Wishing you had included the hit to projected growth from Trump's deportation funding explosion, hostility to foreign students, and already measurable decline in foreign tourism in your piece.
Perhaps we need to start discussing tax increases. I believe it's a fantasy to suggest that only corporates and the rich should face increased taxes although we should substantially increase effective tax rates. To pass such legislation most but not the bottom 20% or so should pay a bit of something more. It could take the form of higher retirement age, somewhat higher SS taxation for all but mostly raising the ceiling for contributions to at least $400k. We could also narrow the gap between taxes on capital and dividends vs. earned income.
A great start would be closure of the worst of the tax deduction giveaways starting with carried interest and moving on to LLC passthroughs.
Let's add elimination of the step up in basis at death to this list. This benefit was originally intended to aid taxpayers who's estate were subject to an estate tax, albeit at a time when an estate of less than $100K would be subject to the estate tax. At today's estate tax exemption level ($14M/individual. $28M for a married couple) only a few estates will ever be subject to this tax (and only then, with bad or no estate planning). Why then does anyone receive the benefit of a step up in basis at death?
Dear Dr. Bernstein: I would like to ask one more fundamental question: do you think the sectoral imbalances matter when considering government debt? In the US, households, businesses, and foreigners spend less than their income. Would you agree that in order to avoid recession, the government needs to spend at least as much as the other sectors save?
If the sectoral analysis is correct, the U.S. government needs to spend about 8% of GDP more than its income. So the level of required debt is not the issue. Of course what they go in debt for, very much is, and the BBB makes horrible choices.
Dear Dr. Bernstein: thank you for your brief and this summary. I see the point about interest payments exceeding growth, which could cause problems for the government as it would for a household or a business. My question is: how do you think that interest rates are set for government debt?
From my observations and their pronouncements, it seems to me that the Federal Reserve controls interest rates. So then the government would actually be different from a household in that part of the government controls the interest payments for other parts of the government.
When the hell is the US going to sax the very wealthy? They are not paying at a rate that is consistent with their economic growth. Their taxes remain flat but the wealth amassed is exponentially higher.
Thanks for the reply. It’s an interesting question exactly which interest rate one should use. In principle, you want the average expected interest rate on Treasury debt (as well as the expected growth rate) over some relevant period of time. Ten years might seem to be an appropriate horizon given that it’s also the horizon for estimating fiscal effects of proposed legislation. If anything, however, a longer horizon may be appropriate given that the fiscal imbalance is structural.
The longer the term of the interest rate (driven by the expected average maturity of Treasury debt) and the longer the horizon, I would think that the correlation between the (overnight) federal funds rate—the Fed’s interest rate tool—and the Treasury rate would be loose, particularly in the current environment for two reasons: (1) Although they just lifted the debt ceiling, Republicans in Congress seem more willing to test the proposition that a US default doesn’t matter. (2) Fed easing, if seen as politically driven, is apt to produce perverse (opposite) effects on market interest rates as investors’ anticipations of inflation rise. To his immense credit, Powell has resisted Trump’s pressure, but his term as Fed Chair expires less than a year from now (May 22, 2026); unless Senate Republicans grow some spines between now and then, his successor is apt to be like all the lackeys who inhabit his Cabinet.
Good piece, as usual…some commentary and one suggestion:
The suggestion first…substitute “balance” for “deficit” when talking about the primary balance. I think it would help interpret the chart, which shows a history that includes quite a few years of a positive primary balance, particularly for those who don’t deal with the concept of a primary deficit routinely. It would also clarify the concept of a “positive primary balance,” as “positive primary deficit” is potentially ambiguous.
The commentary: the years when the (real) interest rate fell below the (real) GDP growth rate were mostly years when the economy was operating well below its potential. In these circumstances, setting aside ongoing concerns about the long-term structural fiscal imbalance were justified by the need for fiscal stimulus to help spur economic growth. The failure to adopt fiscal stimulus in the years following 2009 was a significant factor holding the economy back, while the application of fiscal stimulus in 2020 and 2021 helped return the economy to full employment quickly in the wake of damage wreaked by the pandemic (though in retrospect the 2021 stimulus looks to have been too much). The key point is that the long-term objective should generally be to aim for a primary fiscal balance of zero, with adjustments in either direction depending on the gap between the interest rate and the GDP growth rate, measuring both of those either in nominal or real terms.
A final point: it’s worth emphasizing that the interest rate should be the one that applies to federal debt, which is only loosely affected by monetary policy. Otherwise, “someone” (guess who) might interpret this analysis as an argument for the Fed to cut interest rates. This would be counterproductive if investors saw the motivation for such a move as pleasing the occupant of the White House rather than conditions in the economy.
All good points. Agree re labeling the primary balance.
Our analysis, as you'll see in the longer brief, is that primary deficits in the 1-2 percent range are sustainable if r<g. That said, I like your guidance there too.
I'd think the interest rate on the debt is elastic to the fed funds rate, though haven't looked at how much. Figuring out what drives interest rates is the biggest challenge is these sorts of analyses!
The one metric follows no economic theory or glittering graphs; the Dow Jones index is the ultimate arbiter. If stocks are on the rise all is right ... Alright add in unemployment, The 74M Trump voters are content, actually much more than content, the 2026 midterms once again are at the top of the metrics list.
The question no economist can answer: why is the nation, the consumers, ignoring the charts and graphs?
Dear Dr. Bernstein,
Wishing you had included the hit to projected growth from Trump's deportation funding explosion, hostility to foreign students, and already measurable decline in foreign tourism in your piece.
