And yet... I still think Social Security is a vital national program. Because America needs an old-age support system of some kind to support the many citizens who reach senility without sufficient savings, whether through negligence or through circumstances beyond their control. Even the payroll tax strikes me as broadly reasonable — 12.4% capped at $184,500 of income (although if I was designing it from first principles I would probably eliminate the cap altogether).

Not only do I think a program “like” Social Security is essential for “other” people; it also gives me more confidence in the future and increases my willingness to take risks, because I know that even if I stumble, I will not starve in my eighties. And — without revealing too much — one set of my grandparents has only been able to survive at all because of Social Security. In my own case, family could probably have intervened without it, but it would have been an extremely messy and financially difficult situation for everyone, one I am frankly glad Social Security foreclosed. It is to my memories of them, as much as to the thoughts of myself as an old man, that I find myself turning, half-involuntarily, whenever I get too resentful about payroll taxes. In short, I’ve never had an issue with a public pension system.

No — my problem with Social Security is that we have never approached it with either the maturity or the self-awareness it deserves. Figuring out how to balance the social contract between working-age people — who will produce the goods the elderly consume no matter how we structure society, since no one is buying cars built during the Carter administration — against the genuine claims of the retired is an extremely important question, and one we as a country have essentially ignored. The few times we have tried to openly discuss improving the system, as in 1999 or 2005, our republic did everything but cover itself in honor.

Even now, as we approach the program’s “insolvency” — the 2026 Trustees Report puts the date at the fourth quarter of 2032 — the vast majority of Americans don’t know even the basic facts of how our current social contract works. Just look at these key points from a recent Cato poll!

So this article is an attempt to think honestly about our generational contract: how we can fix it, and how we can make it more sustainable, so that when I retire some fifty-odd years from now I can do so in confidence, without the worming thought that I am robbing the future. My proposal is a bold, asymmetric one — I think that if it were implemented it would radically improve our long-run trajectory, but it is also necessarily early, and so what I want more than anything is for you to poke a million holes in it in search of the best possible solution.

We have known the solution for 50 years.

Since fertility dropped below replacement in 1972 — and arguably earlier because of how it structures payouts proportionally to income rather than prices1 — we have known that the Social Security system, as constituted, is not sustainable. This has been a mathematical certainty for over fifty years at this point, and although it has generated enormous amounts of discourse, it has yet to produce substantial action. You can see the degradation of the program in the simple ratio of workers to retirees, which has fallen from 5 in 1960 to only 2.9 today.

No one has ever thought the problem of solving this pension dynamic is, in some way, mysterious, which can make talking about it a little boring.

“Yes, we know it isn’t balanced!”

But it is worth talking about until we solve it! Because there has been a cornucopia of potential solutions. For example, we could have embraced the pay-as-you-go Italian model and just said that the plan for Social Security is to pay out what we can afford. In 1972, when fertility was below replacement but we still had a ton of young people, that meant a relatively large amount of money. Whereas in 2026, when there are fewer young people, it means a relatively smaller amount.

Or we could have invested the surplus in growth-linked assets. For essentially every year until 2010, Social Security brought in more in taxes than it paid out to recipients, but it was statutorily constrained to “invest” that money in Treasuries, effectively parking the money in the general fund. This meant we could spend the money on other programs, like Medicaid or the military, but it also hamstrung the returns the fund fetched.

For a while there was hope that immigration would make the system sustainable. And I do think it postponed the deadline — without the massive migration of the late twentieth and early twenty-first centuries we would probably already have crossed into insolvency. But it didn’t solve anything on a structural level. In fact, it turned the program into a Ponzi scheme of sorts that required perpetually rising absolute numbers of immigrants just to keep the system afloat.

We have tried to implement these fixes before. First, in 1999, Clinton proposed committing budget surpluses to Social Security with a slice invested in equities, through an independent, non-political board contracting private index-fund managers by competitive bid. But pushback from economists like Alan Greenspan over the risk of the government holding private assets killed it. Next, Bush ran for reelection in 2004 on a Social Security reform built around voluntary personal accounts, but the plan died in Congress in 2005, as is so often the case with reforms.

In other words, the problem has never been one of understanding, or lack of academic consensus, or lack of anything like that. The problem has always been the lack of anyone having the power and agency, or, to put it another way, responsibility, to act.

Don’t let academics run firms.

Broadly, I think that we can split most government functions into two categories. The first is engineering tasks, where the objective function is known and we’re optimizing for it under uncertainty. The second is truth-seeking, where the objective function itself is what we’re trying to discover, and there will always be room for fundamental disagreement.

Dan Wang’s Breakneck — which we read for our sprint on problem-solving — basically makes this same argument with his conception of China as the engineering state and America as the lawyerly state. And once you take that presupposition seriously, a lot falls out of it, since these types of organizations are simply good at solving different types of problems.

The two task-types have each evolved their own machinery, designed for their comparative environments. For truth-seeking, the most effective form of social organization looks something like the Talmudic tradition: constant open discussion, everyone sort of pseudo-equals, everything perpetually open to debate and input, where even the “losers’” objections are recorded for posterity. In other words, we never come to a definitive conclusion and everything is always open to discussion.

Engineering objectives instead demand an alternative way of structuring an organization, and you can see it most clearly in the American corporation. What has come out of centuries of Darwinian selection in the corporate environment is something that basically approximates elective monarchy. There is a goal — profit — that is ambiguous and complicated to pursue but easily definable, easily measurable, and hard to game. That last property is the key one. Without committing fraud, a CEO can’t perpetually fake profit, meaning there is basically no way to honestly (or sustainably) misrepresent the outcome, aka “teach to the test,” or fall victim to Goodhart’s Law.

Nothing is legally preventing shareholders from making all the decisions in a company — every choice that crosses the CEO’s desk could be put instead to a majority vote. We don’t do this because it is an obviously absurd system. Some amount of delegation is required, and we have found that finding the best officer, putting them in trust, giving them broad objectives, letting them cook, and assessing them only on outcomes works best.

You can take monetary policy as another example of an engineering task done well. There is a broad consensus on what “good” outcomes from monetary policy are — stable growth and low inflation — but how you actually achieve it in any given country, or any given year, is ambiguous and hard to plan for in advance. So we entrust a single body to manage it independently, subject to review.

There is a large body of academic work supporting everything I’m saying above. The question of why some tasks get open-ended negotiation while others get a hierarchy and a boss is one of the oldest in economics, and the answer that eventually won the Nobel is that tasks get matched to the governance structures suited to their attributes. The same test has been run on government agencies directly: where outcomes are observable, an agency can operate like a firm; but where they aren’t, it can’t.

And so we should be willing to say something that people like me find uncomfortable: I don’t think the lawyers and the academics and the journalists should be in charge of everything. There are areas of human life that are better run by people who are not like Peter Banks. I’d be a decent academic in another universe. But temperamentally, I am not the kind of person who should run ExxonMobil. I would spend all my time theorizing, having open discussions, never really coming to a final conclusion, forever refining and integrating everybody’s perspective to surface as much of the Truth as possible. That is simply not what you need to do to run ExxonMobil. Much of America looks to me like what would happen if people like myself were in charge of everything.

The proposal

Take pensions away from the lawyers and give them to the engineers by chartering an independent Social Security Trust under two plain mandates: keep the system solvent for the long run, and keep retirees’ standard of living as high as that solvency allows.

Here is how it would actually work. Just as now, the Trust collects the payroll taxes — but rather than being forced to park its reserves in Treasuries, the Trust has full agency over how it invests. Critically, it also holds the payout parameters: benefit levels, the retirement age, the formulas.

Congress and the President would provide oversight by appointing the Trust’s board and retaining removal powers, while the Trust would manage all aspects of Social Security finance and benefits other than the payroll tax rate. In governance terms, it would resemble something like the Federal Reserve’s framework — an independent body operating under a statute that sets clear objectives. Similar to the Fed’s dual mandate of maximum employment and stable prices2, the Trust should face a real tradeoff between two competing goals: namely, 1) long-run solvency, and 2) benefit adequacy. This dynamic would optimize for sustainability because a board that maximized solvency alone would simply cut benefits, while a board that maximized benefits without regard to financing would risk insolvency. The advantage of such a framework is that both goals could be measured, tracked, and audited publicly using standard actuarial and program‑performance metrics.

But for any of this to work, the Trust would need to have a surplus, meaning that it is bringing in more in taxes than it pays out — a precondition for building a reserve. Which naturally raises the question of “how?” Ultimately the options would be either to raise taxes, cut benefits, or some combination of both.

If I was in charge, and in this hypothetical I am, I would remove the payroll tax cap, turning it into a flat tax on all payroll income. Or even just raise it to cover ~90% of national wages as it did in 1983, rather than ~83% today.

In addition to this, I would follow the technocratic consensus and cut payouts for high-income recipients by changing the payout formulas. At the end of the day someone has to foot the bill, and wealthy retirees are the ones most poised to foot it. These people are some of the richest in the country and don’t “need” Social Security to survive — I’m thinking here of my other set of grandparents.

It is true that my generation will have to pay twice — covering today’s retirees while pre-funding our own retirement. But alas this is the heavy burden created by postponing a known problem. A burden which will only grow heavier with every year that we delay.

Corporate governance is a solved field.

In America we are culturally primed to prefer the lawyerly arrangement in our government but I would claim that the question of how to run large organizations well has largely been “solved”, at least when outcomes are measurable.

To see why, the place to start is “moral hazard,” because Social Security is itself a textbook case. When people form contracts, the contract can change how the person behaves after signing. If Social Security did not exist, people would save more — this is trivially obvious. Since if you thought that failing to save meant dying in a ditch, or your kids taking care of you, saving would be worth more to you than it would be in a world with Social Security. The classic estimate of the savings displacement was enormous, but probably overstated. The true size is still argued over, but the direction follows from the logic, and even a small effect is reason enough to design the contract well.

In order to address this problem, the solution is writing a better contract. We approximate this already with things like people who earn more, get more; or if you retire early you get less. The whole idea of this is to try and reduce some of the “perverse incentive” created by a public pension. As I said this is a well trodden area.

My PhD program was, nominally, Accounting — “information economics” — and most of what I studied was corporate governance. The running joke in that field is that it is de facto solved. Being into it is a little like arriving in a physics program really excited about Newtonian mechanics. If you want the whole subdiscipline in great detail, the book Corporate Governance Matters is the place to begin.

What that solved field has found is that when a principal must delegate execution under ambiguity, the best possible design is to entrust a single agent with simultaneous power and simultaneous responsibility — full control rights over the organization — while the principals retain complete and total impeachment control, and nothing else. Then the principal should assess the agent exclusively on outcomes. You don’t go to the agent and say: man, how are you doing? You’re a pretty sick guy, you have some interesting ideas. That is the philosopher-academic-lawyer approach to life, and it is precisely how you must not assess an executive. Instead shareholders should be laser focused on if outcomes improved or not, and nothing else.

Two design details fall straight out of that literature. The Trust must never control its own revenue — an agent that sets its own budget maximizes itself — which is why the tax rate stays with Congress. And the theory also explains, with no appeal to stupidity or villainy, why the current owner, Congress, never acts. Since the cost of fixing the pension is concentrated, immediate, and easily traceable to them, while the benefit is diffuse, decades away, and credited to no one, deferral is the only rational strategy today — as it was in 1972, and as it will be right up to the point of disaster.

To reiterate, monetary policy is the clearest case of this model already working in practice. It has been shown again and again that when politicians run the state's printing press, they run the currency into the ground — you can watch it happen wherever they lean on the central bank, as in Turkey, where a stretch of pliant policy bought a short-term sugar high and then inflation touching 85%. Handing that lever to an independent body of technocrats instead — still under the careful supervision of our elected representatives in Congress — is a big part of what has kept inflation stable across the developed world without sacrificing real growth.3

Since pensions have the identical disease, they need a similar cure. Fine for money, you might say. Has anyone actually done it to a pension?

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Canada already did it.

In 1996 the Chief Actuary projected the Canadian pension fund would be exhausted by 2015, and pay-as-you-go costs were marching toward 14% of wages. To avoid this cliff, Ottawa and the provinces struck the deal in February 1997 which effectively solved the problem we are now facing.

Their fix had three parts. First, they raised rates from 5.6% to 9.9% by 2003 — deliberately above pay-as-you-go cost, to pre-fund the plan — alongside modest benefit trims. Second, they set up the CPP Investment Board, which is an arm’s-length Crown corporation with an investment-only mandate — maximum return without undue risk of loss. Third, they made it so that the independent Chief Actuary has to re-certify the plan, and if the numbers slip below an acceptable threshold while politicians can’t agree on a fix, a statutory default fires raising contributions by half the gap, freezing benefit indexation until the next review.

The result has been unambiguously good. With the fund growing from a C$12 million initial transfer in 1999 to C$793 billion in fiscal 2026, earning 8.8% annualized over the past decade; the Chief Actuary has certified the plan is sustainable for the next 75 years; and the contribution rate actually required is now below the rate on the books because of capital gains compounding. From the 2030s onward, investment income will carry a growing share of every pension cheque, lifting that burden off taxpayers. Already this June with the fund running so far ahead of its obligations, Canada cut the base contribution rate from 9.9% to 9.5%, effective 2027.

Canada has split my Trust into three organs, rather than consolidating this into a single agent with comprehensive responsibility, which falls short of my principal-agent ideal but is still much better than what we have today in America.

But won’t it create new problems?

Yes. And it would be naive to pretend otherwise. The question in policy debates is always about balancing tradeoffs — but in this case I think the tradeoffs are visible, and so as a result easily monitorable, in a way that slow-moving solvency dynamics are not. Most objections I can think of essentially collapse into the same point. You cannot depoliticize trillions of dollars in investments.

Here are two versions of the same basic argument.

Politicians will abuse it.

This is Greenspan’s 1999 objection: government ownership of private assets, he warned, would risk sub-optimal capital markets and political direction of investment. He was of course right that the risk is real. But two counter points of sorts. First, we already face this problem on a smaller scale with the federal government’s own Thrift Savings Plan which holds ~$1.1 trillion of federal workers’ retirement money, as well as state and local pensions. Broadly this has produced only limited distortions, to the point it may come as a surprise to you it exists already. Second, the risk of political abuse is a reason for, not against, taking control away from Congress. Since although the Trust has the risk of being politically captured, Congress is by construction a political body. Ultimately if you want to invest a public pension in capital markets, an obvious improvement, any system will face this same problem.

The payout function is too important to leave to technocrats.

Perhaps. Most technocrats like to avoid redistribution questions, instead leaving them to politicians. But Congress has had an exclusive monopoly over this value question for ninety years and has, simply, refused to answer it. An automatic system like the Canadian one would also be fine but in my opinion it would needlessly constrain the Trust’s ability to act. By construction something like the Canadian system still takes power from representatives and gives it to technocrats, but in this case it assigns that power to only the technocrats of 1997, rather than the ones of today.

However, even if they make the best possible set of choices, it is quite possible people will simply not trust them. Personally, I think a Trust that clearly communicates its objectives, and both has and takes real responsibility, could genuinely win the public’s trust. It would, of course, require Congress and the President standing behind it during the initial difficult years, as with any pension reform — but legitimacy of this kind is earned in arrears, accruing to any body that spends long enough proving it can be handed something important and not wreck it. In brief, I suspect it would have the same trust arc as the Fed, which is also forced to make important distributional determinations without regard for political economy.

