In a striking reversal of his previous views, Jared Bernstein—a former chair of President Joe Biden’s Council of Economic Advisers—has issued a sobering warning about the trajectory of the United States’ national debt. Bernstein’s recently published op-ed in the New York Times draws a direct parallel between the nation’s rising debt and the student loan crisis that has afflicted millions of Americans, sounding alarm bells not only for policymakers but for financial markets as well.
From Dove to Debt Hawk: Bernstein’s Wake-Up Call
For years, Bernstein was considered a “dove” on budget deficits, maintaining that moderate government borrowing wasn’t inherently dangerous and, often, that attempts at immediate fiscal austerity were counterproductive. However, his recent statements mark a significant shift—one triggered by what he calls “dangerous budget math.”
Bernstein notes that up until recently, the U.S. was able to safely carry large deficits because the economy (measured by GDP growth) was expanding faster than the rate at which the government had to pay interest on its debt. This situation is reminiscent of recent graduates who are able to make their monthly student loan payments, provided their incomes keep pace with or outstrip their rising loan bills.
But as Bernstein warns, just as with borrowers whose debt outpaces their income, the U.S. is now at risk. When debt service costs start growing faster than national income, financial stress mounts—and the likelihood of a “debt shock” increases dramatically.
The Anatomy of a Debt Shock
Bernstein doesn’t mince words about the stakes. Pointing to the student loan crisis as a cautionary tale, he highlights data showing the number of Americans with student debt more than doubled—from 21 million to 45 million—between 2000 and 2020. In that period, total student loan obligations more than quadrupled to $1.8 trillion, swelling faster than any other form of household debt and leading to an explosion in delinquencies and plummeting credit scores.
The federal government, argues Bernstein, is now on a worryingly similar path.
For most of the past two decades, the inflation-adjusted yield on U.S. 10-year Treasuries was below the country’s expected economic growth rate. This benign environment allowed debt to grow without undermining fiscal stability. However, pandemic-era stimulus, higher government spending, and the ensuing inflation have fundamentally changed the equation. The yield on Treasuries and expected economic growth have now converged just above 2%, sharply raising the government’s borrowing costs.
The Roles of Policy: Trump Tariffs and Tax Cuts
While Bernstein’s critique is primarily forward-looking, he doesn’t shy away from attributing causes. Though some observers note recent expansions under the Biden administration, Bernstein homes in on former President Donald Trump’s economic legacy—specifically, tariffs and significant tax cuts—as major contributors.
He argues that high tariffs can slow growth and fuel inflation, thereby pushing up both interest rates and the cost of servicing government debt. On the other hand, tax cuts—especially those unfunded by corresponding expenditure reductions or revenue increases—can drive debt higher, leaving the country more exposed to adverse fiscal shocks.
What’s Next? Risks to Spending, Revenue, and the Market
Today, the interest the U.S. pays on its debt exceeds federal spending on both Medicare and defense—two of the government’s largest and most politically sensitive programs. According to the Committee for a Responsible Federal Budget, interest payments are projected to reach $1 trillion in 2025, making it the government’s second-largest outlay after Social Security.
Looking further ahead, both past and anticipated policies—including Trump-era tax cuts and ongoing spending—are set to push the debt-to-GDP ratio beyond its previously unmatched post-World War II peak. According to recent analysis by Goldman Sachs, the current combination of large primary deficits and elevated real interest rates have put the debt and interest expense on “much steeper trajectories than appeared likely last cycle,” rendering the status quo unsustainable.
Economic Analysis and Outlook
From an economic perspective, the risks associated with spiraling government debt are multi-dimensional:
- Rising Interest Costs: Higher interest expenses crowd out spending on societal priorities such as infrastructure, healthcare, and education, with potential knock-on effects for economic growth.
- Potential for Fiscal Crisis: If markets lose faith in the U.S. government’s willingness or ability to manage its finances, borrowing costs could rise further, potentially sparking a fiscal crisis.
- Policy Dilemmas: To avoid a sudden debt shock, Bernstein suggests Congress needs to establish “break-glass moments” with pre-determined, binding fiscal responses—such as automatic spending cuts or revenue increases if debt metrics hit dangerous thresholds.
For investors, policymakers, and market participants, the takeaway is clear: the U.S. debt outlook has fundamentally changed, and the risks of inaction loom larger than ever.
