Growth Over Austerity: Why the U.S. Must Invest Its Way Out of Debt

Contextualizing the “Big Beautiful Bill”

The One Big Beautiful Bill Act of 2025 – recently passed in the House and advancing through the Senate – encapsulates a strategic shift in U.S. fiscal policy. Instead of aiming to reduce deficits through austerity, the bill centers on “grow‐out‐of‐it” logic: using expansion and incentives, not deep cuts, to shrink the debt burden relative to GDP. It bundles major tax incentives (including extensions of the 2017 tax cuts and new cuts, such as eliminating taxes on tipped wages), increased infrastructure and defense funding, and regulatory rollbacks meant to spur investment. The underlying bet is that pro-growth measures will accelerate GDP enough to improve the debt-to-GDP ratio over time, despite adding to the nominal debt in the near term. Indeed, the Congressional Budget Office (CBO) estimates the Senate’s version of the bill would add about $3.3 trillion to deficits over the next decade (roughly $1 trillion more than the House version), mostly due to sweeping tax cuts that reduce revenue. Proponents argue these tax cuts and spending boosts will pay for themselves by expanding the economic pie – a stark contrast to the prevailing calls for fiscal restraint. Critics, however, warn that the bill’s heavy reliance on debt-financing could further inflate an already bloated national debt and push up interest rates.

Projected cumulative addition to U.S. national debt over the next decade (through 2034) if the House’s “Big Beautiful Bill” were enacted. The policy’s cost – about $2.6 trillion added to deficits by 2034 – reflects extensive tax cuts and spending, and would markedly steepen the debt trajectory.

State of U.S. Finances

The U.S. fiscal position in mid-2025 is precarious, providing important context for the growth-versus-austerity debate. Federal interest costs have exploded, reaching levels unheard of in decades. In FY2024 the government spent about $1.1 trillion on interest payments, exceeding the entire defense budget of $884 billion that year. In other words, servicing the debt now costs more than funding the Pentagon – a red line described by historian Niall Ferguson as “Ferguson’s Law,” wherein a nation paying more on debt interest than on national defense is at risk of decline. This situation has emerged because rising interest rates and mounting debt have combined to balloon annual interest outlays. The Federal Reserve’s aggressive rate hikes (to fight inflation) mean new government borrowing is far more expensive, just as large post-pandemic deficits have greatly increased the debt stock that needs financing.

Total national debt (gross federal debt) now stands around $36–37 trillion (nearly 120% of GDP), the highest debt-to-GDP ratio in American history outside of World War II. The deficit for FY2025 is projected around 6.1% of GDP, up from about 5.6% in 2024. In dollar terms, that means a deficit of roughly $1.8 trillion in 2025 following a $1.6 trillion deficit last year. Critically, these deficits are structural – not merely cyclical or pandemic-related – and are expected to persist. Under current law, the CBO projects debt held by the public (which excludes intergovernmental IOUs) will rise from ~98% of GDP in 2024 to 116% of GDP by 2034, and continue to 172% of GDP by 2054 on present trend. In short, absent a course change, the U.S. debt burden is on track to climb to levels far above the size of the economy. Meanwhile, net interest payments are set to be the fastest-growing component of the federal budget. CBO forecasts interest costs will jump from about 2.5% of GDP in 2023 to 3.2% of GDP by 2026, and further to 4.1% of GDP by 2035 – levels never seen in the post-WWII era. Put differently, within a decade, taxpayers will be spending over 18% of federal revenues just to pay interest (versus ~15% in 2023), crowding out other priorities.

These figures set the stage for a national reckoning. Annual interest expense above $1 trillion effectively means the U.S. must continuously borrow just to pay for past borrowing – a debt spiral risk if borrowing costs keep rising. Indeed, analysts note that debt is growing faster than the economy, a recipe for an ever-rising debt-to-GDP ratio. In Q1 2025 alone, the Treasury recorded over $261 billion in interest outlays (an annualized pace of ~$1.1 trillion). This fiscal backdrop has prompted warnings from budget watchdogs and sparked debate about whether the answer is to rein in deficits or double down on growth policies to effectively “grow out” of the debt problem.

The 3% Deficit Target & Ray Dalio’s Warning

Amid growing concern of a debt crisis, some economists and investors are urging a return to fiscal orthodoxy – namely, bringing deficits down to more “sustainable” levels around 3% of GDP. Hedge fund titan Ray Dalio has been one of the most vocal proponents of this view. He warns that the U.S. is headed toward what he calls an “economic heart attack” if it continues running large (6–8% of GDP) deficits and accumulating debt with no end in sight. Dalio argues that to avert a severe debt crisis, Washington must rapidly shrink the budget deficit to roughly 3% of GDP (from the current ~6%) while the economy is still relatively strong. In concrete terms, he estimates this would require a mix of spending cuts and revenue increases equal to about 4% of GDP each – a painful adjustment, but one he believes is “possible… it was done between 1991 and 1998” when bipartisan compromises produced budget surpluses. Dalio points out that in the 1990s, the U.S. managed to go from large deficits to a balanced budget in part by restraining spending growth and enjoying an economic boom. He suggests a similar good-faith effort now could stabilize the situation, reducing pressure on interest rates (possibly lowering them by ~150 basis points) and easing the debt servicing burden.

However, Dalio is not especially optimistic that such political will can be mustered. “If you don’t do that – and we probably won’t – it’s like plaque building in the arteries,” he said, describing how ever-rising debt and interest costs will constrict the budget and economy if deficits aren’t curtailed. His message: without prompt corrective action, the U.S. will soon face a bond market revolt or a sharp inflationary debasement – the “heart attack” scenario where the government suddenly cannot fund itself except by slashing spending or printing money.