Conclusion: a calm decade, or the blistering sprint

Like I’ve said, this is an asymmetric idea, though it is mostly a synthesis of programs already running elsewhere. And ultimately, we will do something — because when a pension system finally hits the wall, the options left are ugly: outright insolvency, or hauling in a team of technocratic economists to rebuild the thing in a hurry. It has happened over and over. Italy in 1995, and again in 2011. Brazil in 2019. Greece after the financial crisis. In every case, a neutral, expert body ends up holding the lever anyway — just at the last possible moment, with no room left for anything but austerity.

We are on the same track. If we do nothing, we will hand the redesign to the same people I’m saying should be in charge anyway. The only real choice we actually get is whether we do it calmly, over a decade, with the full menu of options still open — or in the blistering, histrionic sprint, after the cuts have already landed.

I know which option I prefer.

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The honest answer is that almost nothing that would meaningfully bend the debt curve is politically survivable in anything like its effective form. This isn’t a failure of will so much as a structural feature of democratic politics. The costs of serious reform are concentrated and immediate: a farmer loses a subsidy check, a retiree sees a smaller cost-of-living adjustment, a community loses the economic activity generated by an obsolete military base. The benefits are diffuse and delayed: an averted, unseen fiscal crisis, more fiscal room to respond to the next emergency, modestly lower interest rates a decade hence that no voter will ever trace back to the vote that produced them.

Concentrated, immediate losses generate organized, well-funded opposition; diffuse, delayed gains generate approximately no political constituency at all. Layer onto that the fact that politicians operate on the timescale of the next election cycle: they bear the short-term electoral risk of deficit reduction without ever collecting the reward for its long-term benefits.

No wonder our debt-to-GDP ratio has grown on autopilot for the past half-century and now sits at its highest level since World War II. If we want to solve our debt crisis, we must find a way to override the political incentives that produced it and make fiscal responsibility electorally viable — ideally, electorally beneficial.

One caveat before the cutting starts. Some readers will object that the composition of what follows — heavy on spending restraint, light on rate increases — smuggles in a contested premise, namely that consolidating through the spending side is less damaging to growth than consolidating through taxes. If you would like a deep dive into the impacts of spending vs. tax-based austerity, I would recommend our recent article on austerity.

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Assume No Political Constraints

An old joke goes as follows: an engineer and an economist fall into a hole in the ground. The engineer can’t figure out how to escape, but the economist says, “Easy, just assume a ladder.” For the rest of this piece, I’ll do the equivalent of assuming a ladder out by acting as if I’ve been made dictator for a day. In this exercise, I have unlimited authority to raise taxes, cut spending, and pass legislation with no need to win a vote, survive a primary, or ever face the electorate again.

This isn’t an endorsement of dictatorship as a policy-making method; it’s a deliberate thought experiment. If we strip away the political constraints entirely and ask what a purely technocratic fix would look like, we get a useful benchmark. The gap between that benchmark and what’s actually achievable is itself the measure of how hard this problem is.

First Order of Business: Eliminate Corporate and Agricultural Subsidies

As a staunch capitalist, I believe that firms either don’t need subsidies (because they would survive under market competition) or don’t deserve them (because they would not survive under market competition). Therefore, my first act as fiscal dictator is to zero out the $181 billion the federal government spends on corporate welfare each year.

Second Order: Reform and Cut Entitlements

It’s popular (if politically difficult) to get big business off Uncle Sam’s payroll, but it comes nowhere close to closing the gap between spending and tax receipts. The real money is in entitlements, so the second order of business targets the three largest line items in the federal budget directly: Social Security, Medicare, and Medicaid, which together account for close to half of all federal spending and are the single largest driver of the long-run debt trajectory.

Social Security

Three changes, layered together, do most of the work — and it’s worth being clear about which one is the workhorse. As the decomposition in our ground-truths piece showed, the indexing mechanics swamp the demographic lever: how initial benefits grow matters far more to the long-run cost curve than when people start collecting them.

So lead with the formula.

First, then, switch the initial benefit formula from wage indexing to a progressive price index: a blend that indexes benefits for lower earners to wage growth (as today) but indexes benefits for higher earners to the slower-growing CPI instead. Wages tend to outpace prices over time, so this alone bends the long-run cost curve substantially while leaving benefits for the bottom of the income distribution untouched. This is the heavy lifting.

Second — the minor knob, but still worth turning — raise the retirement age and index it to life expectancy going forward, so the program doesn’t have to be re-litigated every time Americans gain another few years of life. Social Security’s full retirement age was set when a 65-year-old had a fraction of the remaining lifespan they have today; letting the age drift upward automatically, the same way we’d want any other actuarial assumption to update, removes one recurring political fight from the calendar even if it does comparatively little of the fiscal work.

Third, layer in means testing at the top: high-lifetime-earners see their benefits taper down enough so that Social Security stops functioning as a middle-and-upper-class annuity subsidized by everyone else’s payroll taxes. None of this touches the program’s core promise for low- and middle-income retirees; it asks the people least dependent on the benefit to shoulder more of the adjustment.

Medicare and Medicaid

The core problem with these programs is that they are open-ended, cost-based reimbursements, which means the incentive on both sides of the transaction points toward more spending, not better outcomes. For Medicaid — the one program actually administered by the states — a block grant flips that dynamic: it caps the federal contribution and pushes states to genuinely manage costs and quality, rather than passing every marginal expense straight through to the federal balance sheet under the open-ended matching formula.

Medicare presents the same underlying pathology in a different institutional wrapper. Because the program is run directly by the federal government, there is no state intermediary to discipline. Moreover, while Medicare Advantage has already moved a majority of beneficiaries into capitated private plans, the federal contribution to those plans remains benchmarked to costs in traditional Medicare, so the open-ended spending commitment persists beneath the capitated surface. The analog to a block grant here is premium support: the federal government makes a fixed, defined contribution toward each beneficiary’s coverage; plans bid competitively against that amount; and beneficiaries who want richer coverage pay the difference. That converts Medicare from an open-ended entitlement into a defined contribution, putting plans — and to a degree beneficiaries — on the hook for marginal costs rather than the federal balance sheet.

Third Order: Tax Shift

Replace the existing income tax system with an X-tax. The X-tax, developed by economist David Bradford, is a form of progressive consumption tax implemented through two linked pieces: a flat-rate cash-flow tax on businesses (revenue minus wages and investment) and a progressive wage tax on individuals’ labor income (with exemptions for income from savings and investments).

Because investment is expensed immediately rather than depreciated over years, and because the tax falls on consumption rather than on the return to saving and investment, the code stops penalizing the choice to save and invest relative to the choice to consume. Because the business side has few deductions to fight over, most of the corporate tax code’s lobbying surface — the accelerated depreciation schedules, the interest deductions, the industry-specific credits — disappears along with the subsidies from the first order of business.

The individual side keeps the progressivity that makes an income tax politically and morally defensible; you’re not moving to a flat consumption tax, you’re moving to one with graduated rates on wages. The appeal of the X-tax is efficiency without regressivity: a flatter, simpler, more growth-friendly structure that doesn’t ask low earners to shoulder proportionally more of the burden.

Fourth Order: Pro-Growth Reforms

Eliminate all trade protections (except those for national security), massively expand migration, and slash regulatory bloat. None of these are deficit-reduction measures in the narrow accounting sense: they don’t show up as a line item cut or a new revenue source.

But debt sustainability isn’t just a function of the numerator (how much we owe); it’s a function of the denominator too (how fast the economy underlying our capacity to service that debt is growing). Tariffs raise consumer prices and invite retaliation while undermining the productivity gains from specialization. A more open migration system expands the labor force and the tax base at a moment when an aging native-born population is already straining the ratio of workers to retirees.1

And regulatory reform lowers the cost of building things — homes, energy infrastructure, factories — which is disinflationary and growth-enhancing in a way that shows up, eventually, in higher tax revenue without a single rate increase.

Final Order: Fiscal Rules

I am only dictator for a day, which means the entire point of this exercise evaporates the moment I hand power back. Cuts, reforms, and a new tax code mean nothing if the next Congress reverses them within a term.

The American track record here is a graveyard of paper promises. PAYGO has been waived whenever it threatened to bind. The Budget Control Act’s spending caps were blown past by bipartisan agreement, repeatedly. Automatic cuts get switched off more or less every time they actually bite. A statutory fiscal rule is exactly as durable as the next majority’s willingness to keep it, which is to say: not durable at all. This is the trap the opening of this piece described, and a clever statute doesn’t escape it: it just relocates it.

The model that has escaped it is Switzerland’s debt brake, which I covered in detail in our eight-countries piece, so I’ll only sketch the mechanics here: a cyclically adjusted ceiling on expenditure — deficits allowed below trend, surpluses required above it — with deviations tracked in a compensation account that must be worked off through lower future ceilings, automatically, with no committee empowered to waive the correction. In force since 2003, it has driven Swiss federal net debt down to roughly 16 percent of GDP, among the lowest in the developed world, with some of the cheapest sovereign borrowing anywhere.

But here’s the thing to take from the Swiss case (and the point the eight-countries piece made that bears repeating): the compensation account is clever engineering, and it is not why the rule holds. The rule holds because it’s written into the Swiss constitution, and because it got there by referendum with roughly 85 percent of the vote.

A politician who wants to bust the Swiss brake isn’t quietly amending a statute; he’s asking voters to repeal something they overwhelmingly and personally ratified. The bindingness is in the mandate, not the formula.

So the last act of my dictatorship is to entrench the rule constitutionally by decree: a cyclically adjusted expenditure ceiling, an automatic compensation account, and a supermajority — not simple-majority — exception clause for genuine emergencies. I’m dictator for a day; I don’t need a referendum, and within the four corners of the thought experiment, decreeing the amendment is enough.

But notice what the decree cannot manufacture. The Swiss brake doesn’t hold because the text happens to sit in the constitution; it holds because 85 percent of voters put it there themselves. A rule imposed by fiat has the words without the mandate, and the mandate is the enforcement: it’s what turns repeal from a routine act of amending a statute into an act of defying the public. That’s the ingredient no dictator can decree, and it’s what the opening of this piece said we were missing: a constituency for solvency. The real-world version of this program has to be built the hard way by persuading an electorate to ratify the constraint, converting the diffuse, delayed benefit of fiscal responsibility into an explicit public commitment that politicians defy at their peril.

Which is the honest place to end the exercise. The economist in the joke assumes a ladder; the dictator in this one can decree everything except the thing that matters most. The real ladder out of the hole is a popular mandate for a binding rule and unlike the assumed one, it has actually been built.

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And where Washington reaches for a reassuring analogy we have pushed back — on the country everyone calls the counterexample, the empire that debt actually dissolved, and the few nations that engineered real fiscal strength — before starting on the harder half ourselves, in what a disciplined cut would actually require and where the defense budget quietly bleeds. But most of that is diagnosis, carried about as far as we can carry it on our own. The way out is the part we have left for you. We've already got a strong batch of submissions, and we're looking forward to reading many more before the July 15 deadline!

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• Additional Publication: We may offer a USD $300 honorarium to authors whose essays we choose to re-publish beyond the top three.

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The BRICS nations occupy a genuine middle tier in the global financial system — better insulated than most developing economies, but considerably more exposed than advanced ones to shifts in growth, interest rates, and investor sentiment. A drop in global risk appetite, a domestic slowdown, or geopolitical isolation (as with Russia) can tighten the constraints on any of these countries even when their debt ratios look unremarkable. What determines which side of that line a country falls on is whether sound public finances and durable growth are in place to support it.

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Brazil: Deep Markets, Commodity Exposure, and an Unhedged Windfall

Brazil's debt-to-GDP ratio, which its central bank puts at roughly 80% (IMF says 87%), places it closer to the advanced-economy range than to its developing-country peers. It finances the overwhelming majority of that debt domestically and in its own currency which insulates it from the classic emerging-market trap of foreign-currency debt turning unpayable after a depreciation.

But Brazil’s fiscal story is inseparable from commodities. The early 2010s commodity boom — driven heavily by Chinese demand for iron ore, soybeans, and oil — flooded Brazil with export revenue and fueled a period of fiscal optimism, expanded social spending, and confidence that growth would outrun debt. When prices crashed in the mid-to-late 2010s, that revenue evaporated just as spending commitments remained, contributing to the deep recession and fiscal crisis of 2015–2016.

Part of what made the boom-bust cycle so consequential was Brazil’s approach to its major export industries. Brazil has state control over strategic resources — most visibly through Petrobras’s dominant, state-directed role in oil, including pre-salt reserves discovered in the 2000s — rather than channeling windfall revenue into an insulated savings vehicle. The contrast with Norway is instructive: Norway routes its oil revenue through the Government Pension Fund Global, a sovereign wealth fund that deliberately separates resource income from annual budgets and smooths spending across commodity cycles. Brazil never built an equivalent buffer at the same scale, so commodity windfalls flowed more directly into the budget and into Petrobras’s own investment and debt decisions, leaving fiscal policy more exposed to the next downturn rather than insulated from it.

The result is a country with real strengths — a sophisticated domestic investor base and strong debt management — but high domestic borrowing costs and a fiscal position with comparatively little room for error.

Russia: Low Debt, Foreclosed Options

At roughly 18% of GDP, Russia’s sovereign debt burden is among the lowest of any major economy, financed overwhelmingly through domestic sources, with meaningful fiscal reserves built up over years of energy exports. Yet Russia is the clearest illustration that a low debt ratio doesn’t equal financial strength.

Two forces compound Russia’s actual vulnerability. First, its budget remains heavily dependent on oil and gas revenue, so swings in global energy prices translate directly into swings in fiscal capacity.1 Second, the invasion of Ukraine triggered sweeping Western sanctions that cut off much of Russia’s access to international capital markets, froze a large share of its foreign reserves, and isolated its financial system from the channels it would normally use to borrow or hedge abroad.

A government can have plenty of room to borrow on paper and still find itself constrained by an inability to access the broader financial system. Russia underscores a theme that runs through all of these cases: the relevant question isn’t only “how much debt” but “what options does this debt leave you” — and a combination of commodity dependence and geopolitical isolation can foreclose options just as effectively as overborrowing.

India: Long-Dated Debt Built on a 1991 Foundation

India’s public debt sits at roughly 83% of GDP, financed almost entirely through domestic channels, with very little external sovereign debt. It benefits from a large pool of domestic savings, a deepening bond market, and long average debt maturities that reduce refinancing risk.

Much of this financial architecture traces back to the 1991 balance-of-payments crisis and the reforms that followed. Facing a near-default and dwindling foreign reserves, India dismantled large parts of its license-raj industrial controls, opened its economy to foreign investment and trade, devalued the rupee, and began liberalizing its financial sector. Those reforms set off three decades of faster growth and, over time, the development of a much deeper domestic bond market and a broader base of institutional savers — the very infrastructure that now lets India fund large deficits domestically and at long maturities (weighted average of nearly 13 years) rather than relying on volatile external borrowing.

That history helps explain why India’s debt picture today is one of manageable but not costless debt: a larger, faster-growing GDP base makes debt easier to carry over time, but persistent fiscal deficits and high interest payments continue to consume a significant share of government spending, leaving the trajectory dependent on continued strong growth.

China: A Headline Number That Hides the Real Fiscal System

China’s case is the most complicated in the group because its headline sovereign debt-to-GDP figure (88.3%) captures only a fraction of the relevant fiscal picture. The IMF’s “augmented” measure, which folds in local government financing vehicle debt, puts the real figure closer to 117% of GDP as of 2024 and projects it stabilizing near 150% in the coming years. That gap — nearly 30 points of GDP hidden from the headline number — is the story.

