Interest rates are telling us that the debt is too low: that there are too few safe assets in the world, and that more U.S. Treasury debt would be very valuable in this world: Alan J. Auerbach, William G. Gale, and Aaron Krupkin: THE FEDERAL BUDGET OUTLOOK: EVEN CRAZIER AFTER ALL THESE YEARS

The question of whether the U.S. national debt is too high—and of what it should be—is a very knotty one. Interest rates are telling us that the debt is too low: that there are too few safe assets in the world, and that more U.S. Treasury debt would be very valuable in this world in which nobody trusts private sector organizations to create AAA assets, for which the demand is high. But asset quantities relative to historical norms and policy projections are telling another story. Is this one of those times when we should listen to financial markets’ judgments? Or is this one of those times when we should disregard them? Alan J. Auerbach, William G. Gale, and Aaron Krupkin: THE FEDERAL BUDGET OUTLOOK: EVEN CRAZIER AFTER ALL THESE YEARS: “New Congressional Budget Office (CBO) projections… prospect of routine trillion-dollar deficits… underlying problem is even more serious….

…First, the projections assume that the economy is at full employment, on average, over the next decade. If (when?) we face a recession, the medium-term fiscal outlook may look significantly worse. Second, under a “current policy” scenario similar to CBO’s alternative fiscal scenario–in which policy makers routinely extend temporary provisions–we project a debt-GDP ratio of 106.5 percent in 2028, which would be the highest ratio in U.S. history. This compares to CBO’s current-law debt-GDP projection of 96 percent in that year. Third, the situation only gets worse after the first decade. Under current policy, we find that to ensure the debt-GDP ratio 30 years from now does not exceed the current ratio would require a combination of immediate and permanent spending cuts and/or tax increases totaling 4.0 percent of GDP. This represents about a 21 percent cut in non-interest spending or a 24 percent increase in tax revenues relative to current levels. To put this in perspective, the 2017 tax cuts and 2018 spending deals will raise the deficit by slightly more than 2 percent of GDP in 2019. The required adjustments to keep long-term debt at its current ratio to GDP are about twice as big and in the opposite direction…