Not the top priority.

Photographer: Maria Tama/Getty Images

How to Tell Facts About the Debt From Political Hype

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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Recent remarks by Donald Trump, the presumptive Republican presidential nominee, have turned the spotlight back to the U.S.’s $18 trillion federal government debt. The attention follows a period of substantial decline in the budget deficit that countered claims the country was heading rapidly toward debt Armageddon.

QuickTake U.S. Budget Deficit

Here are key facts to remember as you assess what is likely to be a loud and contentious political conversation on debt:

  1. There are five major ways to reduce the burden of debt: by growing faster, thus generating incremental resources for debt servicing while maintaining and enhancing living standards; by raising more tax revenue and earmarking it for debt repayment; by cutting government spending and diverting the funds to higher debt servicing, including prepayments; by defaulting on contractual debt terms; and through financial engineering that captures interest-rate arbitrage opportunities, buys back debt cheaply, improves the mix of issued securities and delivers greater financial efficiency.
  1. There are practical limitations to the ability of these approaches to deliver big results in the short run. As a result, there is no realistic, orderly manner to eliminate the stock of national debt within just a few years. Default is extremely costly, disrupting both public and private capital flows while sharply increasing borrowing costs. There is a limit to what financial engineering -- a strategy that is gradual and opportunistic -- can achieve. Significant fiscal adjustment, be it via sharply higher tax rates for almost everyone or draconian expenditure cuts, risks devastating growth and rendering the overall debt burden even harder to sustain. And it is not easy to generate an immediate growth spurt, especially when the world economy is fighting structural headwinds.
  1. Given the other ailments of the post-recession economy, it isn’t easy to argue that a sharp reduction in the national debt should be an immediate, standalone priority, and it does not belong among the three top urgent economic goals for the next administration. Although the longer-term trajectory of debt should be kept under close scrutiny and contained, there is no evidence that the U.S.’s existing stock of federal debt is a major problem. Borrowing costs are extremely low. The U.S. has access to abundant financing. And unlike many developing countries, it has historically issued almost no debt that is denominated in a foreign currency.
  1. The focus on debt should not divert attention from the need for greater infrastructure spending, both through public projects and public-private partnerships. The potential gains far exceed the incremental cost of debt servicing, especially with such low interest rates. Infrastructure shortfalls are already holding back productivity, cutting into actual and potential growth and, in some cases, causing social difficulties.
  1. The best way to deal with the country’s debt is by unleashing the higher and more inclusive growth that the U.S. is capable of, and by bolstering its future potential. This involves addressing structural impediments to growth, not just by plugging infrastructure gaps but also through pro-growth tax reform and better labor market retooling. It also requires countering the excessive worsening of inequality, which aggravates the problem of deficient aggregate demandby channeling the incremental income to the rich who have a lower marginal propensity to consume. In addition, steps should be taken expand the options for alleviating the crushing burden of student debt and to lead a more effective global policy coordination effort.

Rather than a narrow focus on federal debt, the presidential candidates need to lead a national economic debate on the comprehensive growth strategy that Congress should be implementing. Otherwise, political polarization on Capitol Hill will further undermine the country’s growth performance, erode future potential, and turn debt from mere fodder for political sound bites to a hard-to-solve problem for future generations.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net