America can’t grow its way out of its debt problem

The US economy is staring down the barrel of $40 trillion in debt, bond yields on the cusp of a 19-year high and a costly war driving inflation higher. The Trump administration has a novel solution: We’ll just grow our way out of the problem. It’s a refrain President Donald Trump and Treasury Secretary Scott Bessent have used frequently in recent weeks. It’s an effort to calm a market that has grown increasingly nervous about the war in Iran and Washington’s lack of a coherent plan to get its fiscal house in order. The administration’s theory is grounded in a degree of real economic theory: If the US economy grows at a significantly faster rate, its debt would eventually become relatively sustainable. But to accomplish that, America’s economy would need to grow at a faster rate for many years. That’s not something any administration can control. And the idea assumes we won’t keep adding massively to our debt, a theory belied by populist economic policies supported by politicians on both sides of the aisle. That’s why the market isn’t buying it. The math just doesn’t math. Inflation is making a comeback, spending is out of control, and Washington has no political will to fix either problem. R vs. G America’s debt crossing the $40 trillion mark last month sounded a number of alarm bells. But the most pressing question is whether – and how long – we can keep running massive deficits. When economists try to determine whether the government’s debt is sustainable, a common metric they look to is the difference between “g” (the economy’s growth rate, or GDP) and “r” (the rate of interest on the debt, or 10-year Treasury yields). When g is bigger than r, the debt becomes relatively insignificant compared to economic growth. When r is bigger than g, the debt can grow at an unsustainable pace. That seems self-evident: If you keep getting a raise year after year and you’re able to pay the interest on your debt today, you’ll be able to pay it in the future, too – and it’ll become easier to pay it down as your paycheck grows. Economies don’t function quite like consumers or businesses, and economists debate what “sustainable” debt looks like. But right now, r is around 5%, and g is around 2%. That, at the very least, raises the risk that America’s debt is on an unsustainable path. But that’s not the only metric flashing a warning about America’s debt burden. The primary deficit – the difference between an economy’s spending and tax revenue, minus interest payments – is also a concern. When you compare the US primary deficit to its GDP, it has a ratio of 3%, according to the nonpartisan Congressional Budget Office — and that’s way above target. To be sustainable, a country’s primary deficit needs to have a ratio of zero or a negative number. “That’s how bad the fiscal situation is,” said Mark Zandi, chief economist at Moody’s Analytics. Testing the theory So how much would the economy need to grow to ensure America’s debt doesn’t become unsustainable? GDP would have to grow 6% a year over the course of the rest of Trump’s term. We’re not off to a great start: The economy grew at a 2.1% annual pace in the first quarter and a 1.5% pace in the second quarter. In other words, we’d have to see growth triple tomorrow. If we want to get that done in 10 years, the economy would need to grow between 3% and 4% every year for a decade, according to Joe Brusuelas, chief economist at RSM US. The last time the US economy sustained that kind of growth was in the 1990s, coincidentally the last time the country had a budget surplus. But the United States would also have to stop accruing no massive new debt. That means the end of the Iran war, no economic shocks and no big spending initiatives like the $5,000 dividend checks that Trump proposed Wednesday, which would add $1 trillion to the debt. Increasing growth would also lead to significant inflation – around 5% to 6% a year – a byproduct of an overheating economy, Brusuelas noted. The Federal Reserve would send interest rates higher in response, slowing the economy down. “That math simply isn’t there to grow one’s way out of a $40 trillion debt,” Brusuelas said. Zandi argued that kind of growth could be accomplished by resetting America’s immigration policy and allowing more than 1 million immigrants each year into the country. But he acknowledged that’s not a politically viable option, given the Trump administration’s crackdown on immigration. Absent the political will to enact comprehensive immigration reform, Zandi said there’s no way to get growth high enough to put America’s debt on a sustainable path. The bond market The fiscally responsible way, then, to ensure debt sustainability is to increase tax revenue and lower spending. That has about as much support on both sides of the aisle as immigration reform. Meanwhile, the war with Iran has escalated yet again, raising fears that it will become another costly, long-lasting war that will continue to put the energy market in a chokehold. Oil has moved firmly above $100 a barrel, diesel is at a record, and gas prices are shooting higher again. Bond investors aren’t taking it lying down. The benchmark 10-year Treasury yield is within sneezing distance of hitting 5% for the first time since October 2023 – and just a bit further off from reaching its highest rate since July 2007. Bond traders are demanding more yield. They’re worried inflation will devalue their investment over time and America will need to keep borrowing to maintain its spending, adding ever more supply of Treasuries to the market. The world’s most important financial market is sending a message: Pie-in-the-sky theories on growth and inflationary policies are unacceptable. In the meantime, expect rates tied to bond yields – including mortgages and auto loans – to keep rising.