The United States finds itself at a critical juncture, facing a national debt of unprecedented scale in peacetime. As of early 2025, the total national debt exceeds $36.2 trillion, with the debt-to-GDP ratio hovering around 124%, a level last consistently seen only in the immediate aftermath of World War II [1, 2]. This towering figure casts a long shadow over the nation’s economic future, raising urgent questions about its sustainability and the path forward. While the U.S. has a history of managing significant pay off his debts</span></span></div><div class=term-number>3.</div><div class='dd'><span class=definition>a state of owing - <span class=example>deeply in debt</span></span></div><div class=term-number>4.</div><div class='dd'><span class=definition> the common-law action for the recovery of money held to be due</span></div></div><!-- mw-group end --><div class=break></div></div><!-- mw container end --></div><div class=glossaryTooltipMoreLinkWrapper><a class=glossaryTooltipMoreLink href=https://taxproject.org/glossary/debt/ rel="nofollow" >Term details</a></div>" data-mobile-support="0" data-gt-translate-attributes='[{"attribute":"data-cmtooltip", "format":"html"}]' tabindex='0' role='link'>debt burdens, the current challenge is distinct in its magnitude and the underlying structural imbalances driving it. As in the old adage “When you’re in a hole, first step is to stop digging” – there is gaining recognition of the scope and scale of the challenge. Understanding the perils of this high debt and the various strategies available for its reduction is crucial for navigating America’s fiscal future.
The Current Debt Landscape and its Dangers
The current debt level is not merely a number; it represents a fundamental imbalance between federal spending and revenue. Projections indicate that, without significant policy changes, federal debt held by the public could rise to 156% of GDP by 2055 and 206% by 2075 [3]. This trajectory is driven primarily by increasing outlays on major entitlement programs like Social Security and Medicare, coupled with surging net interest costs and a revenue stream that isn’t keeping pace with expenditures [3].
The dangers associated with such high and rising national debt are multifaceted and can have profound impacts on the economy and the lives of ordinary Americans:
- Slow Economic Growth: High government borrowing can “crowd out” private investment. When the government demands a large share of available capital, it can drive up interest rates, making it more expensive for businesses to borrow and invest in job creation, innovation, and expansion. This ultimately dampens long-term economic growth and reduces wages [3, 4]. Studies have indicated a statistically significant negative relationship between high federal debt and economic growth [4].
- Inflation and Devaluation of the Dollar: While not a direct cause-and-effect relationship, persistently large deficits financed by money creation can increase the money supply without a corresponding increase in goods and services, leading to inflationary pressures. Inflation erodes purchasing power, diminishing the value of savings and making everyday goods and services more expensive for households [4, 5]. In extreme scenarios, a loss of confidence in the dollar due to fiscal instability could lead to its devaluation, further exacerbating inflation and reducing America’s global standing [4].
- Higher Interest Rates: A growing national debt means the government must borrow more, increasing demand for loanable funds. This puts upward pressure on interest rates, not just for the government but also for consumers and businesses. Higher interest rates translate to more expensive mortgages, car loans, and business credit, further dampening economic activity [3, 4].
- Higher Debt Service Crowding Out Other Spending: As the debt grows and interest rates rise, a larger portion of the federal budget must be allocated simply to pay interest on the existing debt. In 2024, the U.S. spent $1.1 trillion on interest, nearly doubling from five years prior, surpassing spending on national defense [6]. This rapidly increasing debt service limits the government’s flexibility to invest in crucial areas like infrastructure, education, research and development, and national security, which are vital for future prosperity [3, 4].
- Risk of a Fiscal Crisis: Perhaps the most severe, albeit less predictable, danger is the risk of a fiscal crisis. This occurs when investors lose confidence in the government’s ability or willingness to manage its debt, leading to an abrupt increase in interest rates, a collapse in bond prices, and widespread economic disruption. Such a crisis could jeopardize the dollar’s status as the world’s reserve currency, making it exceedingly difficult for the federal government to borrow and fulfill its essential functions [4].
Historical Paths Out of Debt: Lessons from the Past
Despite the daunting nature of the current debt, the United States has successfully reduced significant debt burdens at various points in its history. These periods offer valuable, albeit not perfectly transferable, lessons.