Dalio’s deficit-cutting prescription echoes warnings from others, including former officials and credit rating agencies. Notably, Moody’s Investors Service in late 2023 placed the U.S. on a downgrade watch, citing the risk that large deficits and political brinkmanship could erode the country’s creditworthiness. (Fitch had already stripped the U.S. of its AAA rating in August 2023, and Moody’s threatened the same if fiscal trends don’t improve.) Similarly, Peter Orszag – President Obama’s former budget director, now a Wall Street CEO – has sounded the alarm about the “borrow-and-spend” trajectory. Orszag notes that deficits are twice as high as they were a decade ago, and interest rates are markedly higher, fundamentally worsening the debt outlook. After years of tuning out “sky is falling” rhetoric, Orszag now says “I think it’s time to worry again about this trajectory.” He and other deficit hawks warn that ever-growing interest costs will “crowd out” spending on everything from defense to infrastructure, and that investor patience with U.S. fiscal profligacy is not unlimited. The concern is that at some point, bond markets could demand sharply higher yields to continue financing U.S. debt, which would in turn accelerate a fiscal crisis (as higher yields beget higher interest costs, in a vicious cycle). Indeed, long-term U.S. bond yields spiked above 5% in late 2024 – a level not seen in 16 years – partly due to fears about heavy Treasury issuance and insufficient fiscal restraint. Rising yields prompted one member of Congress to remark, “the bond market will be the ultimate arbiter of what is an acceptable tax-and-spend package” – suggesting that if Washington doesn’t voluntarily tighten its belt, global investors might force its hand.

In short, the “3% deficit” camp (Dalio, Orszag, and others) argues that a credible plan to roughly halve the current deficit relative to GDP is needed to restore confidence and avoid a debt spiral. They advocate hard choices now – from entitlement reforms to tax increases – to preempt far more painful adjustments later if a crisis hits. This perspective emphasizes that the status quo is untenable, with interest payments racing upward and ratings warnings flashing red. Yet implementing deep deficit cuts in practice faces significant hurdles, as the next section explores.

Why Austerity Is Impractical for the U.S.

Slashing the deficit to 3% of GDP (or any similarly ambitious target) is easier said than done – and many economists and policymakers argue it would be economically and politically impractical for the United States. There are several reasons for this skepticism:

Structural Spending Commitments: A huge share of U.S. federal spending is essentially “locked in” and politically sacrosanct. In 2024, for example, mandatory programs like Social Security and Medicare, along with defense and interest, consumed roughly 70% of the budget. These categories are either legally obligated or vital to national interests, and they are projected to grow in cost due to an aging population (driving up Social Security and Medicare) and higher interest rates (increasing interest costs). As a result, the entire annual deficit is roughly equal to all discretionary spending – the portion Congress actually debates each year. In FY2024 the U.S. had about a $1.8 trillion deficit and about $1.8 trillion in discretionary outlays. That means even eliminating every discretionary program – defense, education, infrastructure, R&D, national parks, etc. – would barely get the budget to balance. Clearly, a 50% deficit reduction (~3% of GDP) would require cuts far beyond trimming “waste, fraud, and abuse”; it would entail either deep reductions to core entitlement benefits (like Social Security/Medicare), significant tax increases, or gutting entire categories of federal investment. These are politically radioactive options. Past attempts at even modest entitlement reforms or tax hikes have met fierce public resistance.
Interest and “Crowd-Out” Effect: As noted, interest payments are eating up a growing slice of federal resources. Net interest is projected to surpass defense spending within a few years, even under current law. This means future budgets will face pressure to cut other items just to keep up with debt servicing. But reducing primary spending (on programs) can be self-defeating if it causes the economy to slow – because a weaker economy would reduce tax revenues, possibly offsetting the fiscal gains from spending cuts. This is the classic austerity trap: aggressive cuts can shrink GDP, making the debt-to-GDP ratio worse. Countries that have tried to simply cut their way out of high-debt situations often saw their debt ratios rise in the short term as economies contracted. The U.S., with its global reserve currency, has more ability to carry debt (see next section), and harsh austerity could needlessly undercut growth and innovation (for example, starving education, infrastructure, and R&D funding).
Political Reality: Imposing broad austerity in the U.S. is politically near-impossible outside of a major crisis. Neither major party has shown an appetite for significant entitlement cuts or across-the-board tax hikes – measures that would hit the middle class and powerful interest groups. On the contrary, recent history shows a bipartisan tendency to cut taxes and increase spending. The very passage of the Big Beautiful Bill (with trillions in deficit-financed tax relief and spending) exemplifies this: even many self-described “fiscal conservatives” chose the route of tax cuts over deficit reduction. As one analysis wryly noted during the 2025 budget debate, “the fight… was about how much worse to make the situation, not how to make it better… giving us all back money they still want to spend.” In other words, there is scant political will to inflict short-term pain on voters by curbing benefits or raising taxes for the sake of long-term deficit reduction. Attempts at austerity can also be political suicide; they often provoke public backlash and populist uprisings (as seen after 2010, when many European governments that enacted austerity were swept out of office, or in the U.S. itself, where backlash to budget cuts can be fierce).
Macroeconomic Consequences: Austerity during a time of high debt and rising interest rates could risk tipping the economy into recession. The U.K.’s post-2010 austerity program, for instance, significantly slowed Britain’s recovery from the global financial crisis. The Office of Budget Responsibility confirmed that the UK’s deep spending cuts “reduced GDP,” and analysts estimated the policy mix cost the average British household around £4,000 in lost income over the 2010–2015 period. Public services in Britain, from healthcare to local governments, also suffered “savage cuts” that arguably weakened the social fabric in the longer run. The U.S., too, would face similar risks: immediate austerity (such as rapidly cutting the deficit by half) could spike unemployment and crimp growth. Ironically, that could undermine the very goal of reducing the debt ratio – because if GDP stalls or contracts, the debt-to-GDP ratio can rise even if deficits are lower. The experience of countries like Greece underscores this trap: Greece was forced into extreme austerity after 2010 and saw its economy collapse by 25%, unemployment soar above 27%, and its debt-to-GDP actually worsened initially. It became a cautionary tale of how austerity can become, in economists’ terms, “self-defeating.” The United States fortunately controls its own currency (unlike Greece in the eurozone), but the general lesson holds – you can’t cut your way to prosperity when cuts themselves undercut growth.