To understand why, it helps to look at how China’s fiscal system actually evolved. The 1994 tax-sharing reform raised the central government’s share of tax revenue from about a fifth to over half almost overnight, mainly through the VAT, while leaving expenditure responsibilities largely unchanged. Local governments still finance roughly 70% of public spending: a structural vertical fiscal gap that every pillar since has been improvised to fill.2

Land sales became the substitute tax system, booked off-budget in separate “government funds” largely outside the headline books. Land-use-rights sales peaked at 38% of local revenue in 2021, then fell by a third by 2023 as the property sector cracked — exposing local budgets in ways the headline debt figure was never built to show.

State-owned enterprises, despite their political prominence, are a surprisingly minor fiscal pillar: SOE dividends to the state were only introduced in 2007, remain low by global standards, and as much as 90% is recycled back into the enterprises rather than into public budgets.

That leaves debt — particularly through local-government financing vehicles, or LGFVs — as the fourth and most opaque revenue source. Local governments use these off-balance-sheet companies to borrow for projects that mostly don’t pay for themselves, with the median LGFV earning about 1% on its assets in 2022 while borrowing at over 5%, kept alive only by an implicit central backstop.3

The whole system was built for an era of high growth, optimized around investment — VAT, land sales, credit — rather than recurring local taxation. It boomed with the hot real estate market but is now buckling under a slower-growth era, with structural deficits already near 6-7% of GDP (what Rhodium Group calls “the myth of China’s fiscal space”) and falling land revenue. The obvious fixes — a property tax (blocked for years), higher SOE dividends, greater central assumption of local costs — are politically foreclosed. The lesson is that sovereign-debt statistics can badly understate real fiscal risk when large quasi-fiscal and sub-national liabilities sit outside the headline number — in China’s case, by roughly 36 points of GDP, and rising.

South Africa: Institutional Strength Built After Apartheid, Tested by Stagnation

South Africa’s debt-to-GDP ratio of approximately 79% is financed mostly domestically, supported by an independent central bank and a genuinely deep local capital market.

Those institutions are themselves a legacy of the post-apartheid transition. The African National Congress government that took power in 1994 inherited an economy isolated by decades of sanctions and underinvestment, alongside enormous pressure to fund redress for apartheid-era inequality in housing, education, and basic services. Rather than running large deficits to finance that redress, post-1994 governments pursued relatively orthodox macroeconomic policy — fiscal discipline, an independent reserve bank, and capital-market liberalization — partly to win the credibility and investor confidence needed to integrate into global markets after decades of isolation. That choice built the deep, credible domestic debt market South Africa relies on today.

But that credibility didn’t hold in a straight line. Looking across the three decades since 1994, South Africa’s fiscal trajectory runs through four distinct phases. The first, from 1994 to 1999, was one of successful fiscal consolidation, as the new government moved to allay earlier fears of populist overspending and got the public finances onto a sound footing. The second, from 2000 to 2008, built on that base with a genuinely healthy fiscal track record, coinciding with the country’s longest economic upswing since the Second World War.

The third phase, from 2009 to 2020, was effectively a fiscal storm: the global financial crisis hit revenue just as “micro fiscal populism,” the state capture era under the Zuma administration, and eventually the Covid-19 pandemic pushed spending and borrowing sharply higher. It was during this period that South Africa lost the investment-grade credit rating it had spent years earning, as its foreign-currency government bonds were downgraded to junk status by Moody’s in 2020.

This was followed by a fourth phase of renewed consolidation, marked by a shift away from relying on growth alone to cure fiscal imbalances and toward direct fiscal reform.

The Common Thread

Across all five countries, debt composition matters more than the debt ratio itself, and history shapes that composition as much as current policy does. Brazil’s commodity windfalls went largely unhedged rather than into a Norway-style buffer. Russia’s energy dependence and post-2022 isolation matter more than its low debt ratio. India’s domestic financial depth traces back to the reforms forced by its 1991 crisis. China’s local governments inherited a structural revenue gap from 1994 that land sales and LGFV debt have only papered over. South Africa’s institutional credibility was built deliberately after 1994, and is now being tested by the growth it needs to sustain it.

None of the five faces the classic developing-country crisis triggers — heavy external borrowing, foreign-currency liabilities, weak revenue systems. But none has the unquestioned credibility that lets Japan or the United States carry far higher debt loads without investor anxiety. They sit in the middle, and the details of how each got there are the real story.

What separates the more resilient cases from the more fragile ones, in the end, comes back to the same two fundamentals: sound public finances and the growth to sustain them. Where both hold — as in India’s deepening bond market — debt becomes easier to carry over time. Where either falters — Brazil’s unhedged commodity exposure, Russia’s foreclosed financial options, China’s hidden local-government liabilities, and South Africa’s economic stagnation — even a modest debt ratio can mask real fragility.

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The first inflation target in the world came out of New Zealand at the end of the 1980s. After the Reserve Bank of New Zealand Act took effect in 1990, New Zealand became the first country to write an explicit inflation target into law. The early agreements between the finance minister and the central bank governor set a band around 0-2 percent, later widened to 0-3 and eventually 1-3 with a 2 percent midpoint, meant to represent “true” price stability plus or minus about one percentage point to account for the fact that measured inflation runs a bit hot. Those ranges reflected a desire for low inflation and some allowance for index mismeasurement, but they were not the output of a carefully solved social‑welfare optimization problem, and subsequent changes were driven as much by politics as technocracy. That alone is reason enough to question the way the number has hardened into an object of faith.

And when you interrogate it honestly, the case against an evergreen two percent target turns out to be fairly strong. In fact, within the monetary policy literature the center of gravity has been drifting toward the view that there are much better ways to run policy than by fixing a single low number and treating it as sacred rule. The unfortunate reality, however, is that at the current juncture, the United States is ill-positioned to switch.

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The origins of, objections to, and alternatives for, two percent inflation targeting

Canada, Britain, and Sweden followed New Zealand within a few years of its inflation target taking effect. The Federal Reserve was the great holdout: Alan Greenspan governed by instinct and constrained discretion, implicitly aiming at “low and stable inflation” but refusing to nail down a figure. It was only in 2012, under Ben Bernanke, that the Fed finally committed in writing to a two percent target “as measured by the annual change in the PCE price index,” making the anchor that disciplines the most important monetary authority on earth younger than the smartphone.1

To be sure, the reasons offered for two percent are real. A small inflationary cushion keeps interest rates far enough above zero that the central bank has room to cut in a downturn. Measured inflation runs a little hot because price indexes cannot fully capture how people substitute, trade up, and benefit from quality improvements, so true price stability sits slightly below the measured figure. And a bit of inflation greases the labor market because it lets real wages fall without anyone having to cut a nominal paycheck.

Each of these rationales is sound, but they are more so general reasons for a low positive number rather than for two in particular — as opposed to, say, one and a half or three. In reality, the number is a rudimentary convention (dressed as a calculation) that we’ve grown to accept. But because the world has genuinely shifted underneath it, the convention is aging poorly.

Here’s how. The neutral rate of interest (r*) — i.e., the rate at which monetary policy is neither contractionary nor expansionary, i.e., the short-term interest rate that would prevail when the economy is at full employment and stable inflation — has fallen for decades in advanced economies, dragged steadily down as the population has aged, fertility rates have plummeted, and productivity growth has stayed somewhat sluggish.

The problem is that a fixed two percent inflation target, which might have made sense when neutral rates were in the low‑to‑mid single digits, now guarantees more frequent collisions with the floor, meaning that the Fed starts every downturn closer to the zero lower bound (ZLB) and runs out of conventional policy-response room faster.2

It is on this basis that economists like Olivier Blanchard and Larry Summers have been arguing (for years now) that four percent is simply the better number. And more recent formal work has shown that in many mainstream models, as the neutral rate falls, the optimal inflation target tends to rise with it, recovering most of the decline, though not all of it. This is true because the cost of repeatedly hitting the ZLB rises while the marginal cost of somewhat higher steady‑state inflation remains comparatively small.3

There are also cleaner designs than an inflation target at all. The most elegant is to target the level of spending in the whole economy rather than the change in a price index — nominal GDP targeting, argued for years as a favorable option by and the market monetarists, and developed in serious detail by economists at Mercatus.

NGDP-targeting fixes a single deep flaw in price targeting: an inflation-targeter reacts to prices without asking what is moving them. When prices move for reasons that have nothing to do with demand, it pushes policy the wrong way — and which wrong way depends on the shock. A productivity boom that drives prices down reads as below-target inflation, so the inflation-targeter eases, loosening into a bubble.4 A supply shock that drives prices up while output collapses reads as above-target inflation, so it tightens, deepening the slump. A spending-targeter is fooled by neither, because it tracks total spending rather than prices: it does nothing in the first case and holds steady in the second.

In short, the spending-targeter stops fighting the real economy and starts accommodating it — and on the merits alone, NGDP‑targeting is probably the better system.5

One could go further still and tie the goal to something structural like the growth of the working population or the growth of productivity so that the target being optimized for maps to the economy in its current state rather than the state it was in a generation ago. I have not seen anyone build a rule that writes those structural trends into the target itself, and it would be something new. In effect it would bake the determinants of the neutral rate directly into the policy rule instead of leaving them as background estimates. But the instinct behind it seems sound (to me at least).

At any rate, on the technical merits, the critics of two percent inflation targeting are right: a static number governing a moving economy is a strange and suboptimal way to run the most important price in the world. It is largely arbitrary within a narrow band of “low positive numbers,” too low for a world of chronically depressed neutral rates, and too rigid to adapt to persistent changes in demographics and productivity.

So if this were only a question of monetary engineering, it is rather apparent that the answer would be to retire the existing target and build something smarter — be it higher long‑run inflation targets or some alternative convention.

But is it simply a question of monetary engineering?

No… at least not entirely.

There is also a serious opposing camp, including former Fed chairs Bernanke and Yellen, the economist Frederic Mishkin, and others, who worry that higher inflation targets can pull expectations loose from their mooring. Central banks have spent decades teaching the public that “two percent” essentially just means price stability; move the goalposts and you risk losing the price anchor itself.

The more basic worry is that inflation is not just a statistical outcome but a behavioral one. So long as expectations stay anchored — so long as the public believes next year’s prices will behave roughly like this year’s — a central bank can carry a little inflation without it compounding. But expectations are fragile. Let them come un‑anchored and a modest, well‑meant adjustment to the target gets read as permission for something larger: if households expect prices to be higher tomorrow, they spend sooner today, and at the macro level, the price-expectation loop begins to feed on itself. In other words, the hazard of moving the goalposts is that the act of moving them signals to everyone that the number can move.

That is why the Fed’s pandemic-era framework change was so risky even though it was modest on paper. In August 2020 it rewrote its own framework and promised to let inflation run above two percent for a while to make up for the years it had run below. This came to be known as flexible average inflation targeting, or FAIT. The idea was defensible on paper: after a decade of undershooting and a sunken neutral rate, a planned overshoot of two percent to achieve a longer-run average made sense empirically. But within a year inflation had surged well beyond what the new framework had contemplated, driven by a combination of supply shocks, fiscal stimulus, and accommodative monetary policy all at once. The promise to tolerate overshoot then became a serious credibility problem for the Fed (and frankly an embarrassment it spent years living down).

Formally, the language of FAIT survived into the mid‑2020s. But in practice, by the time inflation had been wrestled back down, the Fed returned back to something closer to plain-vanilla inflation targeting and symmetric concern for too much or too little. Overall there was at least one lesson from this episode that is pretty straightforward: even if the old framework was not perfect, a new rule is easy to announce but very hard to keep control of once shocks arrive and expectations start to move. And the part that should worry us is that FAIT was a modest reform attempted in a storm that turned out to be passing. The next reform attempt, if tried now, would be amidst a storm that is not so — dare we say — “transient.”

Political incentives make changing the Fed’s targeting framework right now risky

Consider the structural and rapidly-worsening situation the US finds itself in now. The country is not in a war, not in a deep recession, and unemployment remains low. Yet it is running a deficit of roughly six percent of national income, debt held by the public is closing in on the record it set at the end of WWII as a share of GDP on current projections, and net interest is approaching the trillion‑dollar mark — already larger than defense and Medicare — leaving only Social Security above it in the budget. This is an almost unprecedented combination.

Furthermore Treasury data show that on the order of one‑third of marketable debt is due to mature within a single year and well over half within three, meaning that every sustained climb in yields feeds straight back into the deficit that produced it.

Why the looming debt‑and‑deficits storm reshapes the inflation‑targeting reform calculus comes down to political forces. A government borrowing — more specifically, borrowing to refinance — at this scale has an unspoken but powerful interest in cheaper money: a few years of rates held lower than they should be, and thus a little more inflation, means that the real weight of the debt eases on its own.

To capture this opportunity would mean the inflation target stops being a technical dial the Fed turns at will and instead becomes something the Treasury has a stake in. That is the edge of fiscal dominance: a regime in which the fiscal authority, not the central bank, sets the path of inflation — a regime where “monetary policy serves fiscal ends.” So the risk to reopening the framework right now would be handing a fiscally cornered government say over the one number it most wants to move, and for reasons that have nothing to do with sound monetary policy. The unsettling question is whether we are already drifting toward it.

Despite abounding incentives, the answer is that we are not there yet, at least according to the market’s reading. Treasury yields, term premia, and inflation breakevens may be showing slight signs of distress over the past few years, but they are still consistent with a world in which the central bank retains the upper hand — and where inflation expectaions remain relatively anchored.

The Fed still sets policy to hit its target and the bond market has not begun to price anything like a fiscal-dominance regime. If Fed independence were genuinely broken, the signals would likely show up in a much sharper backup in bond yields, an unusually high term premium, and a generally far more disorderly Treasury market than anything we have seen recently.

None of this means the country is out of the woods regarding fiscal capture of monetary policy. According to the logic Sargent and Wallace set out in 1981, fiscal dominance happens less through a watershed moment than through a gradual regime shift a nation drifts into. When deficits run large enough for long enough, natural forces nudge the central bank toward no longer acting as if the budget belongs to the fiscal authority. And the clearer warning is not the headline debt ratio but the share of the budget swallowed by interest. As that share climbs, so too does the risk of higher rates doing damage and thus the political payoff of paring Fed independence — potentially setting off a harmful, self-reinforcing cycle. These leanings, it should be said, may already be underway.

The president has demanded deep rate cuts and has been aggressive in trying to impose costs for Fed noncompliance. In August 2025 the administration moved to remove a sitting Fed governor, Lisa Cook, over allegations about mortgage paperwork from before she joined the Board — conduct with no bearing on her FOMC vote, and for which she has not been charged. The Supreme Court heard the case in January 2026 and signaled it was unlikely to let the removal stand. Trump’s Justice Department also went as far as opening a criminal investigation into former Fed chair Powell himself in early 2026 (over his congressional testimony about the Fed’s headquarters renovation) before dropping it months later without bringing any charges. While these are not the symptoms of a regime that has already flipped, they are the political pressures that, if maintained over time, do flip it.

