Greg Mankiw delivered the Martin Feldstein Lecture at the Summer Institute of the National Bureau of Economic Research on the subject, “The Fiscal Future” (July 10, 2025, video here, text here). He notes:
Herbert Stein once wisely said that “if something cannot go on forever, it will stop.” And I have no doubt that this path of a rising debt-to-GDP ratio will stop at some point. The open questions are how and when it will stop. That is what I would like to discuss with you today. There are only five ways to stop this upward trajectory. They are (1) extraordinary economic growth, (2) government default, (3) large-scale money creation, (4) substantial cuts in government spending, and (5) large tax increases. I would encourage you to try to assign probabilities to these possible outcomes. Individually, each of these outcomes seems highly unlikely. But the probabilities you assign must sum to at least one. I say “at least” because more than one of these outcomes could occur.
It’s perhaps worth a pause here. My suspicion is that many readers will have two sets of probabilities to assign: one is what you would like to happen, and the other is what you think will actually happen through the US political system. Mankiw offers some thoughts on each option.
1) Extraordinary economic growth?
If economic growth leaped from its historical annual average of 2-3 percent all the way to, say, 6-8 percent, then the denominator of the debt/GDP ratio could rise fast enough that the overall ratio would fall. But 6-8 percent growth rates are only experienced in relatively small and relatively low-income economies making a big jump forward. There isn’t any precedent for a high-income technology leader to sustain this kind of explosive growth: remember, at a 7 percent annual growth rate, the US economy would be (roughly) doubling in size every decade.
2) Government default?
It is sometimes said that it is inconceivable for the US to default on its debt. But ion th 1930s, when many US bonds were written in a way that the lender could demand repayment in gold, President Franklin Roosevelt unilaterally dumped that part of the contract, and the US Supreme Court backed up his power to do so. As Mankiw points out, there’s a guy named Donald Trump who has been willing to entertain the option of a federal debt default. Mankiw quotes a comment from Trump from a descriptio n of a 2016 interview. Trump said:
“I’m the king of debt. I’m great with debt. Nobody knows debt better than me. I’ve made a fortune by using debt, and if things don’t work out, I renegotiate the debt. I mean, that’s a smart thing, not a stupid thing.”
“How do you renegotiate the debt?” the journalist asked.
“You go back and you say, hey guess what, the economy crashed. I’m going to give you back half.”
3) Large-scale money creation?
If a central bank creates high inflation, then the value of past debt will decline. Mankiw says:
It is worth noting that Donald Trump has made clear that he believes the president should have more authority over monetary policy—an idea most economists reject. Last month, Mr. Trump even publicly mused about appointing himself to the Fed. And he has consistently pushed for more expansionary monetary policy. … It is unclear whether future Federal Reserves will have the fortitude to stand up to a demanding and belligerent president. So I wouldn’t rule out the high-inflation scenario.
4) Substantial cuts in government spending?
As Mankiw says: “Many people favor this alternative, at least until they consider the details of what it means. … When thinking about the federal budget, it is best to recall a quip from Peter Fisher, a Treasury official in the George W. Bush administration, who once called the federal government `an insurance company with an army.’”
The cold arithmetic is that if cuts in federal spending are going to be truly substantial, they will have to be applied to Medicare, Medicaid, and Social Security. More specifically, it would be necessary to reduce the projected future spending increases in these programs–even as the number of elderly Americans is on the rise and health care costs keep going up. Whether going after public broadcasting and foreign aid spending is sensible or not, there just isn’t enough money in those programs to come anywhere close to altering the US debt/GDP trajectory.
5) Large tax increases?
Mankiw views this option as “the most likely outcome in the long run,” in part because the other options seem “implausible or unacceptable,” He says:
To close a fiscal gap of 4 percent of GDP with only increased revenue, the United States would need to raise overall tax revenue by about 14 percent. That is a huge tax hike, but it would bring us only about halfway toward the level of taxation that prevails in the United Kingdom. U.S. taxes would remain below the OECD average and well below the levels in France, Italy, and Sweden. From a strictly economic standpoint, that is entirely feasible. … [T]here is now a bipartisan consensus about a central tenet of tax policy. The Republicans don’t want to raise taxes on anyone (except universities with large endowments). The Democrats want to raise taxes only on the richest 1 percent. So, the two parties essentially agree that 99 percent of Americans should not have to endure higher taxes. This bipartisan consensus is the roadblock between where we are and where we need to go.
At some point, the US debt/GDP trajectory will not be sustainable, and some mixture of these five options will be deployed. But it’s one of those problems where I can’t promise you that it will be disaster next month, next year, or even in the next decade. Instead, the growing debt will drive down the US growth rate by a few tenths of a percent each year, which gradually accumulates until American start asking: “When did the US economy lose its ability to grow?” The choices needed to prevent a continual rise in the US debt/GDP ratio aren’t expecially palatable. However, if the investors of the world eventually become unwilling to buy US Treasury debt unless they receive a substantially higher interest rate to account for what they perceive as a substantially higher risk from a growing debt/GDP ratio, the economic dislocatgions and the choices that would be forced upon US policynakers and citizens in a short time period are grim to contemplate.