In summary, while in theory the U.S. could sharply cut spending or raise taxes to reduce deficits, in practice this path is blocked by structural budget realities and the high likelihood of severe economic and political fallout. As former Treasury Secretary Larry Summers quipped, “Fiscal austerity is like going on a strict diet – it’s possible for a while, but not sustainable as a permanent strategy, especially if it makes you weaker.” The impracticality of austerity, combined with America’s unique financial advantages, is why many argue for a different approach: using growth as the primary tool to manage the debt.

Growth as a Viable Alternative to Austerity

If austerity is off the table, what is the alternative? In a word: growth. The core idea of the “invest-our-way-out” strategy is that the U.S. can reduce its debt burden not by shrinking the numerator (debt) but by expanding the denominator (GDP). As long as the economy’s nominal growth rate exceeds the interest rate on the debt, the debt-to-GDP ratio will gradually fall even if the government continues to run moderate deficits. This isn’t just theory – it’s exactly how the U.S. handled its World War II debt overhang. The debt ratio fell from about 106% of GDP in 1946 to just 23% by the late 1970s, largely because the postwar economy grew robustly for decades (helped by a baby boom and productivity gains), while interest rates remained relatively contained. In fact, for most of the 1950s–60s, GDP growth outpaced the interest rate on government bonds, allowing debt from WWII to “become increasingly irrelevant as the economy grew,” as economist Paul Krugman puts it. High growth (plus some inflation and steady primary budget discipline) meant the U.S. “grew out” of its huge war debt without ever explicitly paying it off in the conventional sense.

Growth can reduce the debt burden through multiple channels. A larger GDP means a larger tax base (more revenue at any given tax rate) and usually less need for safety-net spending (as employment rises). Importantly, many investments financed by deficits can themselves stimulate growth or increase future productivity – for example, spending on infrastructure, education, research, and technology can yield higher output and incomes down the line, making the debt incurred worthwhile. The key, of course, is that deficits must be used for productive purposes rather than waste. This is the philosophy behind the Big Beautiful Bill: rather than indiscriminately borrowing to fund consumption, it focuses on measures intended to boost productive capacity or incentivize private investment (tax breaks for business investment, infrastructure modernization, energy development, etc.). The logic is that these policies will raise the economy’s supply potential (e.g. improved roads and ports reduce business costs; R&D leads to innovation; lower tax burdens spur entrepreneurship), allowing faster growth without igniting inflation. If successful, nominal GDP could grow faster than the additional debt incurred, leading to a lower debt/GDP ratio over time. In effect, the plan aims to outgrow the debt. As one supporter summarized, “We’re making the pie bigger, so even if our slice of debt grows in absolute terms, it becomes a smaller portion of the pie.”

The United States enjoys a unique advantage in attempting a growth-led fiscal strategy: its exorbitant privilege as issuer of the world’s primary reserve currency (the U.S. dollar). Because global demand for dollar assets is high, the U.S. Treasury can typically borrow at lower interest rates and in larger quantities than any other sovereign. Trillions of dollars are held by foreign central banks, investors, and institutions precisely because the dollar is seen as the safe asset. As Politico noted, much of world trade is conducted in dollars and foreign entities hold their savings in dollars, “so it is convenient for them to also own U.S. debt. Because demand for the dollar is strong, the U.S. federal government can run higher deficits than other countries.” This means the U.S. has more fiscal space to maneuver – markets are less likely to flee from U.S. bonds at the first sign of rising debt, compared to a smaller country with debt in someone else’s currency. In practical terms, America can afford to invest in its own economy through deficit spending to a greater degree (and for longer) without facing a funding crisis. This is not to say deficits don’t matter – but the threshold of “too much” is simply higher for the U.S. than for others, given the dollar’s global standing. As long as investors trust the U.S. will honor its debts and that the dollar will remain stable, there is considerable leeway for Washington to finance growth initiatives through borrowing. Federal Reserve cooperation is also relevant: the Fed can, if needed, purchase Treasuries (quantitative easing or yield-curve control) to keep borrowing costs manageable – a tool Japan has used extensively (more on that shortly).