It is also worth being precise about this channel, because explicit adjustments to the targeting framework are not the only door in. Political capture of monetary policy does not require reopening the target at all. Along these lines — “personnel is policy” — adjustments to the Fed’s policy frameworks can run straight through appointments and pressure, which is what the Cook and Powell fights were really about.6

And there is another door, still blunter than either of the above. Congress could simply rewrite the Fed’s mandate. It is reaching for that lever already through the Price Stability Act of 2025 (H.R. 5396), which is now moving through the House and would strip the Fed’s employment goal outright, making its inflation target even more central to monetary policy. Granted, under current conditions, this particular bill points the hawkish way. But the same power that can narrow the mandate can loosen it, and a Congress cornered by its own financing needs is the most direct fiscal-dominance vector of all — one that routes around the Fed completely.

Underneath it all ultimately sits the age-old temptation a government deep in debt faces. Nixon succumbed to it, or at least tried to. In lieu of defaulting, cutting spending, or tax hikes, a government, once fiscally-dominated, can simply let inflation run a little hot, hold rates a little low, and watch the real value of the debt effectively melt away. Economists including call this financial repression:

“[A] catch-all term for all of the things governments, central banks, and financial regulators can do to lower the government’s cost of funding below the market rate. You can think of it as an informal tax on bond holders and savers. Over the past few decades, we’ve seen governments in advanced economies reach aggressively for financial repression tools in the face of increasing fiscal pressures as a result of demographic changes.”

Japan is the most prominent recent example, but it is also basically how the US took its debt down from over 100% of GDP after the war to under a quarter of it by the end of the 1970s (repression coming via surprise inflation plus pegged and regulated rates).7

But that escape required a captive bond market: capital controls, long-dated debt, and savers with nowhere else to put their money. None of those requisites hold today. Roughly a third of the debt is held by foreigners who cannot be repressed, about seven percent is indexed to inflation outright through TIPS, and the average bond now matures in about six years — which means the debt reprices almost as fast as it could be inflated away. To move the debt now, inflation would need to be high enough and sustained enough to outrun a market that virtually reprices in real time.8

So the reality is that the great liquidation of the postwar decades is no longer on the menu, even if the temptation to follow that playbook remains. Furthermore none of this is to mention that, given the hyper-salience of “inflation” and “affordability” as public issues in the current climate, it is just not a very politically rational way out.

Conclusion: the right reform, the wrong moment

The question of whether a better target than two percent inflation exists is fairly settled (it does). The unsettled question is whether the US has earned the right, and whether it is fiscally positioned, to reach for it now.

The “Volcker Shock” of the early 80s — when then-chairman Paul Volcker changed the Fed’s policy stance in the middle of a double-digit inflation crisis — offers a clean test. It worked because instead of reformulating the Fed’s mandate, he adjusted its policy regime to deliver the prevailing mandate even harder. He was willing to go as far as tipping the economy into recession by driving interest rates toward twenty percent, all to prove the anchor would hold, bucking what was politically expedient in service of reasserting institutional credibility.

So it is not simply that reform from weakness is impossible. Another example is Brazil, which adopted inflation targeting in 1999 in the teeth of a currency crisis and made it hold, pairing it with a hard fiscal-responsibility law the next year. But Brazil reformed because catastrophe left it no choice and forced discipline alongside the new rule. Today the US has the opposite problem: Fed credibility is often nowadays taken as a given, the dollar’s reserve currency status buys the government enough rope to reform badly, and no external creditor is forcing it to pair a new target with restraint.

Every framework change that strengthened the anchor was, at bottom, a move toward discipline. The world adopted inflation targets in the calm of the 1990s for this very underlying reason: to lock credibility in. What is being entertained now — loosening the anchor to relieve a financing problem — is the mirror image. Rewriting the rule to make a promise harder to break is fine and warranted; rewriting it to make the debt easier to carry would come with harsh second-order effects. And a reform undertaken in this fiscal weather would be the second kind, no matter how carefully it was dressed up as the first.

There is, to be fair, a real truth the reformers are reaching for, and it deserves to be granted. The inflation an economy can comfortably bear really does depend on how fast it grows, so the instinct to tie the rule to nominal output or something macroeconomically similar is not foolish. But you do not get the inflation a fast economy can carry by editing the target. You get it by… growing fast. Thus productivity is the one thing that actually changes what is sustainable, and no act of the central bank can conjure that into being.

None of this is to pretend that waiting is free. Leaving the target where it is for longer carries a real cost, and it is precisely the cost the first half of this essay laid out: a two percent anchor in a low‑r* world means more frequent collisions with the zero lower bound, weaker recoveries, and a central bank too often out of room — a failure of the employment half of its mandate as much as the inflation half (the Japan case is instructive here). To wait is to keep paying that price. And however nontrivial that price is, the alternative price — handing a cornered Treasury a credible-sounding reason to inflate — is larger, and far harder to reverse. A lost recovery may eventually be regained while a debased anchor may not.

So the honest conclusion is the uncomfortable one. Two percent is arbitrary, a better system exists, we know its name, and yet we should still leave it alone. A country in command of its budget could rewrite the rule and be the better for it. But the US — a country running massive deficits at full employment and above-target inflation — has lost the standing to act on it.

Upending monetary policy frameworks now would be like choosing a new referee in the middle of the game we are losing: in all likelihood, it would turn a bad situation worse. This is not an argument for never, but it is an argument for sequence. The moment to reach for a better target is when the conditions that make reaching for it dangerous have eased — e.g., when the deficits have normalized, when debt has stopped climbing as a share of the economy, when the interest bill no longer crowds out everything around it. Inflation-targeting reform belongs to that moment, not to this one.

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Norway and Singapore derive their fiscal strength from accumulated wealth — oil in Norway’s case, decades of compulsory savings and sovereign investment in Singapore’s. Denmark and Sweden demonstrate that generous welfare states can be compatible with fiscal discipline, but only after rounds of market reform and pension restructuring, and only when financed by broad-based taxation rather than redistribution alone.

Luxembourg and Ireland are cautionary as much as exemplary: their headline finances look impressive, but both live off a concentrated windfall, and unlike Norway and Singapore they spend it rather than save it, building permanent commitments on revenue that a change in tax policy or corporate strategy could redirect. Switzerland and Germany are instructive cases for large advanced economies, though for different reasons and through meaningfully different paths. Switzerland benefits from structural economic advantages that, while not as dramatic as North Sea oil, are nonetheless distinctive. Germany is the more instructive example of fiscal discipline achieved with fewer natural tailwinds.

Governments with high levels of asset holdings, such as Norway and Singapore, can be much more solvent than their headline debt-to-GDP figures suggest. At the same time, windfalls — whether from oil, favorable tax geography, or financial services — should be treated as temporary and saved rather than spent. And fiscal rules, when credibly designed and politically sustained, can secure a country’s fiscal solvency for the long term — though, as Germany’s 2025 constitutional exemption illustrates, even the most durable rules can bend under sufficient investment and geopolitical pressures.

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Norway

Norway has one of the largest and most comprehensive welfare systems in the world, but also a dynamic economy and one of the best fiscal positions of any nation on Earth. Many commentators attribute Norway’s ability to fund a welfare state without sacrificing growth or fiscal discipline to the nation’s immense oil wealth.

Indeed, while Norway’s gross government debt is 54% of GDP, its net public wealth remains positive because its financial assets dwarf GDP. What is unique about Norway among oil economies is not that it gives oil wealth to its citizens1, but that it places a strict 3% ceiling on how much of the oil fund can be withdrawn each year and invests the rest in a well-managed sovereign wealth fund.2

Singapore

On paper, Singapore carries a surprisingly high debt-to-GDP ratio for a country synonymous with fiscal conservatism and technocratic governance. In reality, while Singapore’s debt-to-GDP ratio is 171%, most is held to manage reserves and fund compulsory savings rather than to finance deficits.. Like Norway’s, Singapore’s government holds assets well in excess of public debt and other liabilities.

The engine behind Singapore’s reserve accumulation is the Central Provident Fund (CPF), a mandatory savings scheme that functions as the country’s primary social security system. All Singaporean workers and their employers are required to contribute a portion of wages into individual CPF accounts. These funds are then used by the government, which issues Special Singapore Government Securities (SSGS) to the CPF at guaranteed rates, effectively borrowing the population’s forced savings. The proceeds are passed to GIC, one of Singapore’s sovereign wealth funds, for investment in global markets.

This mechanism is a large part of why Singapore’s gross debt figure appears elevated: the debt is not a sign of fiscal distress but rather the liability side of a balance sheet that is more than offset by investment assets. In this sense, Singapore’s “natural resource” is not oil or minerals but the institutionally captured savings of its workforce, intermediated through the state and deployed into global capital markets.3

Singapore’s constitution allows up to 50% of expected long-term real investment returns from reserves to be spent through the Net Investment Returns Contribution, and the state uses these revenues to fund approximately 20% of annual government expenditure. This allows Singapore to maintain competitive tax rates while still financing world-class public services.

Denmark and Sweden

Like their oil-rich Scandinavian neighbor, Denmark and Sweden combine generous welfare states with strong growth and fiscal solvency. But this was not always the case. During the 1970s, both countries expanded public spending beyond what their economies could sustainably support, accumulating deficits. To change course, both nations (Denmark in the 1980s and Sweden in the 1990s) implemented pro-market reforms, spending restraint, and switched to defined-contribution pension plans.

The breadth of their tax bases is the part Americans miss. Denmark and Sweden do not finance their welfare states by taxing the rich — by most measures their tax systems are less progressive than America’s. Both lean on 25% value-added taxes that fall across the income distribution, and their top income-tax rates bite at little more than the average wage compared to the US, where the top bracket doesn’t begin until roughly eight times average earnings.

The ordinary Scandinavian worker hands over a far larger share of his paycheck than his American counterpart. The equality Americans admire is real, but it is produced on the spending side — through universal benefits and services — not by soaking high earners on the tax side. That is the uncomfortable lesson: Americans want Scandinavian services and have shown no appetite for the broad-based taxation, consumption taxes above all, that pays for them. The Nordic bargain is simply “tax everyone, and spend it well,” not “tax the rich.”

Luxembourg and Ireland

Norway and Singapore are not the only countries living off a concentrated windfall. Luxembourg and Ireland are too — the difference is what they do with it.

Luxembourg’s exceptionally strong sovereign balance sheet — with government debt of about 30% of GDP — rests on one of the world's most concentrated financial-services sectors, an industry that exists in large part because of its favorable tax and regulatory regime. Ireland's case is starker: it ran a budget surplus of approximately €12.4 billion in 2025 on corporation-tax receipts of about €33 billion, the bulk paid by a handful of large American multinationals booking global profits through Irish subsidiaries.

But where Norway and Singapore bank their windfalls and spend only the return, these two spend the windfall itself. Luxembourg runs its financial-sector revenue through the general budget, and Ireland — despite launching a Future Ireland Fund in 2024 — routes the large majority of its corporate-tax take, by its own fiscal watchdog’s estimate nearly 90%, into permanent commitments. Building lasting obligations on a windfall is a defensible bet only if the revenue is broad and durable. Ireland’s is neither — nearly half rests on the decisions of just three major foreign firms.

Germany

Germany represents perhaps the most instructive case for large advanced economies precisely because its fiscal strength was built not on resource windfalls or favorable tax geography, but on institutional self-discipline.

The rules and their origins

Germany’s Schuldenbremse, adopted in 2009 and fully binding on the federal government from 2016, caps the federal structural deficit at 0.35% of GDP. Alongside the “black zero” political commitment and a strong economy, it underwrote budget surpluses from 2014 through 2019 and cut public debt from roughly 82% of GDP to just below 60% before the pandemic intervened.

A nontrivial result of this is that German government bonds remain the euro area’s preeminent safe asset, a status that reflects deep market confidence in the country’s fiscal institutions.

Germany’s path to fiscal rules was shaped by reunification4, which required an estimated €2 trillion in fiscal transfers from west to east over three decades and structurally elevated debt through the 1990s. Combined with the low growth of that era — Germany was widely called the sick man of Europe by the late 1990s — these pressures produced the deficit overruns that became a political embarrassment: Germany breached the EU’s 3% ceiling in 2002, 2003, and 2004, making it one of the first prominent violators of the Maastricht rules it had designed. The Schuldenbremse was the response, intended to make recurrence constitutionally impossible.

The 2025 break

In early 2025, Germany’s newly formed government secured a constitutional exemption allowing substantially higher borrowing for infrastructure and defense. A €500 billion off-balance-sheet infrastructure fund was established alongside a carve-out exempting defense spending above 1% of GDP from the Schuldenbremse’s constraints — a response to years of underinvestment and the changed security environment following Russia’s invasion of Ukraine. The Schuldenbremse held for fifteen years and demonstrably shaped German fiscal behavior, but it bent under the combined pressure of geopolitical necessity and accumulated investment deficits. Whether 2025 proves a one-time correction or the beginning of a looser fiscal regime is the central open question in German public finance.

Switzerland

Switzerland's fiscal strength rests on both structural advantages and institutional discipline, making it a more complex case than it first appears, and one that sits somewhere between the pure rule-based model of Germany and the favorable-geography models of Luxembourg and Ireland.

Tax geography and the financial services sector play a meaningful role. Switzerland’s cantonal tax system creates internal competition that keeps rates low and has historically attracted both corporate headquarters and ultra-high-net-worth individuals. The country’s financial services industry — anchored by global private banking, asset management, and insurance — is outsized relative to the population and contributes substantially to government revenue.5

Equally significant is Switzerland’s long-standing role as a destination for wealthy European expatriates seeking relief from the higher tax regimes of neighboring countries. The lump-sum taxation regime (forfait fiscal) lets wealthy foreigners who do not work in Switzerland be taxed on notional living expenses rather than their actual worldwide income or assets — a provision that has drawn billionaires, executives, and high-net-worth retirees from France, Germany, Italy, and the UK.6 It is neither universal nor untouched — five cantons, including Zurich, have abolished it and the federal regime was tightened in 2016 — but it survives federally and in most cantons, giving Switzerland a revenue base that countries inside the EU's tax-harmonization framework cannot easily replicate.

None of this is the whole story, though, because Switzerland also bound itself with a rule. A property-bubble collapse in the early 1990s dragged the economy into prolonged stagnation and pushed federal debt sharply higher; the resulting pressure of a stagnant economy and ballooning debt7 summoned a broad reform coalition, and voters ratified a constitutional debt brake by referendum in 2001. In force since 2003, it has driven federal net debt down to roughly 16% of GDP (among the lowest in the developed world) and delivered some of the cheapest sovereign borrowing anywhere.

So Switzerland is neither a pure story of self-discipline nor a pure story of luck. The structural advantages are real, even if less dramatic than North Sea oil; but the debt brake extended the discipline well beyond what those tailwinds alone would have produced.

Takeaways

Several takeaways emerge from this survey. First, headline debt statistics are frequently misleading. Norway’s gross debt understates its strength; Singapore’s dramatically overstates its weakness. What matters is the full balance sheet — assets as well as liabilities — and the quality and sustainability of the revenues that service them.

Second, windfalls should be treated as temporary until proven otherwise. Norway, Ireland, and Luxembourg all benefit from revenue streams that could diminish or disappear. The countries that have managed such windfalls most successfully are those that saved them rather than built permanent spending commitments around them.

Third, and most importantly for policymakers in larger democracies, fiscal discipline is primarily an institutional challenge, not a technical one. Switzerland and Germany did not stumble into strong public finances; they engineered them through constitutional rules that made profligacy harder and created political cover for restraint.

Similarly, Denmark and Sweden chose fiscal sustainability, at some political cost, after experiencing the consequences of not doing so.

The United States faces none of the insurmountable obstacles that might make these lessons inapplicable. It has no shortage of administrative capacity, no absence of credible institutions, and no lack of economists who understand what a sustainable fiscal trajectory looks like. What it has lacked, at least so far, is the political will to impose constraints on itself before markets demand it.