Period | Initial Debt-to-GDP (Approx.) | Final Debt-to-GDP (Approx.) | Key Strategies Employed |
---|---|---|---|
Post-Revolutionary War (late 1700s – early 1800s) [7] | Significant, but variable | Reduced substantially | Fiscal consolidation, establishment of federal credit, tariffs, land sales. |
Post-War of 1812 (1815-1835) [7] | ~16% (1815) | 0% (1835) | Sustained budget surpluses, significant land sales, spending cuts, strong political will to eliminate debt. |
Post-Civil War (1865-early 1900s) [7] | ~31% (1865) | ~3% (early 1900s) | Economic growth, deflation, consistent budget surpluses, relatively frugal government spending. |
Post-World War II (1946-1974) [7, 8] | 117.5% (1946) | ~23% (1974) | Rapid economic growth, primary budget surpluses, “surprise” inflation, financial repression (low-interest rate policies by the Federal Reserve). |
Late 1990s (1993-2001) [7] | ~66% (1993) | ~56% (2001) | Economic boom (dot-com era), fiscal discipline (tax increases, spending restraint), “peace dividend” (reduced defense spending), budget surpluses. |
The most relevant historical parallel to today’s situation is the post-World War II era, where the debt-to-GDP ratio was even higher than it is currently. While significant economic growth played a role, it was complemented by other factors like sustained budget surpluses, unexpected inflation, and periods of financial repression [8].
Ways Out of Debt, US Options
Reducing the U.S. national debt to a manageable amount (Roughly 20%-50% of GDP) would require a combination of difficult and politically challenging measures. Here are eight potential strategies:
1. Increase Taxes
How it would work: This involves directly increasing government revenue. Various approaches could be employed:
- Raising Income Tax Rates: Both individual and corporate income tax rates could be increased. For individuals, this could mean higher marginal rates across income brackets or specifically for high-income earners. For corporations, reversing some recent tax cuts would increase federal revenue.
- Implementing a Value-Added Tax (VAT): A VAT is a consumption tax levied at each stage of production and distribution. Many developed countries use VATs, and a broad-based VAT in the U.S. could generate substantial revenue [9].
- New Payroll Taxes: Expanding the base of earnings subject to Social Security taxes or increasing the payroll tax rate could bolster these critical programs and contribute to overall revenue.
- Eliminating or Limiting Deductions: Reducing tax breaks, such as itemized deductions or certain tax preferences, broadens the tax base and increases effective tax rates for many taxpayers [9].
- “Sin Taxes” or Carbon Taxes: Taxes on goods like tobacco, alcohol, or carbon emissions could provide revenue while potentially discouraging certain activities.
Challenges: Tax increases are often politically unpopular and can face strong opposition from various interest groups and taxpayers concerned about their impact on economic growth and personal income.
2. Lower Spending (Austerity)
How it would work: This involves reducing government expenditures across the board.
- Mandatory Spending Reform: The largest portions of the U.S. budget are mandatory programs, primarily Social Security, Medicare, and Medicaid. Reforms could include adjusting eligibility ages, altering benefit formulas, or establishing caps on federal funding for these programs. Given the aging population, these reforms are often cited as critical for long-term fiscal sustainability [3, 9].
- Discretionary Spending Cuts: This category includes defense spending, education, infrastructure, scientific research, and other government operations. Reductions could involve limiting new projects, cutting personnel, or reducing funding for specific agencies. For example, options include reducing the Department of Defense budget or cutting funding for international affairs programs [9].
- Improving Efficiency and Reducing Waste: Efforts to streamline government operations, reduce improper payments, and combat fraud and abuse can contribute to savings, though often not on the scale required to significantly impact the overall debt.
Challenges: Spending cuts, especially to popular entitlement programs or critical services, are intensely debated and politically difficult due to their direct impact on citizens and various sectors of the economy.
3. Economic Growth
How it would work: Rather than directly cutting spending or raising taxes, this strategy focuses on growing the economy faster than the debt. As Gross Domestic Product (GDP) expands, the debt-to-GDP ratio naturally decreases, and a larger economic pie generates more tax revenue even with existing tax rates.
- Investing in Productivity: Government investments in infrastructure (roads, bridges, broadband), education, and research and development (R&D) can boost long-term productivity and innovation.
- Pro-Business Policies: Policies that foster a favorable environment for businesses, such as regulatory reform, reduced bureaucratic hurdles, and incentives for private investment, can spur economic activity.
- Trade Liberalization: Expanding trade opportunities can lead to increased exports, economic growth, and job creation.
Challenges: While desirable, relying solely on economic growth is often insufficient, especially with very high debt levels. Sustained high growth rates are difficult to achieve and maintain, and the benefits can take time to materialize. The post-WWII debt reduction showed that growth alone wasn’t enough; it required accompanying fiscal surpluses and other factors [8].