A growth-oriented approach isn’t just a theory – there are historical and international precedents to examine. We’ve mentioned post-WWII America, but consider also Japan’s experience. Japan’s gross debt is over 250% of GDP – far higher than America’s – yet Japan has not faced a crisis, largely because its central bank (the BOJ) kept interest rates ultra-low for decades, and the government kept stimulating the economy to avoid deflation. By effectively capping bond yields (through massive BOJ bond-buying and later a formal yield-curve control policy), Japan has been able to service an enormous debt at negligible interest cost – giving it time to try to grow the economy out of stagnation. The results have been mixed (Japan’s growth has been anemic, though unemployment stayed low), but crucially, Japan never experienced the kind of spiraling debt crisis that many predicted, thanks in part to its ability to finance debt internally at low rates. This shows how a sovereign with its own trusted currency can sustain high debt if it maintains control over interest costs. The U.S., with far stronger growth dynamics than Japan, arguably has an even better chance at growing out of its debt, provided it manages inflation and keeps real interest rates below its growth rate. Former IMF economist Olivier Blanchard has highlighted this dynamic, noting that if r < g (real interest rate is less than growth rate), debt can be rolled over indefinitely without exploding. The current U.S. strategy – implicitly – is to ensure r < g through a combination of Fed policy and growth-friendly fiscal measures.

It’s important to stress that a growth strategy is not a license for unlimited debt; it must be executed prudently. The composition of deficit spending matters greatly. Debt used to fund investments that raise future productivity (infrastructure, education, technology, etc.) is far more likely to “pay for itself” over time than debt used for short-term consumption or politically popular giveaways that yield no economic return. For example, borrowing $200 billion to build modern transportation networks may increase GDP by more than $200 billion in the long run (via improved efficiency), whereas borrowing $200 billion for a temporary stimulus check might only boost GDP briefly and leave no lasting impact. The Big Beautiful Bill attempts to skew toward the former – it includes, for instance, funding for infrastructure and incentives for manufacturing (like semiconductor plants and energy projects) alongside the tax cuts. The hope is that these supply-side boosts will raise the economy’s capacity permanently. In theory, a growing, more productive economy will generate higher tax revenues organically, helping to bring deficits down in later years without draconian spending cuts or tax hikes. In effect, today’s deficits, if well-spent, are an investment in tomorrow’s prosperity.

Critics might call this wishful thinking, but it’s worth noting that even staunch fiscal hawks agree growth is a powerful debt reducer – they just doubt current policies will deliver enough growth. Nonetheless, with austerity politically DOA, growth is a viable (perhaps the only) path forward. As long as inflation remains in check (so that the Fed doesn’t slam on the brakes), a higher growth trajectory can materially improve U.S. fiscal health. Each additional percentage point of GDP growth yields tens of billions in extra revenue and a lower debt/GDP ratio. In the best case, a virtuous cycle forms: smart investments -> higher growth -> higher revenues + lower debt ratio -> improved market confidence -> lower interest rates -> easier debt sustainment, and so on.

The Big Beautiful Bill essentially stakes America’s fiscal future on being able to “outgrow” the debt, rather than cutting the debt. It’s a gamble, to be sure – but given the impracticality of austerity, it may well be a gamble worth taking, provided it’s managed carefully.

Global Case Studies: Austerity vs. Growth in Practice

To better understand the trade-offs, it helps to look at international case studies where countries faced high debt and chose different paths. These examples highlight the consequences of austerity and the potential of growth-focused strategies:

Greece (2010s Eurozone Debt Crisis): Greece offers a stark cautionary tale of austerity. After accumulating unsustainable debt (over 130% of GDP) and losing market access in 2010, Greece was forced by its EU creditors into drastic austerity measures in exchange for bailouts. The result was a deep depression: Greek GDP contracted by about 25%, and unemployment skyrocketed to 27% (over 50% for youth) at the peak. Successive rounds of spending cuts and tax hikes aimed to reduce the debt, but instead, the economy’s collapse worsened the debt ratio (since GDP fell so much). Social conditions deteriorated (one in five Greeks ended up in severe poverty), and the country suffered a “lost decade” of high unemployment. While Greece eventually regained modest growth, the austerity program is widely viewed as economically devastating, illustrating how cutting deficits in the midst of a slump can backfire. Importantly, Greece didn’t control its own currency (it was bound to the euro), so it lacked monetary flexibility – a key difference from the U.S. Still, the Greek case underscores that austerity can exact an enormous human and economic toll, and that debt crises are often solved only after growth returns, not solely through cuts.
United Kingdom (2010–2015 Austerity): After the 2008 financial crisis, the UK government undertook an austerity program from 2010 onward, aiming to tame deficits that had blown up to ~10% of GDP. While the UK did cut its deficit significantly, the austerity measures (budget cuts across many departments, welfare reductions, public sector pay freezes) are now seen to have hampered economic growth and public services. The country’s GDP growth in the early 2010s was tepid – an initial rebound in 2010 stalled once cuts kicked in. By one estimate, austerity left UK GDP about 2–3% smaller by 2015 than it would have been otherwise, and productivity growth never recovered to pre-2008 trends. The Office of Budget Responsibility (OBR) officially confirmed that austerity reduced GDP growth in the short term. On a human level, services like policing, local governments, and social care saw funding squeezed, leading to what some have called a “decade of decline” in the UK’s public infrastructure. Critics like economist Simon Wren-Lewis calculate the average British household lost thousands of pounds in income due to the slower growth path. Proponents argue the UK restored fiscal credibility, but politically the austerity experiment contributed to voter anger and upheaval (some link it to the Brexit vote and the fall of successive governments). The UK case illustrates that moderate growth and mild inflation post-2010 did more to reduce Britain’s debt/GDP than the budget cuts did, and that the cuts themselves carried painful costs. Notably, by the late 2010s, even conservative policy makers had largely abandoned talk of further austerity, implicitly recognizing its limits.
Japan (1990s–2020s “Persistent Stimulus”): Japan, confronted with economic stagnation and high debt after its 1980s asset bubble burst, took a very different approach: repeated fiscal stimulus and monetary easing over decades. Japan’s government ran deficits most years and accumulated gross debt above 250% of GDP – yet it avoided a debt crisis. How? Primarily through ultra-low interest rates enabled by the Bank of Japan. The BOJ kept policy rates near zero and directly bought Japanese Government Bonds (JGBs) on a massive scale, especially under Abenomics (after 2013). This kept Japan’s borrowing costs extremely low – 10-year JGB yields were held around 0% for years. As a result, even though debt was enormous, interest payments remained very modest (around ¥10 trillion annually, roughly constant for decades). With cheap financing, Japan could sustain big deficits that funded stimulus projects, infrastructure build-outs, and social programs aimed at keeping unemployment low and deflation at bay. The outcome was mixed: Japan’s growth remained anemic (~1% or less on average), and deflation persisted for a long time, but unemployment stayed low and living standards remained high. Crucially, Japan never “blew up” financially as some predicted – investors did not dump its debt en masse, largely because the BOJ backstopped the market. Japan’s debt/GDP eventually stabilized (albeit at a high level), and the country gained valuable infrastructure and maintained social cohesion. The lesson from Japan is that a rich, credible sovereign can carry very high debt for a long time if it maintains control over interest rates and if the debt is domestically held. The U.S. is not Japan – its growth potential is higher, but its inflation risk might also be higher – yet the Japanese experience shows that managing debt through low rates and continuous investment is feasible, if not ideal. It’s essentially the opposite of austerity: Japan bet on keeping the economy afloat at all costs, and while it now faces challenges as interest rates tick up, it has shown that a patient, growth-oriented approach can stave off crisis (albeit with the side effect of an overlarge central bank balance sheet).
United States Post-WWII: As mentioned, the U.S. after World War II is perhaps the clearest historical example of growing out of debt. The federal debt stood at roughly 119% of GDP in 1946 — higher than today’s level — following enormous wartime expenditures. Rather than attempt to pay down that debt through austerity, the U.S. relied on sustained economic growth and moderate inflation to reduce the debt burden relative to GDP. From 1947 to 1970, nominal GDP surged — powered by high birth rates, a manufacturing boom, technological progress, and expanding global trade — averaging around 7–8% annual nominal growth, while interest rates on government debt often remained below 4%. The government ran primary budget surpluses in many years, but more importantly, it invested heavily in long-term growth drivers: the interstate highway system, the GI Bill for education, public research institutions, and the space program. Meanwhile, the Federal Reserve kept Treasury yields capped in the late 1940s, and occasional inflation helped erode the real value of outstanding debt. By 1960, the debt had fallen to ~46% of GDP, and by the 1970s, to a postwar low of ~23%. This debt was not “paid off” in the conventional sense — it was absorbed by a rapidly growing economy and by continued global investor confidence in U.S. debt. This postwar era is often cited to argue that debt trajectories are not irreversible: if the growth rate of the economy exceeds the interest rate on debt (g > r), the debt-to-GDP ratio can decline even in the presence of ongoing borrowing. While the postwar boom was fueled by exceptional circumstances — including a young workforce and a global industrial monopoly — today's policymakers may have reason to believe that a comparable structural growth opportunity now lies in the emergence of artificial intelligence. AI has the potential to be a general-purpose technology on the scale of electricity or the internet, with transformative implications for productivity across nearly every sector — from healthcare to manufacturing, logistics, education, and professional services. If harnessed strategically, the AI revolution could unlock substantial real GDP growth over the next two decades, driving a wave of automation, optimization, and new business models. Unlike earlier booms tied to consumption or real estate, this wave could be investment-led and productivity-enhancing, boosting labor output, reducing service costs, and expanding the economy's capacity. In this light, strategic public investment in AI infrastructure, education, regulatory clarity, and digital infrastructure could replicate, in spirit, the kinds of growth-enabling policies seen in the postwar era. Moreover, if AI can raise long-run potential GDP by even 1–2 percentage points, it would significantly improve debt sustainability — precisely because debt ratios fall when growth outpaces borrowing costs. As with the post-WWII era, monetary-fiscal coordination will be critical: keeping interest rates below nominal growth via prudent Fed policy could preserve fiscal space while allowing the benefits of AI-led growth to materialize. In short, just as America once grew out of a massive wartime debt through deliberate public investment and technological innovation, the coming age of AI may offer a similar — though not identical — opportunity. Policymakers must recognize that we are not bound to repeat past mistakes of austerity. Instead, if the AI era is embraced strategically, it could represent a new golden age of productivity-led debt stabilization — one driven not by sacrifice, but by smart, future-focused investment.

In sum, global cases show that austerity can come at a high cost and may fail to fix debt problems, whereas growth-oriented strategies, backed by accommodative monetary policy, can alleviate debt burdens over time. The U.S. has the advantage of learning from these examples – aiming to capture the positives of the growth approach (as in post-WWII U.S. or even Japan’s avoidance of crisis) while avoiding the pitfalls (Japan’s ultra-slow growth, or uncontrolled inflation). The next section addresses a common objection: the idea that governments must budget like households – an analogy proponents of the growth strategy reject.