Of course, none of these analogues map cleanly onto the US — in terms of real economy and political economy — but the lessons from the countries examined here suggest that certain constraints, once adopted and sustained, can compound over time into something extremely valuable: fiscal space that provides security in crises, credibility in markets, and genuine fiscal optionality that heavily indebted nations do not tend to have.

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The evidence, in fairness, has looked pretty compelling. A sovereign that borrows in a currency it prints took gross debt past 240% of GDP and held it there while suffering functionally none of the predicted consequences. There was no funding crisis, no default, no inflation spiral, and ten-year yields on government bonds floated persistently near zero. Blind faith in monetary orthodoxy led many traders to short JGBs in what became known as the “widowmaker” trade. Politically, Japan’s record has made debt hawks in Washington’s hand-wringing over a debt ratio half Japan’s size look like pure theater.

We have also been critical of MMT, even if it’s impossible not to concede much of the theory’s core premises. The central descriptive claim — that a monetary sovereign does not face the hard external-funding ceiling that constrains a household, a firm, or even a euro-zone member — is not wrong. Unlike the Soviet Union or the graveyard of other sovereigns whose fiscal crises precipitated their nations’ undoing, Japan’s debt is almost entirely held by its own citizens and domestic institutions. This means that the risk of a classic sovereign default, where a country runs out of foreign currency to pay its foreign creditors, is effectively nil.

But sovereign default is not the only risk vector and Japan’s record was never evidence of deficits being costless. In this piece, we argue instead that it was evidence of a specific machine running under specific conditions, that these rather goldilocks-esque conditions have meaningfully shifted, and that Japan isn’t as much the counterexample to fiscal anxiety as it is a fairly strong case for it.

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The Machine

The conventional fiscal-anxiety framework begins with Sargent and Wallace's 1981 “Some Unpleasant Monetarist Arithmetic,” which showed that monetary financing eventually becomes a tax on bondholders via inflation. Japan long looked like the exception. Headline and core inflation ran near zero or below 2% for most of the period after the 1990s asset bust, and even after the BoJ formally adopted a 2% CPI target in 2013 it repeatedly undershot that goal — the expected tax never showed up. Yet former IIF chief economist has characterized Japan as “where MMT goes to die.” Exactly how it is dying is an instructive case for the developed world's fiscal hawks.

Let's start with the underlying "machine," which involved three moving parts:

1. A central bank with an inflation target it couldn’t hit;

2. A fiscal authority that took advantage of the resulting low‑rate environment to borrow heavily at near‑zero nominal yields; and

3. A captive, predominantly domestic, investor base — banks, insurers, pension funds, and eventually the BoJ itself — that absorbed most of the issuance.

An aging population and chronically weak demand kept underlying inflation pressures subdued, giving the BoJ room to expand its balance sheet aggressively. Rather than demonstrating that debt and deficits are irrelevant, under the cover of chronic deflation, Japan’s experiment amounted to a prolonged attempt by the BoJ to lift inflation to target via large‑scale asset purchases (QQE and yield‑curve control) that made its balance sheet, as a share of GDP, far larger than the Fed’s at its QE peak.

This was highly convenient for the fiscal side. As long as inflation stayed below target and long‑term yields remained compressed, the government could roll over and expand its debt stock at minimal interest cost, while the central bank absorbed a growing share of outstanding JGBs through secondary‑market purchases. Put simply, the government issued while simultaneously the central bank absorbed.

What the BoJ didn't absorb directly, the captive domestic savings pool did. Regulations had channeled household deposits into low-yield accounts and the postal system: upwards of 90% of JGBs have been held by domestic institutions and households for most of the past two decades.1

makes the sharpest version of the reading. In the market-monetarist frame, the stance of monetary policy is defined by outcomes-versus-target, not by instrument settings themselves. Perhaps counterintuitively, low rates and a massive balance sheet are actually consistent with a tight monetary stance in a situation where the central bank keeps missing its inflation target to the downside.2

By that measure, the BoJ ran a relatively hawkish policy regime for three decades — whatever the face value of its instruments might have indicated, and however stable markets remained.

No Crisis Is Not The Same As No Cost

What the dovish reading misses, even on its own evidence, is what the dormancy actually cost. Japan didn’t disprove the inflation constraint so much as find the one macroeconomic environment in which it lies dormant — chronic, structural deflation — and live there for thirty years. The cost of doing so was real, even if it wasn’t paid in the way the dovish framework would predict.

The fiscal expansion that ran alongside the monetary one — in Sumner’s own words, “one of the most reckless in human history” — was reckless precisely because it failed to stoke aggregate demand. Monetary offset kept demand neutralized in real time, so the deficits bought very little in macro terms, not even inflation.3 For an MMT framework that locates demand in fiscal policy, this must constitute the model failing on its own metric. Indeed, the one period of decent NGDP growth — Abenomics — came when Japan combined aggressive monetary easing with a shift back toward consolidation, including consumption-tax hikes in 2014 and 2019, rather than the ever‑looser fiscal stance MMT advocates.

What the deficits bought instead was time. Japan paid continuously in foregone growth: for much of the period since the mid‑1990s, its nominal GDP has been essentially stagnant, with the level in the early 2000s about the same as in 1995 and even in 2025 still below its mid‑1990s peak in dollar terms.

So the honest framing here is that the debt ratio climbed less because the numerator exploded than because the denominator refused to grow. Three decades of calm bond markets were three decades of monetary policy successfully suppressing what fiscal policy was trying to do — while the debt stack piled up. As Sumner has put it:

“I was told ‘deficits don’t matter’ because interest rates were low. I pointed out that rates might not stay low forever, and that these debts would still be on the books when interest rates started rising.”

The familiar “Lost Decade” story does a good job of naming the symptoms, but the underlying dynamic gets much less attention.

Such an environment produced an economy where capital found no productive call worth answering, and what got starved was the productive base. Real wages went sideways for decades; corporate Japan, sitting on the deepest cash piles in the developed world, rationally declined to deploy them. Unsurprisingly, the Nikkei spent thirty-four years climbing back to its 1989 peak, creating a generation of equity investors who got less than nothing in real terms. Meanwhile balance sheets stayed pristine and markets non-volatile, while the central bank was left without the capacity to answer shocks and household purchasing power eroded under a currency the authorities had limited room to defend and ultimately allowed to slide.4

Now, none of this argues away demographic forces. An aging, shrinking workforce was never going to support 4% growth no matter what the BoJ targeted, and any honest account has to start there.

But the argument here is incremental: conditional on those structural drags, the policy arrangement let the productive base hollow much further than it had to — by suppressing the price signals (rising yields, a weakening currency, modest inflation) that would have pushed capital into more productive use. Former IMF chief economist Ken Rogoff puts the counterfactual — Japan without the bubble, the messy crisis aftermath, the policy errors — at roughly 25-50% richer per capita than the actual one. So yes, demographics did a lot of the work. But policy probably did a lot of it too.

Crucially, what began as the BoJ’s failure to hit its target became, over time, the architecture the state built around. Chien, Du, and Lustig (2025) gives the cleanest recent statement of what that architecture was: a sovereign wealth fund built on cheap, borrowed money. Yen-denominated household deposits, effectively held captive, were what shouldered the costs of exorbitant JGB issuance. In other words, Japan’s private households and financial institutions financed a leveraged equity portfolio — a hedge fund of sorts — running a carry trade that belonged entirely to the state. Another way to think of this is that Japanese domestic savings were effectively channeled into funding the productive economic bases of other countries, while Japan’s own went unfunded (or at least, underfunded).

By the mid-2020s, Japan’s government-owned stocks and foreign investments topped 100% of GDP. Less than half of that portfolio was in domestic equities, with the rest in foreign assets — US stocks, Treasuries, and other sovereign bonds.5

The financial-repression literature (Carmen Reinhart’s work is canonical) is pretty straightforward on this. Sustained negative real rates against captive demand quietly liquidates the national debt. Ken Rogoff, Reinhart’s frequent co-author on this work, calculates these “very large losses on domestic savers through a combination of low real yields, currency weakness, and financial repression” to be on the order of 3–4% of GDP per year in many historical episodes.

To be sure, this liquidation cost is ultimately being paid by Japanese households, whose stock‑and‑bond participation still hovers around the low‑20s percent, versus roughly 60% of US households owning stock in some form.6 And so the much-admired price stability came in the form of an expensive tradeoff. A generation of suppressed dynamism was facilitated in exchange for basically never having a single bad week in the bond market. This tradeoff has played out even as the currency's safe-haven status meaningfully eroded, which is where we turn next.

The Cover Is Gone

After thirty years of fighting falling prices, the conditions that made the machine work have now reversed. What Japan (theoretically) wanted — for inflation to normalize — has arrived: wage settlements above 5% for the third consecutive year, the strongest run since the early 1990s, and headline CPI that peaked above 4% in early 2023 and hovered above 2% for much of 2023–25 — partly imported through the weak yen coupled with rising global energy prices, partly a result of the domestic wage-price dynamic the BoJ spent two decades trying to summon.

Without the deflationary cover, the BoJ cannot print to suppress yields without feeding the above-target inflation it must now instead contain. So it has been forced to pivot: it ended negative rates and abolished yield-curve control in March 2024, raised its policy rate to 0.75% by December 2025, then to 1.0% just this week — the highest since 1995 — and began tapering its large-scale asset purchases.

The instinct here would be to take cues from the bond market — from JGBs — as to the manner in which the monetary pivot is being digested by market participants. But that instinct is wrong (or at least incomplete). JGB yields, as a market signal, are a noisy and probably muted read on Japan‑specific distress, because the BoJ still holds just under half the JGB stock and remains an important buyer at the long end.7

So, if the inflation constraint does not bite via higher yields on government debt, where exactly is it binding?

Robin Brooks’s central insight — that the constraint may alternatively take the form of currency depreciation, which can run out of control when debt gets too high — is useful here. He has adamantly maintained that a sovereign’s risk premium does not vanish when its central bank caps yields. Instead, the risk premium relocates, because yield caps plug just one of several release valves, “merely transform[ing] what would have been a bond market crisis into a currency crisis.”

The higher-signal thing to watch here is therefore the currency, and Japan’s currency is indeed behaving as though a crisis is already underway.8

Importantly, a weaker yen is a major source of anxiety for the Japanese consumer, who imports a great deal of everyday goods like energy and food. As the yen has cratered post-Covid, consumer spending in Japan has only just recently clawed back to around its pre‑Covid level in real terms:

Worse yet, the bond market is still leaking because, muffled as the market may be, price discovery persists.9 The forty-year yield punched above 4% in January 2026, the first 4%+ print on any super-long JGB in roughly three decades, and the May 2025 twenty-year auction drew the weakest demand since 2012.

The Ministry of Finance has thus responded by trimming super-long issuance and shifting toward shorter tenors, the classic move of a sovereign under funding stress when the pain of higher yields starts to flow through.

Nevertheless, on the fiscal side the Takaichi government — in office since October 2025 having run on subordinating the primary-balance target to growth — is pressing the accelerator, with a record ¥122.3 trillion budget financed by ¥29.6 trillion in fresh issuance. The fiscal-2026 budget assumes a 3% funding rate, the highest in twenty-nine years, with debt-servicing costs at a record ¥31.3 trillion, over a quarter of total expenditure. (Market practitioners named the ‘Takaichi trade’ months ago: stronger Nikkei, weaker JGBs and yen.)

But what the MMT-friendly “decades of calm” reading blatantly misses about exorbitant debt and duration is that the pain also arrives even when holding yields constant. As the ever-rising debt stock reprices, each maturing low-coupon bond is replaced by a higher-coupon one causing debt-servicing costs (interest payments) to rise even if yields stop climbing.10

It is telling that the central bank has stopped pretending. In a February 2026 speech, BoJ Policy Board member Hajime Takata attributed the rise in long-end yields to “a rise in the risk premium, known as the term premium.” This is, in no uncertain terms, the monetary authority acknowledging that the jig is up the market is now pricing fiscal risk into Japanese debt.11

Honest engagement with the dovish rebuttal survives all of this. An economist at Dai-ichi Life puts the rebuttal cleanly: in an era of inflation, rising debt-service costs come bundled with rising nominal GDP and tax revenue, so a bigger interest bill is not automatically a solvency problem. The IMF makes the same point structurally — nominal growth that exceeds the effective interest rate is precisely what has pulled Japan’s ratio down from its 258% pandemic peak toward 230%, even as gross debt stays the highest among major economies. This is also the Blanchard point, and it is correct as arithmetic.

A parallel rebuttal runs on the debt itself: net of the government's vast financial-asset holdings, Japan's net debt drops to around 130% of GDP. Consolidate the BoJ's JGB holdings as the intragovernmental claim they economically are, and the figure falls to on the order of three-quarters of GDP — lower than the US on the same measure.

Furthermore, Sumner’s “never reason from a price change“ rule says that rising stocks beside rising yields signal stronger expected growth, not panic, and Japanese thirty-year yields still sit more than a hundred basis points below the US counterpart. On the narrow question of whether Japan is experiencing something like the 2022 gilt rout, he is right — it unequivocally is not.

But the favorable arithmetic is a harder bet than it sounds. It requires nominal growth to durably exceed the marginal funding rate as the entire debt stock reprices, and Japan’s structural real growth runs near half a percent against a long-end now yielding 3 to 4%. Brooks’s framing cuts underneath the arithmetic entirely: a monetary sovereign can run out of fiscal space long before inflation forces the issue, because the constraint shows up first in the currency and the term premium rather than in a missed payment.

Markets, as Brooks wrote in January, are therefore telling Japan that it has run out of fiscal space. And the cost is very real, even if it gets paid through subtler channels than a sovereign-default headline would suggest — through captive savings, an eroded currency, the financial repression of negative real returns on deposits. Others have described this kind of erosion of creditors’ claims as a “stealth default.”

So while the dovish case on debt-and-deficits isn’t necessarily foolish or misinformed, it is unresolved. Japan, given the ambitiousness of its monetary experimentation, is doubtlessly where it gets resolved over the next several years. The harder question, and the one that matters for Washington, is whether the structural conditions that let Japan run the experiment in the first place are at all replicable.

Why Washington Can’t Copy Tokyo

Strip out the short-term rates set by central banks, and the long end of the yield curve is telling a similar story across the developed world at once: the same term-premium widening shows up in the United States, the United Kingdom, France, even Germany, the safe haven of old. None of this is unique to Japan in direction, only in degree.

Brooks’s frame is that this is a single synchronized event — the world used up its fiscal space during the pandemic, and markets now demand to be paid for holding long-dated debt everywhere. Japan is simply the leading edge, with a central bank that ran the suppression experiment longest and is unwinding it first, which makes it the diagnostic case. The question for Washington is not whether it faces the same debt-repricing pressures — it does — but whether it faces those pressures in the same way as Japan does.

The conditions, however, diverge sharply, for three main reasons.

1) What made Japan’s debt sustainable (for as long as it was) doesn’t translate to the US.

Japan financed thirty years of deficits out of a vast domestic institutional balance sheet: on the order of 90% of its government debt has been held at home, by patient, price-insensitive institutions — the BOJ, life insurers, banks, the postal system — with yen liabilities and nowhere to flee. Formerly the world’s largest net creditor for most of the period, running persistent current-account surpluses throughout, Japan lost its top-creditor spot in 2024.12

Now, price-sensitive marginal buyers exist where there predominantly used to be captive domestic ones: foreigners are now roughly 65% of monthly cash JGB turnover. In short, the conditions that made Japan’s exception possible — including a thirty-year deflationary window — are rapidly closing.