Agree. See also this: https://www.dallasfed.org/research/economics/2025/0708
Perhaps we need to start discussing tax increases. I believe it's a fantasy to suggest that only corporates and the rich should face increased taxes although we should substantially increase effective tax rates. To pass such legislation most but not the bottom 20% or so should pay a bit of something more. It could take the form of higher retirement age, somewhat higher SS taxation for all but mostly raising the ceiling for contributions to at least $400k. We could also narrow the gap between taxes on capital and dividends vs. earned income.
A great start would be closure of the worst of the tax deduction giveaways starting with carried interest and moving on to LLC passthroughs.
Let's add elimination of the step up in basis at death to this list. This benefit was originally intended to aid taxpayers who's estate were subject to an estate tax, albeit at a time when an estate of less than $100K would be subject to the estate tax. At today's estate tax exemption level ($14M/individual. $28M for a married couple) only a few estates will ever be subject to this tax (and only then, with bad or no estate planning). Why then does anyone receive the benefit of a step up in basis at death?
MMT?
Since if I recall correctly, these massive deficits occurred because of Republican tax cuts for the rich
You might repeat that from time to time
Thanks. And the line is blue and not green.
Showoff.
Are there world leaders who are advocating dumping US bonds? Maybe people who were once our allies?
Dear Dr. Bernstein: I would like to ask one more fundamental question: do you think the sectoral imbalances matter when considering government debt? In the US, households, businesses, and foreigners spend less than their income. Would you agree that in order to avoid recession, the government needs to spend at least as much as the other sectors save?
If the sectoral analysis is correct, the U.S. government needs to spend about 8% of GDP more than its income. So the level of required debt is not the issue. Of course what they go in debt for, very much is, and the BBB makes horrible choices.
Dear Dr. Bernstein: thank you for your brief and this summary. I see the point about interest payments exceeding growth, which could cause problems for the government as it would for a household or a business. My question is: how do you think that interest rates are set for government debt?
From my observations and their pronouncements, it seems to me that the Federal Reserve controls interest rates. So then the government would actually be different from a household in that part of the government controls the interest payments for other parts of the government.
Stop funding genocide.
When the hell is the US going to sax the very wealthy? They are not paying at a rate that is consistent with their economic growth. Their taxes remain flat but the wealth amassed is exponentially higher.
Thanks for the reply. It’s an interesting question exactly which interest rate one should use. In principle, you want the average expected interest rate on Treasury debt (as well as the expected growth rate) over some relevant period of time. Ten years might seem to be an appropriate horizon given that it’s also the horizon for estimating fiscal effects of proposed legislation. If anything, however, a longer horizon may be appropriate given that the fiscal imbalance is structural.
The longer the term of the interest rate (driven by the expected average maturity of Treasury debt) and the longer the horizon, I would think that the correlation between the (overnight) federal funds rate—the Fed’s interest rate tool—and the Treasury rate would be loose, particularly in the current environment for two reasons: (1) Although they just lifted the debt ceiling, Republicans in Congress seem more willing to test the proposition that a US default doesn’t matter. (2) Fed easing, if seen as politically driven, is apt to produce perverse (opposite) effects on market interest rates as investors’ anticipations of inflation rise. To his immense credit, Powell has resisted Trump’s pressure, but his term as Fed Chair expires less than a year from now (May 22, 2026); unless Senate Republicans grow some spines between now and then, his successor is apt to be like all the lackeys who inhabit his Cabinet.
Good piece, as usual…some commentary and one suggestion:
The suggestion first…substitute “balance” for “deficit” when talking about the primary balance. I think it would help interpret the chart, which shows a history that includes quite a few years of a positive primary balance, particularly for those who don’t deal with the concept of a primary deficit routinely. It would also clarify the concept of a “positive primary balance,” as “positive primary deficit” is potentially ambiguous.
The commentary: the years when the (real) interest rate fell below the (real) GDP growth rate were mostly years when the economy was operating well below its potential. In these circumstances, setting aside ongoing concerns about the long-term structural fiscal imbalance were justified by the need for fiscal stimulus to help spur economic growth. The failure to adopt fiscal stimulus in the years following 2009 was a significant factor holding the economy back, while the application of fiscal stimulus in 2020 and 2021 helped return the economy to full employment quickly in the wake of damage wreaked by the pandemic (though in retrospect the 2021 stimulus looks to have been too much). The key point is that the long-term objective should generally be to aim for a primary fiscal balance of zero, with adjustments in either direction depending on the gap between the interest rate and the GDP growth rate, measuring both of those either in nominal or real terms.
A final point: it’s worth emphasizing that the interest rate should be the one that applies to federal debt, which is only loosely affected by monetary policy. Otherwise, “someone” (guess who) might interpret this analysis as an argument for the Fed to cut interest rates. This would be counterproductive if investors saw the motivation for such a move as pleasing the occupant of the White House rather than conditions in the economy.
All good points. Agree re labeling the primary balance.
Our analysis, as you'll see in the longer brief, is that primary deficits in the 1-2 percent range are sustainable if r<g. That said, I like your guidance there too.
I'd think the interest rate on the debt is elastic to the fed funds rate, though haven't looked at how much. Figuring out what drives interest rates is the biggest challenge is these sorts of analyses!
The one metric follows no economic theory or glittering graphs; the Dow Jones index is the ultimate arbiter. If stocks are on the rise all is right ... Alright add in unemployment, The 74M Trump voters are content, actually much more than content, the 2026 midterms once again are at the top of the metrics list.
The question no economist can answer: why is the nation, the consumers, ignoring the charts and graphs?