Rebutting the “Household Budget” Analogy

A frequent argument in budget debates is that the government should manage its finances like a household – tightening its belt when in debt. Proponents of austerity often invoke this analogy, warning that “you can’t live beyond your means forever” or “America must balance its checkbook.” However, economists (including centrists and even some conservatives) widely agree that government finances are fundamentally different from household finances. A sovereign government, especially one like the U.S. with its own currency, is not constrained in the same way a family or business is. Here’s why the household analogy is flawed:

Monetary Sovereignty: The U.S. federal government issues the U.S. dollar – it cannot run out of money in the technical sense. It finances debt by creating dollars (in coordination with the Fed) or by borrowing dollars from investors who have few safer alternatives. A household or business, by contrast, can’t print money and can go bankrupt if it can’t pay its debt. The U.S. can always meet a dollar-denominated obligation by virtue of this monetary sovereignty (though doing so excessively could devalue the currency). As former Fed Chair Alan Greenspan once noted, “The United States can pay any debt it has because we can always print money to do that.” Default in nominal terms can only happen by political choice (as nearly occurred in debt-ceiling standoffs), not by necessity. This is a crucial difference – it means the government has much more time and leeway to deal with debt, and it should focus on economic impacts (like inflation or growth) rather than arbitrary debt levels.
The Dollar’s Reserve Status: Not only can the U.S. print money, but the world actually wants its money. As discussed, global demand for dollar assets means the U.S. can finance deficits at low cost. Households do not have millions of strangers eager to buy their personal IOUs – but the U.S. Treasury does, via international and domestic investors treating Treasurys as a risk-free asset. This is why analogies like “the U.S. is maxing out its credit card” are simplistic. In reality, the U.S. is the issuer of the credit card and everyone wants one. As long as the dollar remains the chief global currency, the U.S. can sustain higher debt without losing creditor confidence. This is not a blank check to be irresponsible, but it means the government’s debt capacity is far beyond that of any household or even most other countries. The risk of “insolvency” is essentially nil; the real risk is inflation or currency depreciation if too much money is printed – but that’s a different mechanism than a household facing bankruptcy.
Investment and Growth Feedback: Governments also have a unique ability to influence their income (GDP) through spending, in a way households cannot. If a family heavily in debt cuts its spending, that might be wise individually; but if a government heavily in debt cuts spending, it can shrink the economy and thus reduce its own future revenues (since tax receipts fall in a weaker economy). Likewise, strategic government spending can boost growth (and thus tax revenue), partially paying for itself. This dynamic has no household analogue. A household tightening its belt doesn’t make its income go down (it might even increase if they take an extra job), but a government tightening its belt can make national income go down. Thus, what’s prudent for a family during hard times (spending less) might be counterproductive for a government if it drags the economy into recession and perversely worsens the debt ratio. This is one of the core insights of Keynesian economics and Modern Monetary Theory (MMT): unlike households, governments with idle economic capacity can often spend their way to higher income (up to the point of full employment). In other words, sometimes increasing the deficit can make future deficits smaller by catalyzing growth.
No Finite Horizon: Households eventually must pay off debts (in retirement or to pass on estates) and have finite lifespans. The U.S. government, in theory, has an infinite horizon – it doesn’t need to extinguish its debt, just manage it. The U.S. has carried debt continuously since 1776, and no one expects it to fully repay it one day; instead, the goal is to ensure it remains sustainable (interest costs manageable, debt ratio stable or falling over long run). This is more akin to a corporation that rolls over debt perpetually as it grows. If the economy keeps growing, even a permanent debt can become relatively small over time. This perspective shift – from “paying down debt” to “growing out of debt” – is key. Many economists argue that focusing on the debt-to-GDP ratio is more important than the absolute debt level. A household cannot outgrow its debt (its income is relatively fixed), but a nation can.

In short, treating the federal budget like a household budget is a false equivalence that can lead to damaging policy. As Politico humorously noted, “the government’s finances are not like a household’s – unless your family happens to issue its own currency and that currency is treated as a global reserve asset.” The U.S. government’s priorities should thus be to maximize economic health and manage inflation, rather than aiming for arbitrary debt ratios or deficit numbers that have little meaning outside of economic context. This is not to say deficits don’t matter – but what matters is the capacity of the economy to handle them, not a simple analogy to household debt.

Modern Monetary Theory (MMT) further contends that a sovereign currency issuer like the U.S. is only constrained by inflation, not by revenue per se. In the MMT view, the government should use its fiscal powers to ensure full employment and invest in the country, and only pull back when inflation is too high. Deficits, in and of themselves, are seen as a policy tool (to add purchasing power to the economy), not a moral failing. While MMT is controversial, it has influenced the debate by emphasizing that the U.S. cannot “go broke” in dollars and that the true limits are resource-based (do we have the labor, capital, materials to absorb government spending without price spikes?). Even mainstream economists acknowledge there is some truth to this – the U.S. had multi-trillion-dollar deficits during the pandemic without immediate fiscal crisis; the constraint showed up when inflation surged, not when some debt threshold was crossed. Thus, the household analogy is not just misleading, it can be dangerously wrong if it pushes policymakers to cut spending in a downturn (which is like a doctor making a sick patient weaker to cure them). A more apt analogy might be that the federal government is the doctor for the economy, not a patient – its role is to manage the economy’s health, sometimes administering stimulus, sometimes fiscal restraint, but always with the aim of overall economic well-being, not simply balancing books for the sake of it.