Crucially, the captive domestic creditor base is the single most important fact about what made Japan’s tolerance for debt so high for so long, and it’s just not something the US can manufacture. The US is the mirror image: the world’s largest net debtor, running structural current-account deficits, financing itself from abroad with foreigners holding a substantial share (albeit down to nearly a third) of marketable Treasuries.

2) The standard rejoinder is that the US has something better than domestic savers: the dollar.

The reserve currency commands a deeper, more durable bond‑demand base than the yen ever did: the dollar still accounts for close to 60% of global FX reserves versus only a few percent for the yen. The dollar’s “exorbitant privilege” is real, but it doesn’t rest only on market depth or network effects. A large majority of official dollar reserves and other “safe” U.S. assets are held by countries inside the U.S. security perimeter, and Eichengreen, Mehl, and Chiţu (2019) shows that military alliances boost the dollar share of a partner's reserves by about 30 percentage points. In a 2025 follow-up, the same authors estimate that credibly withdrawing those alliances would cause roughly 6% of US marketable public debt to be liquidated and long-term rates to rise by up to 80 basis points — adding around $115 billion a year to Treasury interest costs."

Thus a significant part of the reserve premium — over and above depth and network effects — is the alliance system. Pulling on the security architecture is pulling on the ballast of America’s borrowing position. The dollar’s role also brings its own asymmetric failure mode. Because it anchors global reserves, trade invoicing, and cross‑border funding, a disorderly dollar adjustment would not only hit US consumers via higher import prices, it would also propagate as a global shock through funding and credit channels.

Japan, by contrast, can endure a slow, grinding, decades‑long yen depreciation (painful for its own households but far less systemic) precisely because the yen is a much smaller reserve and funding currency.

3) Interest on the debt in the US isn’t merely a “distributional issue.”

Let’s assume that Mosler is right and that rising interest costs on Japan’s debt are merely a distributional issue — meaning that those higher interest payments amount to government transfers to domestic asset-holders (who skew higher in wealth and income). Whereas the vast majority of Japan’s public debt is held by domestic creditors, this would not hold true for the US, whose public debt is held by a significant contingent of foreign investors. In the US, instead of merely being a distributional issue, a meaningful portion of such debt‑servicing costs are transferred to bondholders abroad rather than recycled within the domestic private sector.

Final Takeaways From Japan

The right lesson from Japan is neither the dovish one nor its hawkish caricature — not “we have decades, relax,” nor “we are one auction from a Greek crisis.” Japan financed its reckoning in foregone growth, a captured monetary policy, and a currency now doing the adjusting, and it is making the payments in a compressed window with a government still pressing the accelerator.

Sumner makes the monetarist version of the warning — that the recent run of 6%-of-GDP US deficits arrived in unusually good years, with no recession, war, or pandemic. To read that calm as sustainable is to “miss the dog that didn’t bark.”

That leaves a narrow menu. Monetization is what Japan exhausted; it works until inflation returns, then inverts into the currency crisis now playing out. Consolidation exists on paper and dies in politics (in Tokyo and Washington alike) for reasons Buchanan and Wagner identified: democracies overspend on benefits that accrue to identifiable voters while the taxes are diffuse and deferred. Cutting those benefits concentrates pain on groups that vote, so the rational political move is to just avoid the pain to ultimately avoid the blame. In other words, the off-ramp exists but the politics necessary to take the off-ramp don't.

What then remains is the only exit that is neither austerity nor a currency-and-inflation event. And that is growing the denominator (GDP) faster than the bond market reprices the numerator (the debt). Productivity, as we’ve argued previously, is the only plausible path that makes the fiscal arithmetic survivable. Importantly, it requires investing in productive capacity underneath the debt stock rather than leaning further into mandatory spending.

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Brooks highlighted this interesting comparison: in real effective terms, the yen fell below the Turkish lira in April 2026. That is a developed creditor nation’s currency — considered for decades by global investors as the safe-haven currency — trading, in real terms, below a currency tied to one of the world’s most fiscally disastrous regimes in recent history.

Over the past three decades, however, a competing body of research has challenged this conclusion. Associated most prominently with Alberto Alesina and his collaborators, this literature argues that the economic effects of fiscal adjustment depend not only on its size but also on its composition. Spending-based consolidations, it contends, are generally less damaging to growth than tax-based consolidations and, under certain conditions, may even coincide with economic expansion. Fiscal policy affects the economy not only through its immediate impact on aggregate demand but also through expectations, investment decisions, and perceptions of future tax burdens.

In Austerity: When It Works and When It Doesn’t, Alberto Alesina, Carlo Favero, and Francesco Giavazzi present the most comprehensive defense of this argument. Drawing on roughly 200 multi-year fiscal consolidation plans implemented across sixteen OECD countries between the late 1970s and 2014, they conclude that expenditure-based adjustments consistently outperform tax-based consolidations in both preserving economic growth and restoring fiscal stability. Their findings challenge one of the central assumptions of modern Keynesian macroeconomics: that spending cuts necessarily impose larger economic costs than tax increases.

The argument remains deeply contested. Critics have questioned the authors’ identification strategy, the role of monetary policy in successful consolidation episodes, and the size of the fiscal multipliers underlying their conclusions. Research following the eurozone debt crisis has suggested that austerity may be considerably more costly during recessions than earlier estimates implied. The debate is therefore not simply about whether austerity works. It concerns the mechanisms through which fiscal policy affects economic activity, the conditions under which fiscal adjustment succeeds, and the trade-offs governments face when attempting to restore fiscal balance.

This article evaluates those competing claims. It examines the Keynesian case against austerity, the evidence on fiscal multipliers, the historical episodes that underpin the expansionary-austerity literature, and the experience of the eurozone debt crisis. While the evidence suggests that spending-based consolidations are often less damaging than tax-based ones, outcomes depend heavily on monetary conditions, the credibility of the adjustment plan, and the specific categories of spending being reduced. Fiscal consolidation is not simply a question of how much governments cut. It also depends on what they cut, when they cut it, and under what economic circumstances.

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The IS-LM Model

To understand why austerity is so contested, it helps to begin with the theoretical framework that has shaped macroeconomic thinking on fiscal policy for nearly a century. The IS-LM model, developed by John Hicks in 1937 as a formalization of Keynes’s General Theory, maps the relationship between interest rates and real output across two equilibria: the goods market (the IS curve) and the money market (the LM curve).

From this framework flow three conclusions that form the backbone of the Keynesian case against austerity.

The first is that fiscal contraction shrinks output. When the government cuts spending or raises taxes, it withdraws demand from the economy. Firms sell less, hire less, and invest less. The IS curve shifts left, reducing equilibrium GDP.1

The second is that spending cuts reduce output and employment more than tax hikes. A cut in government spending directly removes demand from the economy, dollar for dollar; the government simply stops buying goods and services, and GDP falls by the full amount before any multiplier effects. A tax increase is one step removed: the government raises taxes, households have less disposable income, and they reduce consumption by the amount of the tax increase multiplied by the marginal propensity to consume (MPC). This response reflects primarily an income effect: households feel poorer because their after-tax income has fallen, so they reduce spending. There may also be a wealth effect, since higher taxes can lower the present value of households’ future resources and make them feel less financially secure, further discouraging consumption. However, because households save some fraction of their income rather than spending it all, a one-dollar tax increase reduces consumption by something less than one dollar. The tax multiplier is therefore smaller in absolute value than the spending multiplier. In the textbook Keynesian model, if the MPC is 0.8, the spending multiplier is 5 and the tax multiplier is 4. This distinction is central to the austerity debate: both instruments are contractionary, but a government that must close a given deficit gap by some combination of the two will do less short-run damage by raising taxes than by cutting spending by the same amount.

The third conclusion is that fiscal contraction is especially severe during recessions. When the economy is already operating below potential and interest rates are near zero, monetary policy loses traction: the central bank cannot meaningfully offset fiscal drag by cutting rates further.2 Austerity applied at the trough of a business cycle therefore bears much of its contractionary weight without the same countervailing force that conventional monetary easing might provide in normal times.

These conclusions are internally coherent, but the IS-LM model rests on assumptions that do not always hold. It treats expectations as largely static, overlooking the possibility that credible fiscal consolidation can boost consumer and investor confidence, lower sovereign risk premiums, and crowd in private investment. It also assumes that government spending multipliers are consistently positive and large, an assumption that a substantial empirical literature has called into question. Finally, the model is largely silent on the composition of fiscal adjustment: whether deficits are reduced through tax increases or spending cuts. It is precisely this omission that Alesina, Favero, and Giavazzi seek to address.

Multiplier Madness

Central to every argument about fiscal policy is the size of the fiscal multiplier: the change in output produced by a one-unit change in government spending or taxation.

The Keynesian Model

In the simple Keynesian model, this number is unambiguously greater than one. A dollar of government spending enters the economy, is earned as income, a fraction of which is saved and the remainder spent again, generating a cascade of demand that exceeds the original injection.

Keynesian theory draws a sharp distinction between the spending multiplier and the tax multiplier, and the difference has direct consequences for austerity policy. The government spending multiplier works through a direct injection: when the government spends a dollar, that dollar becomes someone’s income immediately. With a marginal propensity to consume of 0.8, the recipient spends 80 cents, which becomes someone else’s income, 64 cents of which gets spent, and so on. The total increase in output is 1 / (1 - MPC), or 5 in this example.

The tax multiplier, alternatively, operates indirectly. A one-dollar tax cut raises household disposable income by one dollar, but households save some portion of it; if MPC is 0.8, they spend 80 cents, and the multiplier chain proceeds from there. The tax multiplier is thus MPC / (1 - MPC), or 4 with the same assumptions. A tax increase of $1 billion therefore shrinks output by $4 billion in this model, while a $1 billion spending cut shrinks it by $5 billion. This gap is the theoretical basis for the claim that spending cuts are the more destructive form of austerity, dollar for dollar.

In practice, the gap between the two multipliers has important policy implications. If a government needs to close a $100 billion fiscal gap, it can do so through spending cuts, tax increases, or a blend. The simple Keynesian model says tax increases inflict less short-run output damage per dollar of deficit reduction. Alesina and his co-authors do not dispute this arithmetic but argue that the model misses the longer-run dynamics: tax increases suppress private investment and business formation in ways that compound over years, while spending cuts, if credible and well-targeted, can actually improve confidence and crowd in private activity.

The debate is therefore not solely about the magnitude of the multipliers but about their persistence and about the channels through which fiscal policy affects business expectations.

The More Recent Literature

Empirical research over the past three decades has told a far messier story. Estimates of the fiscal multiplier vary so widely across studies and economic contexts that extracting a reliable consensus figure is essentially impossible.3

The disagreement is partly methodological. Identifying the multiplier requires isolating changes in fiscal policy that are genuinely exogenous, not driven by the state of the economy itself, and this is exceedingly difficult. Governments typically cut spending during booms and expand it during recessions, which means a naive regression of output growth on spending changes will underestimate the multiplier, since high spending is observed alongside weak output. Different studies correct for this problem in different ways, using instrumental variables, narrative records of policy decisions, or structural VAR models, and arrive at different answers. The IMF’s 2010 World Economic Outlook used one approach and found multipliers of around 0.5; a follow-up paper by Olivier Blanchard and Daniel Leigh, examining the same consolidation episodes, found that the IMF’s models had systematically underestimated the multiplier during the post-2008 period, with true values closer to 1.5.

The difference was not trivial: it implied that the austerity programs applied across Europe in the early 2010s had done roughly three times as much economic damage as the institutions overseeing them had projected.4

But the disagreement is also substantive. The multiplier appears to vary significantly with economic conditions: larger when the economy is in recession than at full employment, larger when interest rates are at the zero lower bound5, larger in closed economies than open ones, and larger for direct government consumption than for transfers or tax cuts.

These differences matter enormously for policy, because they mean that a multiplier estimated from one context may not generalize to another. The Keynesian case that fiscal policy is reliably stimulative in downturns is better supported than the crude version that multipliers are uniformly large and stable. But the corollary — that spending cuts in a depressed economy are reliably catastrophic — is also too strong. The experience of the 1990s in particular generated a set of counterexamples that the simple model struggles to accommodate.

What the multiplier debate also leaves out is any account of the long-run fiscal trajectory. A government that sustains primary deficits for long enough will eventually face a reckoning, through rising interest costs, loss of market access, or some form of forced (and often ill-timed) adjustment. In that context, the relevant counterfactual to austerity is not indefinitely sustained stimulus but eventual, possibly disorderly, consolidation under less favorable conditions. The expected cost of postponing adjustment must be weighed against the certain cost of undertaking it now, and the multiplier literature, focused as it is on short-run output dynamics, has relatively little to say about how that calculation should be made.

The empirical debate over multiplier size is, in this sense, somewhat beside the point: even a large multiplier does not tell you whether to consolidate, only what it will cost in the short run. The historical cases of countries that consolidated successfully, and some that did so while growing, are therefore where the real analytical weight lies.

Expansionary Austerity

The cases that most sharply challenge the Keynesian framework are those in which fiscal consolidation was followed not by recession but by acceleration, episodes where the contractionary arithmetic of the IS-LM model simply failed to materialize. The historical record contains enough such cases that they cannot be dismissed as flukes, even if each one can be contested on its own terms.

Denmark

Denmark in the mid-1980s offers one of the earliest and clearest examples. Facing a large current account deficit and rising public debt, the Danish government implemented a multi-year consolidation plan beginning in 1983 that combined spending restraint with a currency peg to the Deutsche Mark. Rather than tipping the economy into recession, the adjustment coincided with a sharp acceleration in private consumption and investment.

The standard interpretation, advanced by Giavazzi and Pagano in their 1990 paper, is that the credibility of the fiscal adjustment, signaled by the exchange rate anchor6 and the durability of the spending cuts, shifted household expectations about future taxes downward, boosting current consumption through the wealth effect.

Canada

Canada’s adjustment in the mid-1990s is particularly instructive because it was larger in scale and implemented without an exchange rate anchor. By 1995, Canada’s federal debt-to-GDP ratio had reached 70 percent and its sovereign credit rating was under threat. The Liberal government of Jean Chrétien, working with Finance Minister Paul Martin, implemented a consolidation plan that reduced program spending by roughly 20 percent ($25 billion) over three years (about four points of GDP), a pace of adjustment more aggressive than almost anything attempted in Europe two decades later. The cuts fell heavily on transfers to provinces, public sector employment, and subsidies to crown corporations, while tax increases played a marginal role.

Growth slowed modestly in the first year and then rebounded strongly; by the late 1990s, Canada was running primary surpluses and its debt ratio was in rapid decline.

The Canadian case is difficult to fully disentangle from the concurrent boom in global commodity prices and the depreciation of the Canadian dollar, both of which provided external tailwinds to its energy and lumber exporting sectors, but the speed and durability of the fiscal turnaround remains remarkable.

Ireland

Ireland’s experience prior to the euro crisis provides the sharpest internal contrast in the austerity literature. Between 1982 and 1986, Ireland attempted to close a yawning fiscal deficit primarily through successive rounds of tax increases. Income tax rates were already high and were raised further, VAT was increased, and new levies were introduced across the tax code. The effort failed comprehensively. Output stagnated, unemployment climbed to 17 percent, emigration accelerated, and the debt-to-GDP ratio continued rising despite the fiscal drag. By 1986, the deficit was barely smaller than it had been four years earlier, and the economy was mired in a low-growth equilibrium that showed no sign of self-correction.