4. Inflation (Devalue Dollar)
How it would work: This involves allowing or actively encouraging a higher rate of inflation. Inflation erodes the real value of existing debt, particularly fixed-rate debt, because the government repays creditors with dollars that are worth less in real terms. Many consider this an indirect tax as it is a willful means of devaluing dollar and reducing the buying power of citizens savings. However, this maybe more palatable to politicians as they don’t have to be blamed for raising taxes.
- Monetary Policy: While central banks primarily target price stability, a more permissive stance towards inflation, or even policies that actively increase the money supply, could lead to higher inflation.
- Fiscal Stimulus: Large, debt-financed fiscal stimulus without corresponding increases in productive capacity can also fuel inflation.
Challenges: This is a risky strategy. While it can reduce the real burden of debt, it comes at a significant cost:
- Erosion of Purchasing Power: Inflation acts as a “stealth tax,” diminishing the value of citizens’ savings, wages, and fixed incomes. A high likelihood of creating economic strife.
- Uncertainty and Instability: High and volatile inflation creates economic uncertainty, discouraging investment and long-term planning.
- Loss of Confidence: Persistent high inflation can undermine confidence in the national currency, potentially leading to capital flight and a loss of the dollar’s global reserve status.
- Higher Future Borrowing Costs: Lenders will demand higher interest rates to compensate for anticipated inflation, making future government borrowing more expensive. Attempts to inflate away debt are rarely a sustainable solution for a major economy [5].
5. Asset Sales
How it would work: The government could sell off federal assets to generate one-time revenue that could be used to pay down the national debt.
- Real Estate: This could include selling underutilized federal buildings, land, or other real property. While the federal government owns a vast amount of property (e.g., millions of acres of land and thousands of buildings), the revenue generated from selling these assets, while significant, is often a small fraction of the total national debt [10].
- Natural Resource Rights: Selling drilling rights for oil and gas, or mining rights on federal lands, could also generate revenue. Estimates suggest that recoverable energy resources on federal property could be valued in the trillions of dollars, potentially making a more substantial contribution [10].
- Government-Owned Enterprises: While less common in the U.S. than in some other countries, the privatization of certain government-owned entities could also generate funds.
Challenges: Asset sales face considerable political opposition, often from those who believe public assets should remain publicly owned. Furthermore, a large-scale “fire sale” could depress market values, limiting the actual revenue generated. The revenue from such sales, while not negligible, would likely only make a dent in the current scale of the U.S. debt [10].
6. Modern Monetary Theory (MMT)
How it would work: MMT fundamentally redefines the role of government debt. Proponents argue that a sovereign government, as the issuer of its own currency, is not financially constrained in the same way a household or business is. It can “print” money to finance any spending it deems necessary, as long as there are available real resources (labor, materials) to employ.
- Direct Money Creation: Instead of borrowing, the government would directly create new money to fund public spending, such as infrastructure projects, universal healthcare, or a job guarantee.
- Inflation as the Only Constraint: Under MMT, the only true limit to government spending is inflation. If spending leads to an overheating economy and rising prices, then taxes would be used to reduce demand and cool the economy, rather than to fund spending itself.
Challenges: MMT is highly controversial among mainstream economists. Critics warn that:
- High Inflation Risk: The theory’s premise of “unlimited” money creation, even with the caveat of inflation control, is seen as inherently risky and prone to leading to rampant, uncontrollable inflation. Historical examples of countries that resorted to large-scale money printing often experienced hyperinflation and economic collapse [5, 9, 13, 14, 15].
- Loss of Dollar’s Status: Abandoning fiscal restraint and traditional debt management could severely undermine international confidence in the U.S. dollar, jeopardizing its critical role as the global reserve currency [9].
- Political Discipline: MMT requires immense political discipline to raise taxes or cut spending at the precise moment inflation becomes a problem, which is challenging in a democratic system.
7. Default/Restructure
How it would work: These are extreme measures typically only considered by countries in severe financial distress.
- Default: An outright refusal by the government to pay its debt obligations. This would involve simply not making interest or principal payments on outstanding bonds.
- Restructuring: Negotiating new terms with creditors. This could involve extending repayment periods, reducing interest rates, or even accepting a haircut (a reduction in the principal amount owed).
Challenges: For a major economy like the U.S., which issues the world’s reserve currency and has a deeply integrated financial system, the consequences of default or even a forced restructuring would be catastrophic:
- Loss of Creditworthiness: The U.S. would immediately lose its standing as a reliable borrower, making it extremely difficult and expensive to borrow in the future.
- Financial Market Chaos: It would trigger a global financial crisis, as U.S. Treasury bonds are a cornerstone of the international financial system. Banks, pension funds, and investors worldwide hold vast amounts of U.S. debt, and a default would cause massive losses.