Potential Criticisms & Safeguards of the Growth Strategy

Embracing a growth-led approach to debt doesn’t mean throwing caution to the wind. There are valid criticisms and risks to acknowledge, along with potential safeguards to make this strategy sustainable:

1. Inflation Risk: The most immediate concern with expansionary fiscal policy (especially amid already high debt) is inflation. If the government overstimulates demand beyond what the economy can produce, the result will be rising prices – effectively eroding living standards and forcing the Fed to jack up interest rates (which would worsen the debt problem). Critics worry that the Big Beautiful Bill, on top of an economy at full employment, could fuel new inflationary pressures. This risk is real; however, the bill’s proponents argue much of its focus is on supply-side growth (tax cuts to incentivize work and investment, removing regulatory bottlenecks, etc.) that should increase productive capacity. To mitigate inflation, it’s crucial that fiscal and monetary authorities coordinate: the Federal Reserve can adjust interest rates to cool demand if needed, while Congress can modulate the pace of stimulus. In essence, guardrails on inflation must remain – if inflation starts running persistently above the Fed’s target (~2%), policymakers might need to temper deficits or target spending in ways that don’t overstoke demand (for instance, spending directly on increasing supply, like funding semiconductor fabs or energy production that alleviate shortages). In 2021–2022, the U.S. learned that too much stimulus (fiscal + monetary) can overheat inflation. The lesson for a growth strategy is clear: monitor inflation like a hawk. Use the output gap and other indicators to judge when to pull back. One could envision a policy framework where deficits are allowed to run hot until, say, core inflation exceeds a certain level or unemployment drops below a threshold, at which point either automatic stabilizers or Fed tightening cool things off. Essentially, flexibility is key – growth spending should be dialed up or down based on economic conditions, not locked in regardless of inflation.

2. Quality of Investments: Another criticism is that deficit spending is often driven by politics rather than economics, leading to wasteful projects or boondoggles. If borrowed funds are squandered on “bridges to nowhere” or corporate giveaways that don’t create jobs, then the debt incurred won’t be offset by future economic gains. To address this, a growth-focused strategy should include rigorous cost-benefit analysis of spending and tax incentives. For example, infrastructure projects should be selected based on highest returns (fixing congested highways, upgrading ports, expanding broadband – things that clearly boost productivity). Tax incentives should be structured to actually induce new activity (e.g. investment tax credits that only reward incremental investments, not ones that would’ve happened anyway). Transparency and oversight (perhaps an independent infrastructure bank or committee) can ensure money is channeled to truly productive uses. In the Big Beautiful Bill’s case, while the bulk is tax cuts, there are indeed provisions like infrastructure funding and R&D support – these should be protected and efficiently executed, as they represent the “payoff” part of the plan. Furthermore, avoiding asset bubbles is important: ultra-loose policy can sometimes inflate housing or stock bubbles. Macroprudential measures (like tighter regulation on mortgage lending if a housing boom gets too frothy) might be needed in parallel, so that growth does not manifest in unsustainable asset inflation.

3. Long-Term Fiscal Discipline: Even if we prioritize growth now, the U.S. should keep an eye on long-term debt dynamics. A credible growth strategy can be complemented by commitments to fiscal discipline in the out years. For instance, lawmakers could enact a future debt-to-GDP target that automatically adjusts spending or revenue if the ratio isn’t on a desired path by, say, 2030. This is different from a near-term balanced budget rule (which would be counterproductive); instead, it’s a medium-term framework that reassures creditors that the debt ratio will stabilize. One idea floated by some economists is indexing certain spending programs or tax provisions to debt/GDP – for example, if debt/GDP in 2030 exceeds 120%, a set of phased-in tax increases or restrained spending growth could kick in, unless GDP growth has been so robust that the ratio is falling. Essentially, conditional triggers could act as a safety valve. Another safeguard is focusing on “primary balance” (budget balance excluding interest) over the long run. If we can use growth now to greatly expand GDP, then in a decade we could aim to converge toward a primary balance that stabilizes debt. The Peterson Foundation notes that even after WWII, the U.S. generally ran near-balanced primary budgets during the high-growth years – meaning they didn’t compound the problem once growth picked up. Similarly, the U.S. could commit that once its trend growth is restored and unemployment low, it will not further increase the debt/GDP materially (i.e., deficits would only be allowed to equal interest payments at that point). Such signals can help maintain market confidence that the U.S. isn’t on an ever-accelerating debt path.

4. Guarding the “Exorbitant Privilege”: The U.S. must also take care not to undermine the very advantages (reserve currency, trust in Treasury bonds) that allow it to safely run higher deficits. That means avoiding actions that would call into question the full faith and credit of the government – for example, the destructive debt-ceiling standoffs must be averted so investors never doubt U.S. willingness to pay. It also means being mindful of external balance: if deficits were to cause an overheating economy, it could widen trade deficits and put downward pressure on the dollar. A gradual dollar decline isn’t catastrophic (it can even help U.S. exporters), but a loss of reserve currency status would be. To maintain confidence, the U.S. should strengthen relationships with allies and trading partners, ensure Treasurys remain the world’s safest asset (perhaps issuing more long-term bonds to lock in low rates, and maintaining the rule of law and political stability). Additionally, while using the Fed to help with debt is acceptable to a point, outright monetizing of debt in a runaway fashion would spook markets (leading to inflation and flight from the dollar). So the Fed’s independence and commitment to price stability must remain intact. Essentially, the privilege of easy borrowing must not be abused – the growth strategy should be seen not as profligacy, but as savvy investment, and communicated as such to the public and markets.

In summary, the growth path is not without risks, but they can be managed. By closely watching inflation, ensuring money is spent on truly productive areas, planning for a pivot to fiscal moderation once growth is achieved, and maintaining the trust of markets and the public, the U.S. can maximize the chances that an investment-led strategy pays off. The alternative – entrenched austerity – carries its own grave risks (economic stagnation, social unrest, missed opportunities), so it becomes a matter of smart risk management on the growth side.

Conclusion & Policy Implications

The United States stands at a fiscal crossroads. On one side is the familiar call for austerity – to urgently cut deficits through painful spending cuts or tax increases in order to stabilize debt. On the other side is the case we have laid out for growth over austerity – to leverage America’s strengths by investing in the economy, even if it means higher deficits in the short term, with the goal of fostering robust growth that makes the debt burden more manageable over time. Given the analysis above, the growth-focused strategy emerges as not only the more palatable option, but arguably the only realistic path forward.

