonable place.” But she also has warned that extending Trump-era
tax cuts that are set to expire next year would drive up the nation’s
debt as a share of its economy.
The good news is that there are examples of nations that have pulled back from a sea of debt to stabilize their finances and their place in the world. Britain managed that trick before falling backward, and Canada, Denmark, Sweden and Finland all have emerged from more recent debt crises to return to fiscal health.
In fact, the U.S. itself did so not so long ago. In the 1980s, there were serious concerns about rapidly rising debts. Amid those worries, Yale historian Paul Kennedy published a classic work on the historic relationship between economic strength and international power, “The Rise and Fall of Great Powers,” chronicling the fate of dominant nations that became overextended. He noted that, at the time, the U.S. was piling up debt in peacetime as no great power had since France in the 1780s.
But the American political system responded with policy changes that produced that brief period of surpluses in the 1990s, and subsequent bipartisan agreements helped subdue deficits. Today, though, Kennedy’s warning that by the 21st century “the compounding of national debt and interest payments…will cause quite unprecedented totals of money to be diverted in that direction” is coming true.
Some of the decline in American power that Kennedy warned about seems to have been avoided so far. Now, he told me in an interview, he has been “asking my economist friends about this conundrum…of a very, very large and in some ways overextended great power being able to keep issuing more and more its of currency-denominated bonds without there being, shall we say, punishment for it.” That punishment, he adds, still could come someday if Asian nations, particularly China, which today holds enormous quantities of U.S. Treasury bonds, “just decided for some reason of having a political quarrel with the U.S. to dump vast amounts of Treasurys,” setting off a fiscal and economic crisis.
For
now, the debt is being driven upward by higher interest payments, plus
the fact that the current tax code isn’t providing enough revenue to
cover Social Security and Medicare. Those forces come at a time when
neither party wants to touch those entitlement programs and when
Republicans seek tax cuts and Democrats promise no tax increases for
families making less than $400,000 a year. Both political parties are
using the debt mostly as a rationale for doing things they would like to
do anyway—some Republicans to oppose more aid for Ukraine, for example,
and some Democrats to raise taxes on corporations and the wealthy.
The
net effect is to downgrade discussion of deficits and debt on their own
terms. Going beyond that would require a level of discipline and
bipartisan resolve that, while found at times in the past, is sorely
lacking in Washington today.
Gerald
F. Seib was The Wall Street Journal’s executive Washington editor and
Capital Journal columnist and currently serves as a visiting fellow at
the Robert J. Dole Institute of Politics at the University of Kansas.
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Appeared in the June 22, 2024, print edition as 'Will Debt Sink the American Empire?'.