The adjustment after 1987 took a fundamentally different form. The incoming Fianna Fáil government, working under a national social partnership agreement on secured wage moderation in exchange for tax reform, front-loaded deep cuts to public expenditure, particularly the public sector wage bill, capital spending, and social transfers, while holding and eventually reducing tax rates. Corporate tax policy was made more favorable to foreign investment.

The results defied the predictions of the simple Keynesian model: growth accelerated sharply, private investment rose, unemployment began a long decline, and the debt-to-GDP ratio fell throughout the consolidation. Ireland’s two consolidation episodes, separated by only a few years and applied to the same economy with similar initial conditions, constitute something close to a natural experiment in the authors’ central thesis.

The composition of the adjustment, tax-heavy in the first instance, expenditure-based in the second, appears to account for most of the difference in outcomes.

None of these cases are clean. Each can be contested on the grounds that external conditions were favorable, that monetary policy was accommodative, or that country-specific factors — a flexible exchange rate, a particular institutional arrangement, a fortuitous alignment with the global cycle — explain the outcomes as much as the composition of the fiscal adjustment does.

Alesina and his co-authors are aware of these objections and address them through their econometric framework, attempting to control for cyclical conditions and monetary policy stances. Their conclusion is that the composition effect survives these controls. But whether the controls are fully adequate remains an open question, and the eurozone crisis provided a set of test cases that put the framework under considerable stress.

The Eurozone Crisis

The sovereign debt crises that swept through the eurozone periphery after 2010 became the most closely watched natural experiment in fiscal policy in decades. The trigger was a sudden repricing of sovereign risk: bond markets, which had treated eurozone debt as near-interchangeable through most of the 2000s, began demanding sharply higher yields to hold the obligations of weaker member states. Greek ten-year yields eventually reached an all time high of ~37% in March 2012, shutting Athens out of private capital markets entirely; Portuguese and Irish debt followed, while Spanish and Italian yields backed up to levels that raised serious questions about debt sustainability in the eurozone’s third and fourth largest economies. Greece restructured its sovereign debt in 2012, imposing roughly 50 percent losses on private creditors in what was then the largest such restructuring in history.

The underlying vulnerabilities differed by country but shared a common architecture. Eurozone membership had compressed borrowing costs across the periphery through the 2000s, enabling fiscal looseness in Greece, construction-driven credit booms in Spain and Ireland, and persistent current account deficits across the bloc. When the 2008 financial crisis exposed those imbalances, investors reconsidered the implicit assumption that membership constituted a joint guarantee — and the ECB’s explicit mandate against monetary financing of sovereigns meant there was no institutional backstop against self-fulfilling runs on even solvent governments.

Four countries, Greece, Portugal, Spain, and Italy, were thus forced into large-scale fiscal consolidations under varying degrees of external pressure. Greece and Portugal (as well as Ireland) accepted formal troika programs — administered jointly by the European Commission, the ECB, and the IMF — with disbursements conditional on fiscal targets and structural reforms. Spain and Italy, too large to bail out under existing facilities, faced market pressure without formal programs.

All operated within a monetary union that precluded exchange rate adjustment, concentrating the full burden of rebalancing on wages, prices, and fiscal retrenchment. We’ll begin with Greece.

Greece

This is the hardest case for any framework to accommodate. The scale of the required adjustment was without modern peacetime precedent: a primary deficit that peaked above 10 percent of GDP had to be eliminated within a few years under troika conditionality. The composition was mixed, combining deep cuts to public sector wages and pensions with large increases in VAT, income taxes, and a succession of emergency levies.

Because the Greek state had limited capacity to cut the kinds of transfers and discretionary spending that the expenditure-based template requires — much of Greek public spending was constitutionally protected or practically impossible to reduce quickly7 — the adjustment was inevitably more tax-heavy than the Alesina framework would recommend. GDP fell by more than 25 percent over five years, unemployment peaked above 27 percent, and the debt-to-GDP ratio rose throughout the consolidation, as collapsing output overwhelmed the primary surplus that was eventually achieved.

Whether a purely expenditure-based adjustment would have produced better outcomes is genuinely unclear. It is not obvious that such an adjustment was available: the Greek state’s institutional capacity to implement spending cuts was limited, and the social and political constraints on the size of the adjustment were severe regardless of its composition.8

Portugal

Portugal’s experience is more amenable to the authors’ framework. Its adjustment program, initially front-loaded with tax increases, pivoted toward expenditure restraint in its later years. The painful early phase produced a sharp recession. As the composition shifted, with reductions in public sector wages, transfers, and subsidies taking on a larger share of the adjustment, the pace of contraction moderated. Portugal exited its bailout program in 2014 without a debt restructuring, achieved a primary surplus, and subsequently posted some of the stronger growth rates in the eurozone.

The Portuguese case does not unambiguously vindicate the spending-cut thesis — the recovery also benefited from the ECB’s more activist posture after Mario Draghi’s 2012 “whatever it takes” intervention and from strong export growth — but its trajectory is broadly consistent with the prediction that shifting the composition of adjustment toward expenditure produces better outcomes over time.

Spain

Spain’s consolidation is perhaps the most complex. Its post-2010 adjustment combined tax increases, regional spending cuts, and significant structural labor market reforms that reduced the cost of hiring and firing and moderated wage growth in the tradable sector. The labor market reforms were arguably as important as the fiscal measures in restoring Spanish competitiveness and eventually driving the recovery. Unemployment reached 26 percent at its peak, but Spain’s recovery was more durable and more broad-based than Greece’s, aided by a more diversified economic structure and stronger institutional capacity.

Spain suggests that the composition of structural reform matters alongside the composition of fiscal adjustment, and that the two interact in ways the Alesina framework does not fully capture.

Italy

Italy presents the most uncomfortable case for the book’s thesis, not because it disproves the composition argument, but because it illustrates how binding the political constraints can be. The Monti government’s emergency consolidation of 2011 and 2012 relied overwhelmingly on tax increases: a major revival of the property tax, a sharp rise in fuel duties, increases in VAT, and a surcharge on high incomes. Meaningful spending restraint was essentially off the table in a country with deep clientelistic networks and constitutionally protected entitlements. The result was a double-dip recession that pushed Italian GDP more than 9 percent below its 2007 peak by 2013, from which the country had still not fully recovered a decade later.

The composition was wrong in precisely the way Alesina predicts, and the outcomes were correspondingly bad. But the lesson Italy teaches is not simply that you should cut spending instead of raising taxes. It is that when cutting spending is institutionally unavailable, the theoretical optimum offers no practical guidance. The framework tells you what works; Italy shows that what works is not always what is possible.

Britain

The authors cite Britain’s post-2010 consolidation under George Osborne as a qualified success for the spending-cut approach, and the initial evidence appeared to support this reading: the deficit fell, the sovereign credit rating was preserved, and growth returned by 2013. In retrospect, this verdict looks considerably less secure. British productivity growth was exceptionally weak throughout the austerity decade, with output per hour flatlining in a way that had no precedent in postwar data.

Public investment, which bore a disproportionate share of the cuts, fell sharply and stayed low, and may have depressed the economy’s long-run supply capacity in ways that do not show up in short-run output statistics.9 The National Health Service and local government services were compressed to the point where the structural damage is still being counted.

Britain’s consolidation may have succeeded in narrow fiscal terms while imposing large, diffuse costs that were slow to materialize and difficult to attribute to any single policy decision. This possibility points toward a refinement the Alesina framework needs but does not fully provide.

Not All Spending Cuts Are Equivalent

Cuts to government consumption, public sector wages, administrative overhead, and procurement are likely to have different long-run consequences than cuts to public investment in infrastructure, research, and human capital, which generate returns that persist for decades. The framework treats these as broadly equivalent, and this aggregation obscures an important distinction.

The evidence from a range of empirical studies suggests that the multiplier on public investment is substantially higher than the multiplier on government consumption, meaning investment cuts impose larger output losses per dollar saved. More importantly, sustained underinvestment operates on a timescale beyond the five year horizon over which the book’s analysis is conducted. An austerity program that achieves its fiscal targets by gutting public investment may look successful in the medium run while quietly eroding the supply-side foundations of future growth.

An Updated Model

Taken together, these cases suggest that the Alesina framework needs to be embedded within a broader set of conditions rather than applied as a free-standing rule. The core insight — that composition matters, and that tax-heavy consolidation is reliably more damaging than expenditure-based adjustment — survives scrutiny.

But it operates against a background of contingencies and countervailing factors that are also determinants as to whether even a well-designed austerity plan will succeed.

The most important contextual factor is the monetary policy environment. Expenditure-based austerity works best when it can be accompanied by monetary easing or, for countries with independent currencies, exchange rate depreciation. The crowding-in effects that Alesina’s successful cases illustrate depend partly on the central bank’s ability to cut rates in response to fiscal tightening, and on the exchange rate’s capacity to shift demand toward the tradable sector as domestic demand contracts. When interest rates are at the zero lower bound, the conventional monetary offset is unavailable and the fiscal multiplier on spending cuts rises — though this constraint is not absolute. Unconventional tools such as quantitative easing can provide some offsetting stimulus even at the lower bound, and the degree to which QE substitutes for conventional rate cuts remains contested. The evidence suggests it is a partial, and often insufficient, substitute: it operates through different transmission channels, is harder to calibrate, and its effectiveness varies significantly with financial market conditions and central bank credibility.

Countries in a currency union face this constraint in an amplified form. They cannot depreciate and must instead rely on internal devaluation — cuts to wages and prices — to restore competitiveness. That process is slow, painful, and politically destabilizing. This is not an argument against austerity within a currency union; it is an argument that the required composition of the adjustment becomes even more critical, and the tolerance band for error even narrower, than in countries that retain monetary autonomy.

Equally important is what gets cut. A consolidation plan that identifies savings in transfers, subsidies, public sector wages, and administrative overhead is likely to produce better long run outcomes than one that achieves the same headline number through cuts to infrastructure investment, education, or preventive health care. This is not simply a Keynesian argument about demand, it is a supply-side argument about the economy’s long-run productive capacity. Britain is the cautionary example here: a consolidation that front-loads cuts to public investment in order to protect current consumption may look fiscally responsible in the near term while imposing costs that compound quietly over years and decades. Protecting public investment should be a near-inviolable constraint on any consolidation plan, even at the expense of a slower pace of overall adjustment.

Harder to manufacture than it is to describe, credibility may matter most of all. The expansionary consolidations in the historical record share a common feature: they were undertaken in a way that made forward-looking households and firms willing to revise their expectations about future tax burdens downward. When a consolidation is perceived as durable and well-designed — i.e., when the spending cuts are seen as warranted and permanent, rather than temporary — and when the institutional framework supports that perception, the expectation of a lighter future tax burden can offset some or all of the immediate demand drag. When it is perceived as half-hearted, performative, or reversible, this mechanism does not operate, and the contractionary arithmetic of the IS-LM model reasserts itself. Credibility cannot be willed into existence; it is earned through specificity, political durability, and the track record of the institutions implementing the plan. A government that has repeatedly announced and then retreated from consolidation plans will find that the confidence channel is closed to it, regardless of how well-designed its latest proposal is.

Conclusion

Alesina, Favero, and Giavazzi have produced the most empirically rigorous examination of fiscal consolidation available, and their central finding — that composition matters, and that tax-based austerity is reliably more damaging than expenditure-based adjustment — is well-supported by the evidence.

But the framework is not without its limitations. It underweights the role of monetary conditions in determining fiscal multipliers, aggregates government spending in ways that obscure the critical distinction between consumption and investment, and draws on a set of historical success cases whose favorable conditions are not always replicable. The British example, now with a longer run of data, is a warning against premature declarations of vindication.

For the United States, the framework offers guidance that is directionally correct but requires significant elaboration. The federal government’s long-run fiscal challenge is primarily a function of mandatory spending — Social Security, Medicare, and Medicaid, growing faster than revenues. Any durable consolidation plan will need to address the expenditure side of the budget, and the Alesina evidence strongly supports the conclusion that doing so will be less damaging than attempting to close the gap through tax increases alone. But the framework’s silence on public investment is a genuine gap. A consolidation that preserves or increases investment in infrastructure, clean energy, and scientific research while achieving savings through reforms to entitlement growth, procurement, and transfers would be consistent with the book’s core thesis while avoiding the long-run supply-side damage that indiscriminate spending cuts risk.

The deeper challenge is political rather than economic. The spending cuts most likely to achieve durable fiscal consolidation — reforms to entitlement growth, reductions in transfers, restraint of the public sector wage bill — are precisely the cuts most difficult to sustain politically. The historical success cases Alesina identifies were often implemented under conditions of acute fiscal crisis, where the normal political constraints were temporarily suspended by the sheer urgency of the situation. That is a poor model for deliberate reform. Getting the composition right is necessary but not sufficient. Timing, credibility, and political durability are the conditions under which composition does its work, and assembling all three, in a political environment where the costs of adjustment are concentrated and the benefits are diffuse, is the hardest part of the problem that no economic framework can solve.

This is precisely why the current moment matters. When labor markets are firm, output is expanding, and private capital is flowing into productivity-enhancing investment at scale, the political costs of entitlement reform are lower, the credibility of consolidation is easier to establish, and the risk that fiscal tightening tips into a self-reinforcing downturn is diminished. The case for preserving targeted public investment in R&D and infrastructure is also strongest in this environment — not as a concession to spending interests, but because a government that consolidates intelligently now can remain a complement to private dynamism rather than a drag on it. The window is not permanent. Consolidations undertaken by choice, in favorable conditions, on well-designed terms, have a historical record worth taking seriously. Those forced by crisis do not.

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Much like my article on the USSR the core claim here is that financial sustainability is based on trust in the solvency of a state. But that trust cannot be summoned from thin air and is always ultimately reliant on that actual state’s solvency.

In truth, monetary regimes aren’t really selected — in the sense that a society weighs the costs and benefits of a system from first principles — as much as inherited. The classical gold standard was coherent and a well-functioning system, on its own terms, that put different values at the center than we do today. It was not, as many people think, an archaic or myopic system with no advantages at all, even if its modern proponents often miss the forest for the trees.

I. The Classical Gold Standard and the Theory of Its Own Operation

For most of human history, “gold” or other precious metals have acted as the de facto currency in most of Eurasia. However, when people talk about the “Gold Standard” what they are almost always referring to is the “classic” gold standard which emerged in the 18th century and is synonymous with the British Empire. It was largely as a refinement and rationalization of the older pre-existing system and much of it stood in reaction to the excessive money printing of the French Revolutionary regimes.

By the middle of the 19th century, though, it had taken on a life of its own, and the period in which it was hegemonic, roughly 1880 to 1914, combined rapid growth with large and substantially free movements of capital and labor. Perhaps most important to its architects at the time, the world was also defined by extraordinary price stability — and, through its first two decades, by persistent mild deflation on the order of 1-2% a year, as a fast-growing economy outran a money supply tied to a slowly expanding gold stock. Arguably, that era, referred to in France as the Belle Époque, was the most dynamic and innovative in human history.

So how did it actually work?

At the core of this system sat David Hume’s idea of the price-specie-flow mechanism outlined in “Of the Balance of Trade“ (1752) and was actually quite simple.