Imposing aggressive austerity now would likely do more harm than good. With interest costs already over $1 trillion and essential programs crowding the budget, a crash diet to hit, say, a 3% deficit of GDP would necessitate draconian cuts that could tip the economy into recession and fray the nation’s social contract. The experiences of the U.K. and Greece show that such cuts bring significant economic pain – slower growth, higher unemployment, deteriorating public services – and can ignite public backlash without even guaranteeing an improvement in debt dynamics (in Greece’s case, austerity made debt/GDP worse initially). In the U.S., where political divisions already run deep, austerity could be socially destabilizing – large cuts to Medicare/Social Security or other benefits would hit millions of people’s livelihoods and could provoke a fierce populist response. Indeed, austerity policies in other countries have often been a “gift to populists,” fueling the rise of anti-establishment movements.

By contrast, a well-designed growth strategy offers a more hopeful narrative: rather than managing national decline through constant belt-tightening, it seeks to renew American prosperity and competitiveness. The “Big Beautiful Bill” – notwithstanding debate over its details – symbolizes a bet on American innovation and productivity. If the bet pays off with even moderately higher growth, the fiscal outlook can improve markedly. For example, if the U.S. can boost its long-run nominal GDP growth from ~4% to ~5% (through a combination of real growth and controlled inflation) while keeping average interest rates on its debt around 3–4%, the debt-to-GDP ratio would eventually stabilize or even fall. Growth also tends to ease other budgetary pressures (fewer people needing unemployment benefits, higher tax receipts, etc.). It’s worth recalling that in the late 1990s, the last time the U.S. balanced its budget, it was largely the economic boom (strong growth, rising incomes) – not just legislative restraint – that yielded surpluses. We should heed that lesson: the surest way to reduce deficits in the long run is to nurture a dynamic, expanding economy, not to strangle the budget in pursuit of arbitrary targets.

That said, the growth strategy is not a free lunch. It demands discipline of a different sort – discipline in policy execution and future commitments. Policymakers must be vigilant that the additional debt incurred is serving a true purpose. They must also be prepared to make course corrections (for instance, modest tax adjustments down the road, or entitlement reforms that don’t hurt the vulnerable) once the economy is on a stronger footing, to lock in the gains. In essence, “grow now, adjust later” could be a mantra – as opposed to the self-defeating “cut now, shrink now” of austerity. The U.S. can also take incremental steps that both parties often agree on: improving tax compliance and closing loopholes (which raise revenue without hurting growth), modest reforms to slow healthcare cost growth (bending the Medicare cost curve saves money in the long run), and immigration reform (which can expand the labor force and thus growth). Such measures, paired with the investment agenda, would enhance the overall fiscal outlook.

It is also critical to maintain credibility through this process. The world’s confidence in U.S. Treasurys and the dollar is a priceless asset – one earned over decades of relative stability. The U.S. should signal that it takes its obligations seriously (no more debt-ceiling dramas that toy with default) and that it has a long-term plan for fiscal health, even if that plan is centered on growth. Communication from leaders should emphasize: “We are not ignoring the debt; we are addressing it in the most sustainable way – by growing our economy. We will not let debt spiral; we will ensure our economy grows faster. And we stand ready to make tough choices in the future if our growth projections don’t materialize.” Such messaging can help counter the narrative of the U.S. as fiscally reckless.

In conclusion, the United States’ “exorbitant privilege” gives it a rare opportunity to choose investment over austerity at a critical juncture. Rather than viewing the national debt as an anchor that must be dragged along by cutting loose everything else, the U.S. can transform it into a springboard – using strategic debt-financed investments to launch the economy onto a higher growth path. This approach recognizes a fundamental truth: a nation cannot shrink itself to greatness. Yes, deficits and debt carry risks, and yes, interest costs need to be watched. But an excessive fear of debt that leads to underinvestment in the country’s future is arguably a greater risk. With borrowing costs still relatively low by historical standards and pressing needs (from aging infrastructure to the energy transition to global competition in tech), now is the time for smart, targeted spending that yields growth dividends, not for knee-jerk austerity.

The “grow out of it” strategy, as embodied by the Big Beautiful Bill, is essentially a statement of confidence – confidence that the United States economy, if properly empowered, can outgrow its debt and thrive just as it has in past generations. Policymakers should embrace that optimism, while coupling it with prudent safeguards. If successful, the reward will be a stronger economy, a more manageable debt load, and the preservation of America’s financial leadership. In the end, growth is the only sustainable way forward because it enlarges the pie for everyone and makes fiscal challenges far more tractable. As the saying goes, the best way to get out of a hole is to stop digging and start climbing. For the U.S., climbing means investing in growth – an approach that, if executed wisely, will leave austerity’s “hole” far below as the nation ascends to new economic heights.

Sources: The analysis above draws on a range of data and expert commentary, including CBO projections of U.S. deficits and debt, interest cost trends from the Peterson Foundation, and warnings from prominent figures like Ray Dalio and Peter Orszag. The rationale for growth over austerity is informed by historical examples (post-WWII U.S. debt reduction via growth) and international case studies such as Greece’s austerity-induced collapse and Japan’s debt stability under low rates. Policymaker quotes and market reactions are referenced from recent reports (e.g. Politico’s account of investor concerns and Moody’s actions). These sources collectively underpin the conclusion that while fiscal prudence is important, a strategy focusing on expansion and investment – not austerity – stands out as the pragmatic choice for the U.S. in 2025 and beyond.

References

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