- Economic Collapse: Domestic interest rates would skyrocket, the dollar would likely plummet, and the economy would plunge into a deep recession or depression.
- Geopolitical Impact: The U.S.’s global influence would be severely diminished.
Given these dire consequences, default or forced restructuring is widely considered an unthinkable and non-viable option for the United States [11].
8. Nationalizing Resource Revenue
How it would work: This strategy involves the government taking greater control over valuable natural resources, directly collecting and utilizing the revenue generated from their extraction for public coffers, rather than primarily through taxes or royalties on private companies. A prominent example discussed in popular discourse, notably by Kevin O’Leary (“Mr. Wonderful”), suggests tapping into oil fields, such as those in Alaska, and nationalizing the revenue generated to pay down the national debt [16].
- Direct Control and Revenue Collection: Instead of leasing drilling rights or collecting royalties from private companies, the government could directly own and operate extraction facilities, with all profits flowing to the Treasury.
- Dedicated Debt Reduction Fund: Revenue generated from these nationalized resources could be specifically earmarked for debt reduction, similar to how some countries use sovereign wealth funds.
Challenges: This approach faces significant hurdles and criticisms:
- Political Feasibility and Opposition: Nationalization of industries, particularly major ones like oil and gas, is a radical shift in U.S. economic policy and would face immense political and legal opposition. It would likely require significant compensation to existing private leaseholders and companies, potentially offsetting much of the initial revenue benefit.
- Operational Expertise and Efficiency: Running complex industries like oil extraction effectively requires specialized expertise, capital investment, and efficient management, which critics argue governments often lack compared to private entities.
- Market Dynamics and Volatility: Oil prices are highly volatile. Relying heavily on oil revenue for debt reduction would expose the national budget to significant swings based on global energy markets.
- Environmental Concerns: Increased extraction, even under government control, could conflict with environmental goals and climate change mitigation efforts.
- Limited Impact on Total Debt: While a large sum, the current annual revenue from federal oil and gas leases (around $8.5 billion in FY2023) is a tiny fraction of the over $36 trillion national debt [17, 18]. Even if all potential revenue were nationalized, it would take a very long time to make a substantial dent in the debt, especially considering the ongoing annual deficits.
Our Way Out
The path to significantly reducing the U.S. national debt is not simple, nor is there a single magic bullet. Another old adage, “It’s easy to get into something (debt), but it’s hard to get out.” History shows that debt reduction often involves a combination of strategies, with each period having its unique mix of choices and mechanisms. The post-World War II success was a rare alignment of rapid economic growth, sustained primary surpluses, and unexpected inflation. Today, the challenge is amplified by the sheer scale of the debt and the political difficulty of implementing the necessary fiscal adjustments.
Historically, the duration of significant debt reduction efforts has varied, but they are not short or easy. For instance, the dramatic decline in the debt-to-GDP ratio after World War II took nearly three decades (from 1946 to 1974) to reach its low point [8]. The period after the War of 1812, leading to the complete elimination of debt by 1835, spanned roughly 20 years [7]. These examples suggest that, even with concerted effort, significant and sustainable debt reduction is typically a multi-decade endeavor, requiring consistent policy choices across several administrations and legislative cycles on the order of a generation.
Achieving a substantial reduction, particularly to an ambitious 20-50% debt-to-GDP ratio, will almost certainly require a strong will and bipartisan commitment to a multifaceted approach. This would likely include:
- Targeted spending cuts, especially to slow the growth of mandatory programs.
- Strategic revenue enhancements, potentially including a broadening of the tax base.
- Policies that consistently foster strong and sustainable economic growth.
These efforts are particularly critical in periods of a “shrinking credit cycle.” A shrinking credit cycle typically refers to a phase in the economic cycle characterized by:
- Tightening Lending Standards: Banks and other lenders become more cautious, making it harder for businesses and consumers to access credit.
- Reduced Availability of Capital: Less capital flows into the economy for investment.
- Higher Borrowing Costs: Even for those who can get credit, interest rates tend to be higher.
- Slower Economic Growth or Recession: As borrowing and investment decline, economic activity slows, leading to reduced corporate profits, job losses, and lower consumer spending [12].
- Increased Defaults: Businesses and individuals struggle to repay existing debts, leading to higher default rates.
In such an environment, the challenges of debt reduction are exacerbated. Government tax revenues decline due to slower economic activity, while demand for social safety net programs (like unemployment benefits) often increases. This creates a painful squeeze on public finances, making it even harder to cut spending or rely on growth to improve the debt-to-GDP ratio. The current fiscal situation, with high debt and rising interest rates, means the U.S. is particularly vulnerable to the negative impacts of any future shrinking credit cycle, underscoring the urgency of proactive fiscal reforms.
