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Preventing a National Debt Explosion

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  • Martin Feldstein

Abstract

The projected path of the U.S. national debt is the major challenge facing American economic policy. Without changes in tax and spending rules, the national debt will rise from 62% of GDP now to more than 100% of GDP by the end of the decade and nearly twice that level within 25 years. This paper discusses three strategies that, taken together, could reverse this trend and reduce the ratio of debt to GDP to less than 50%. The first strategy, which focuses on the current decade, would reduce the administration's proposed spending increases and tax reductions that would otherwise add $3.8 trillion to the national debt in 2020. The second strategy, which would augment the tax-financed benefits for Social Security, Medicare, and Medicaid with investment-based accounts, would permit the higher future spending on health care and pensions with a relatively small increase in saving for such accounts. The third strategy focuses on "tax expenditures," the special features of the tax law that reduce revenue in order to achieve effects that might otherwise be done by explicit outlays. Tax expenditures now result in an annual total revenue loss of about $1 trillion; reducing them could permanently reduce future deficits without increasing marginal tax rates or reducing the rewards for saving, investment, and risk taking. The paper concludes with a discussion of how the high debt to GDP ratio after World War II was reversed and how the last four presidents ended their terms with small primary deficits or primary budget surpluses.

Suggested Citation

  • Martin Feldstein, 2011. "Preventing a National Debt Explosion," Tax Policy and the Economy, University of Chicago Press, vol. 25(1), pages 109-144.
  • Handle: RePEc:ucp:tpolec:doi:10.1086/658383
    DOI: 10.1086/658383
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    References listed on IDEAS

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    1. Congressional Budget Office, 2010. "The Budget and Economic Outlook: An Update," Reports 21670, Congressional Budget Office.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
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    Cited by:

    1. Feldstein, Martin, 2016. "Reducing long term deficits," Journal of Policy Modeling, Elsevier, vol. 38(4), pages 632-638.

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    More about this item

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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