Congress is Rightly Tired of Budget Boys Crying “Wolf!”
Bobby Kogan and Jared Bernstein’s new report for the Center for American Progress, on “Why the National Debt Matters More than It Used to …”, does not cite my 2011 Levy Economics Institute Policy Note, “Is the Federal Debt Unsustainable?”, even though that work has been freely available online for 15 years and has all the relevant mathematics, simulations, and policy implications, which have not changed.
Their essay is three times longer than mine, and from a literary standpoint, convoluted. Still, if one searches carefully, one can find kernels of clarity and truth. For example, they write “… there is no risk that the United States will be unable to pay its creditors …”; and “When debt is high and g [real economic growth] is larger than r [the average real interest rate on federal debt], debt becomes even easier to stabilize for that given level of g minus r”; and again “If interest rates were one percentage point higher than the CBO projects, the [budget math] would be significantly worse.” All of this is true, and all was stated in clear language in my 2011 Note.
Beyond this, the Kogan-Bernstein paper is a farrago of tortured reasoning and misleading statements. For example, they write that the present primary deficit, which is 2.6 percent of GDP, is “at historically high levels, surpassed only by prior periods of deep recession or war.” But long-term history—before big government or the international dollar—is irrelevant here. For the years since the crisis in 2008, the present primary deficit is not especially high and has been drifting down since the pandemic.
It is true that the federal debt is high by any historical standard except for the period immediately following the Second World War. Why is that? Kogan and Bernstein blame the Bush tax cuts, which followed the internet bust, but a glance at the record shows they barely made a dent. The big jump was due to the Great Financial Crisis. The ratio stabilized after 2011 as I predicted it would, before being bumped up by the pandemic. It has since stabilized again. It is not presently exploding.
Kogan and Bernstein concede that “interest rates are not currently higher than economic growth” before going on to warn that “rates are expected to continue rising before eventually overtaking growth within three years.” Note the passive voice. A footnote references “Authors’ calculations based on data from Congressional Budget Office …”, but there are no “data”—none—for the three years in question, which lie in the future. What there are, are projections, a very different thing. Data are real; projections are imaginary.
The CBO’s past habit was to project debt disaster by giving bloated interest rate projections. In 2011, I wrote: “The CBO’s assumption, which is that the United States must offer a real interest rate on the public debt higher than the real growth rate, by itself creates an unsustainability that is not otherwise there. It also goes against economic logic and is belied by history. … By the terms of the CBO’s own model, a low interest rate erases the notion that the US debt-to-GDP ratio is on an ‘unsustainable path’.”
In its early 2026 projections, the CBO did not foresee a large further rise in interest rates (the report indicates they have since raised them). Yet Kogan and Bernstein project a rise in the debt-to-GDP ratio to 171 percent of GDP by 2050—evidently along with the CBO’s steady real growth (1.8 percent) and a return to low (2.0 percent) inflation. Why one should care about a financial ratio in such an otherwise rosy outlook is unclear. But the reality is that the return to 2.0 percent inflation is highly unrealistic, notwithstanding the Federal Reserve’s target, set arbitrarily in the Bernanke era. At present rates of inflation and interest rates, g will continue to exceed r and the debt apocalypse will recede.
The current nominal interest rate on the federal debt is 3.447 percent on average. The current CPI headline rate is 3.4 percent; the PCE is 3.7 percent. By standard calculation, the “real” interest rate on the federal debt, today, is roughly zero. The growth rate “g” (1.5 to 2 percent) is thus well above “r”—the key condition for eventual stabilization of the debt ratio. And it is likely to remain that way, even if interest rates rise, for reasons we now examine.
Kogan and Bernstein do not appear to understand—or to be prepared to admit—how interest rates are actually set in the United States. The closest they come is: “there are many factors beyond public debt that determine interest rates.” You don’t say. To not even mention that the Federal Open Market Committee sets the basic interest rate—the federal funds rate—by fiat at its regular meetings is a case of what my old boss Rep. Henry Reuss (D-WI) liked to call “straining at gnats and swallowing camels.”
So, what if the FOMC raises interest rates? Thanks to the high debt-to-GDP ratio, interest payments on the debt (and on bank reserves, directly from the Fed) tend to stimulate the economy, by enriching asset holders. The effect of higher rates will be to pump more payments into the economy, pushing up activity, asset prices, costs—and the inflation rate. Thus, the high debt level has neutered the Fed’s supposed path to lower inflation through “tighter” policy. For this reason, Jerome Powell was unable to slow economic growth by raising rates (although he did damage the housing market). Kevin Warsh will discover the same thing, sooner or later.
I concluded my 2011 paper with these words: “The prudent policy conclusion is: keep the projected interest rate down. Otherwise, stay cool. There is no need for radical reductions in future spending plans, or for cuts in Social Security or Medicare benefits, to achieve this. Do not change the expected primary deficit abruptly. Let the economy recover through time, and do not worry if the debt-to-GDP ratio rises for a while.” That conclusion remains correct. Getting the dynamics right will depend on what the Federal Reserve does, and very little on what Congress does or doesn’t do.
There is, in sum, no basis for the Kogan-Bernstein recommendation of a 2.6 percent of GDP fiscal shift toward austerity—nearly a trillion dollars of spending cuts or tax increases, without touching the interest rate. Kogan and Bernstein appear to follow the CBO’s standard assumption that major fiscal shifts affect the budget but not the economic outlook. In reality, cuts in the primary deficit regularly foreshadow recessions, for the straightforward reason that they cause them, by draining purchasing power from the private sector. The history of primary budgets gives a clear indication of this. Indeed, to make such a shift would certainly slow the economy and make matters worse.
I won’t trouble the reader with the second half of the Kogan-Bernstein report, which indulges speculation about the effect of AI on the real growth rate. These are issues one cannot discuss coherently if you think, as these authors appear to do, in terms of an economy that produces “widgets.” I deal with that question elsewhere.
But there is some genuinely good news in the Kogan-Bernstein paper. They write that “a quarter century of graphs showing debt ratio projections heading north have not moved the political system to act. To the contrary, Congress has become less responsive over time.” This is definitely true. Kogan and Bernstein go on to call for new ways, not yet imagined, to scare Congress, the public and the “political system.”
A more optimistic conclusion is that Congress, to the surprise of many, is in fact capable of learning—and has tired of budget boys who cry “Wolf!”
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Senior Scholar James K. Galbraith holds the Lloyd M. Bentsen, Jr Chair in Government Business Relations at the LBJ School of Public Affairs, The University of Texas at Austin, and is a former Executive Director of the Joint Economic Committee. His most recent book is The Power to Destroy: How Bad Economics Drove America’s Decline (University of Chicago Press, 2026).