Beyond economic considerations, debt discipline is a moral imperative for the well-being of future generations. Each dollar borrowed today represents a claim on future economic output and income, effectively shifting the burden of repayment to those who have yet to earn it. A nation that consistently lives beyond its means risks handing down a legacy of diminished economic opportunity, higher taxes, reduced public services, and greater financial instability to our children and grandchildren. Responsible fiscal stewardship ensures that future generations inherit a strong economy with the flexibility to address unforeseen challenges and invest in their own prosperity, rather than being perpetually constrained by the choices of the past. The journey out of the current debt levels will demand difficult choices and a sustained commitment to fiscal responsibility. The journey out of the current debt levels will demand difficult choices and a sustained commitment to fiscal responsibility.
References
[1] CEIC Data. (n.d.). US Government Debt: % of GDP, 1969 – 2025. Retrieved from https://www.ceicdata.com/en/indicator/united-states/government-debt–of-nominal-gdp
[2] U.S. Treasury Fiscal Data. (n.d.). Understanding the National Debt. Retrieved from https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/
[3] Peterson Foundation. (2025, May 1). New Report: Rising National Debt Will Cause Significant Damage to the U.S. Economy. Retrieved from https://www.pgpf.org/wp-content/uploads/2025/05/EY-Rising-National-Debt-Will-Cause-Significant-Economic-Damage.pdf
[4] U.S. House Committee on the Budget. (2025, March 5). The Consequences of Debt. Retrieved from https://budget.house.gov/press-release/the-consequences-of-debt
[5] The Budget Lab at Yale. (2025, March 12). The Inflationary Risks of Rising Federal Deficits and Debt. Retrieved from https://budgetlab.yale.edu/research/inflationary-risks-rising-federal-deficits-and-debt
[6] CBS News. (2025, June 11). The U.S. spends $1 trillion a year to service its debt. Here’s why experts say that’s a concern. Retrieved from https://www.cbsnews.com/news/trump-big-beautiful-bill-federal-debt-servicing-cost-what-to-know/
[7] Wikipedia. (n.d.). History of the United States public debt. Retrieved from https://en.wikipedia.org/wiki/History_of_the_United_States_public_debt
[8] CEPR. (2023, October 30). Reassessing the fall in US public debt after World War II. Retrieved from https://cepr.org/voxeu/columns/reassessing-fall-us-public-debt-after-world-war-ii
[9] Peterson Foundation. (n.d.). 76 Options for Reducing the Deficit. Retrieved from https://www.pgpf.org/article/76-options-for-reducing-the-deficit/
[10] Independent Institute. (2017, March 6). Liquidating Federal Assets: Executive Summary. Retrieved from https://www.independent.org/article/2017/03/06/liquidating-federal-assets/
[11] Investopedia. (n.d.). Sovereign Default: Definition, Causes, Consequences, and Example. Retrieved from https://www.investopedia.com/terms/s/sovereign-default.asp
[12] Loomis Sayles. (n.d.). Unlocking the Credit Cycle. Retrieved from https://info.loomissayles.com/unlocking-the-credit-cycle
[13] Investopedia. (n.d.). Hyperinflation Throughout History: Examples and Impact. Retrieved from https://www.investopedia.com/ask/answers/061515/what-are-some-historic-examples-hyperinflation.asp
[14] Investopedia. (n.d.). Worst Cases of Hyperinflation in History. Retrieved from https://www.investopedia.com/articles/personal-finance/122915/worst-hyperinflations-history.asp
[15] EBSCO Research Starters. (n.d.). Hyperinflation. Retrieved from https://www.ebsco.com/research-starters/social-sciences-and-humanities/hyperinflation
[16] Fox Business. (2023, April 11). ‘Shark Tank’ star Kevin O’Leary plans to build new US oil refinery to ‘do the right thing for America’. Retrieved from https://www.foxbusiness.com/media/shark-tank-kevin-oleary-build-new-us-oil-refinery-america
[17] Congressional Research Service. (2025, April 23). Revenues and Disbursements from Oil and Natural Gas Leases on Onshore Federal Lands. Retrieved from https://www.congress.gov/crs-product/R46537
[18] Energy in Depth. (2025, May 1). CRS: Federal Oil & Natural Gas Leasing Revenue Tops Nearly $8.5 Billion in 2023. Retrieved from https://www.energyindepth.org/crs-federal-oil-natural-gas-leasing-revenue-tops-nearly-8-5-billion-in-2023/