Each participating country defined its currency as a fixed quantity of gold and stood ready to convert notes into metal, and metal into notes, on demand and without limit. Thus the pound was not a thing with value in itself but a claim to a specific weight of gold. Since gold acted as a basis vector of value every currency was effectively pinned to the others and could drift only within the narrow band — the “gold points” — beyond which it became cheaper to ship bullion than to exchange currency.

The primary goal and consequence of the system was monetary discipline. A state could not expand its money supply at will, because anyone holding the surplus paper could present it for gold, and a government that issued beyond its reserves would simply watch them drain away. Money creation was tethered to the gold stock and therefore at the pace of mining1, which because of the economic growth at the time produced mild, persistent deflation.

Trade between nations was similarly rationalized by this system. If a country imported more than it exported, the difference in gold caused its money supply to contract and drive down prices until its goods grew cheap enough to pull demand — and the gold — back again. A surplus country experienced the reverse resulting in an upward pressure on the “real” economic value of their currency. As a result the trade (current) accounts of nations thus effectively balanced themselves, with no intervention.

Hume does a good job of basically describing the system as it was imagined conceptually among contemporaries. The argument turned on a thought experiment:

“Suppose four-fifths of all the money in GREAT BRITAIN to be annihilated in one night... Must not the price of all labour and commodities sink in proportion, and every thing be sold as cheap as they were in those ages? What nation could then dispute with us in any foreign market...? In how little time, therefore, must this bring back the money which we had lost, and raise us to the level of all the neighbouring nations?”

The reverse case completed the symmetry:

“Again, suppose that all the money of GREAT BRITAIN were multiplied fivefold in a night, must not the contrary effect follow? Must not all labour and commodities rise to such an exorbitant height, that no neighbouring nations could afford to buy from us... and our money flow out, till we fall to a level with foreigners...?”

From these cases, Hume drew the general principle and reached for the metaphor that would define the doctrine:

“Now, it is evident, that the same causes, which would correct these exorbitant inequalities, were they to happen miraculously, must prevent their happening in the common course of nature, and must for ever, in all neighbouring nations, preserve money nearly proportionable to the art and industry of each nation. All water, wherever it communicates, remains always at a level.”

And much like water, the goal wasn’t so much to fight the inevitable flow, but to instead channel it productively.

“We need not have recourse to a physical attraction, in order to explain the necessity of this operation. There is a moral attraction, arising from the interests and passions of men, which is full as potent and infallible.”

…

“In short, a government has great reason to preserve with care its people and its manufactures. Its money, it may safely trust to the course of human affairs, without fear or jealousy.”

Thus the system was seen as requiring no discretionary management and admitting of none. Where management was acknowledged, it took the modest form of the “rules of the game” — a phrase popularized by Keynes and later given empirical content by Nurkse (1944) — under which a central bank losing gold was expected to raise its discount rate, and one gaining gold to lower it, thereby reinforcing the automatic adjustment.

Later scholarship has shown that central banks routinely violated the rules of the game without the system breaking down, because what sustained it was not mechanical adjustment but the credibility of the commitment to convertibility itself (Bordo and MacDonald 1997). This adherence functioned as what Bordo and Rockoff (1996) call a “good housekeeping seal of approval,” where states that remained on gold borrowed in international markets at materially lower rates. You can, roughly, analogize this to companies that receive a markup in the market from publishing their financial disclosures in a country like the US rather than China. Because investors knew that countries were financially constrained under the gold standard, they could lend with more faith in being repaid, creating a virtuous and self-fulfilling system.

What the contemporary theory omitted were the two conditions that made gold’s discipline functional. The first was that in London lay both the Bank of England, operating as what Keynes would call the “conductor of the international orchestra,” and also the heart of empire and military power. The second was political. This was a world before mass suffrage and organized labor, in which a government could impose the deflationary adjustment the system demanded.

II. The War and the Liquidation of British Capital

The First World War ended the classical system. Since it required there to be a long run “balance of trade” between countries, states had little room to maneuver in times of crisis. So as British imports soared on the back of war material and exports plunged from workers being sent to the frontlines, the government was forced to find new sources of gold to keep a semblance of a balance. To do this they passed a series of laws designed to force investors to liquidate their foreign capital, converting them into hard currency that could then be taken by the government in exchange for treasuries. Between 1914 and 1918 Britain largely sold off their capital stock and by the conclusion of the fighting was financially exhausted at every level.

As the gold supply passed from London to New York, the fortuitous combination of empire, finance, and military strength passed also.

Part of the bargain had been that the investors who had transformed their capital stock into pounds expected to be able to use them at the pre-war valuation. In fact, the idea that Britain would always honor its debts at their face value, without inflating at all, was emotionally central to the old system. After the Napoleonic wars Britain had been saddled with enormous debts, and rather than inflate them away or negotiate them down honored them in full, running primary surpluses and paying the bonds down over the better part of a century.

In the aftermath of WW1 there was an attempt to repeat this and honor the war debts at their real economic value. To do this the government implemented financial austerity and returned to gold in 1925 at the old exchange rate. However, the political dynamics — namely dominance of London by financial capital — that had made it possible after the Napoleonic wars were no longer in place and the state’s policies were met by the General Strike of 1926, and political outrage. A similar dynamic played out across most of Europe.

Ultimately, it was abandoned again after the Depression because the mechanisms required to balance a metal-based currency — raising interest rates into the deflationary shock — were too politically costly to maintain. This phenomenon, known as Golden Fetters (1992), propagated the downturn internationally and disabled policy response, since no country could ease monetary conditions without losing gold. It is plausible that, given enough time, capital would have regained trust and the international system could have been put back together again, but domestic pressure to bring back consumption overwhelmed the old monetary elite.

Still the widespread belief in the necessity of the gold standard as a check on printing continued to exist, and after the war it was once again put back together. The Bretton Woods system, as it is known, was a gold-exchange standard under which the dollar was convertible to gold, but only by foreign official holders, with other currencies pegged to the dollar.

This system was not a true gold standard, for a number of reasons. The most basic is that ordinary citizens were already off it. Already in 1933, Executive Order 6102 had ordered citizens to surrender their gold to the Treasury at $20.67 an ounce to avoid “hoarding.” Under the classical system there was no reason to hoard gold, because holding currency was functionally identical to holding a certificate to a bank vault — but once the state was printing far more money than it could honor with gold, citizens holding bullion on the expectation of inflation risked exposing the central bank to a currency run. You can see this at play in the policy directly. After having compelled Americans to hand in their gold at $20.67, the Gold Reserve Act of 1934 promptly devalued the dollar by roughly 40% against gold, at the direct expense of the people who had just surrendered theirs.2

Nor was the promise to foreign governments much sturdier. For the system to work, the United States had to supply the world with dollars by running deficits — and those dollar claims accumulated abroad faster than the gold behind them, further pressuring the credibility of its promise to redeem them.

Then there was the eurodollar market. Through the 1950s, the swaths of dollars deposited in banks outside the United States and beyond the reach of American regulation gave rise to a synthetic-dollar market. The eurodollar grew up almost organically, conjured into being by London merchant banks and, fittingly, by Soviet holders who wanted dollars without keeping them in New York.

By the 1960s, France, under de Gaulle and advised by Jacques Rueff, began systematically converting its depreciating dollars into gold and moving the metal to Paris. That, paired with the eurodollar overhang drove Washington, on 15 August 1971 to formally close international convertibility and so begin our current — post–Bretton Woods — system.

III. The Dollar Order and Its Analogues

The question with which this essay began — why we have a fiat money system today — admits of the easy answer offered at the outset: inconvertible money gives the state room to act in depressions and emergencies that a metal standard forecloses. That answer isn't wrong, but it only explains why we tolerate the system, not why we have it.

In truth it was war, and the associated fiscal excesses, that destroyed the gold standard and liquidated the conditions necessary for its survival.

What the gold standard and the dollar order share ultimately what is most informative to us today thought. Both rest on trust, and trust rests, in the end, on solvency. Under gold the link was extremely salient since a state that issued beyond its means watched its reserves disappear. But under a fiat system the dynamic is just as binding, if not as automatic. Ultimately nothing can abolish the underlying bet that the state will honor its commitments. As a result, the dollar's exorbitant privilege is still, at bottom, a belief in its capacity to buy real goods at a stable price, if you destroy that — to fund a war, or a pension system — the dollar’s value goes with it.

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These advantages are not free, and they are what make Pentagon waste worth taking seriously. The United States’ military might will come at a cost of more than $1 trillion in defense spending in the current fiscal year, and a meaningful share of it buys neither the capability nor the credibility that underwrites the dollar. It buys cost overruns, duplicative bureaucracy, books no auditor can certify, and congressional incentives that prioritize political considerations over fiscal discipline. Measured against a deficit near $2 trillion, the dollars lost to waste may seem relatively small. But the asset they erode is most certainly not.

Procurement Cost Overruns

One of the most visible sources of waste is the Pentagon’s procurement process. Major weapons programs routinely run over budget and behind schedule. According to the Government Accountability Office (GAO), the Department of War plans to invest nearly $2.4 trillion in its 106 costliest weapons programs. Yet those programs continue to experience substantial cost growth and delays.

In 2025 alone, the combined estimated cost of 30 major defense acquisition programs increased by $49.3 billion. Remarkably, a single program — the Air Force’s Sentinel intercontinental ballistic missile replacement — accounted for more than $36 billion of that increase, or 73 percent of the total.

The Sentinel program’s projected acquisition cost has increased by roughly 81 percent since its original baseline estimate.

These are not isolated incidents. They are symptoms of an acquisition system that too often rewards optimism at the outset and tolerates cost overruns later.

Bureaucratic Inefficiencies

The Pentagon’s sprawling bureaucracy compounds these challenges. The average major weapons program now takes nearly 12 years to deliver its initial operational capability. Delays have become so commonplace that they are often treated as inevitable. Meanwhile, the Department of War continues to rely on dozens of outdated information systems. As part of its audit remediation efforts, the Pentagon has identified 89 legacy systems for retirement, a move expected to save approximately $760 million annually through fiscal year 2029.

Many of these systems were developed decades ago and were never designed to operate as part of a single integrated enterprise. Different offices often rely on incompatible databases and software platforms, forcing personnel to manually reconcile information across multiple systems. Maintaining these legacy systems is costly because they depend on outdated technology and specialized support, while their fragmented architecture makes it difficult to track assets, monitor spending, and produce reliable financial records. These shortcomings have been a major contributor to the Pentagon’s repeated audit failures and have made the department slower, more expensive, and less accountable than it should be.

Recent reform efforts have attempted to address some of these inefficiencies. Under War Secretary Pete Hegseth, the Pentagon announced in April of 2025 the cancellation of approximately $5.1 billion in consulting and support-service contracts, arguing that many of these functions could be performed by existing civilian personnel. Earlier in 2025, the Department of Government Efficiency (DOGE) identified an additional $580 million in spending reductions, including cuts to consulting contracts, administrative programs, and an over-budget human resources software initiative.

Although such savings represent a drop in the bucket relative to the Pentagon’s more than $1 trillion annual budget, they demonstrate that meaningful efficiencies can still be achieved without reducing military capability.

Poor Financial Management

Poor financial management presents another major challenge. The Department of War remains the only major federal agency that has never received a clean audit opinion. Since the first department-wide audit in 2018, the Pentagon has failed every annual review. The FY2024 audit — alongside the three prior annual audits — identified 28 material weaknesses, two significant deficiencies, and six instances of noncompliance with laws and regulations.

The scale of the challenge is enormous: the Pentagon is now responsible for roughly half of all federal discretionary spending and oversees trillions of dollars in assets spread across thousands of locations worldwide.

Without reliable financial records, policymakers cannot accurately determine where money is being spent, which programs are succeeding, or where waste can be eliminated.

Congressional Incentives

Congress is another author of the waste, and here the incentive isn't even hidden. A member who fights to keep a plant open or a production line running in his district is doing exactly what the job rewards him for doing — the problem is that it rewards him just the same whether or not the weapon at the end of that line is one the military ever asked for. In fiscal year 2024 alone, Congress added approximately $21 billion in defense spending that the Pentagon did not request.

Congressional appropriators have repeatedly inserted funding for weapons systems and projects that military planners considered lower priorities. Once a program’s production is spread across 50 states and 435 congressional districts, it develops a powerful political constituency that makes cancellation extremely difficult regardless of cost growth or strategic value. The result is a budgeting process that often rewards geographic distribution and political influence more than military effectiveness.

Solutions

The most urgent fix is to the procurement process itself. Congress should mandate independent cost assessments before major programs are approved, rather than relying on oversight mechanisms that typically identify problems only after costs have already spiraled. Senior-level reviews should be triggered whenever programs exceed their original cost or schedule estimates by meaningful margins, ensuring that the optimistic baseline projections that have plagued programs like the Sentinel missile replacement are challenged at the outset rather than accepted as inevitable. Congress should also more carefully scrutinize the Pentagon’s reliance on cost-plus contracting, which reimburses contractors for expenses while guaranteeing a profit margin regardless of whether projects remain on budget. Expanding the use of fixed-price contracts where feasible would better align contractor incentives with taxpayer interests and encourage greater discipline in program management.

One reform that deserves renewed consideration is another Base Realignment and Closure (BRAC) commission. Between 1988 and 2005, Congress periodically authorized independent bipartisan commissions to identify military installations that were no longer necessary for current force requirements. Rather than allowing lawmakers to protect individual bases in their districts, the commission would submit an entire package of closures and consolidations for an up-or-down vote. Previous BRAC rounds generated billions of dollars in long-term savings, and Pentagon officials continue to argue that the military maintains significant excess infrastructure. The Pentagon’s most recent publicly available estimates suggest that the military still possesses roughly 19–22 percent excess infrastructure capacity, indicating that substantial savings could be achieved through another round of closures and consolidations. A new BRAC round would allow resources currently devoted to underutilized facilities to be redirected toward readiness and modernization.

Fixing financial management means treating the Pentagon’s audit failures as the serious institutional problem they are. Congress should establish clear benchmarks for audit compliance and require annual public reporting on unresolved deficiencies. The Department of War cannot credibly claim to spend taxpayer money wisely while remaining the only major federal agency that has never passed a clean audit. Reliable financial records are not a bureaucratic nicety — they are the foundation on which every other reform depends.

Finally, Congress must bring its own incentives into alignment with fiscal discipline. The $21 billion in unrequested defense additions in FY2024 alone illustrates how readily political considerations override strategic ones. Separate votes on major unrequested expenditures, stricter justification requirements, and greater transparency in the appropriations process would help ensure that defense dollars follow military priorities rather than district maps. Procurement reform achieves little if lawmakers continue treating the defense budget as a vehicle for job creation rather than a tool of national security.

Conclusion

Both of the usual camps have it backwards. The deficit hawk who wants to fix the budget by trimming the security architecture is sawing at the branch he sits on — that architecture is part of what lets the United States borrow as cheaply as it does, and shrinking it would tighten the very constraint it was meant to loosen — while the appropriator who defends an 81 percent overrun on the Sentinel, or a base the Pentagon has begged to close, tells himself he is protecting national strength when what he is really doing is spending it down for district payrolls.

A capable military and a disciplined budget are not competing claims but two sides of the same dollar. Every dollar lost to an unbuildable program or an unauditable ledger is a dollar not buying the deterrent. And for a country whose currency rests on that deterrent, waste is corrosive, amounting to a slow strategic withdrawal.

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Boyd subscriber responded to our essay contest announcement in April with a description of the whole problem in three sentences:

“My entire life people screamed about leaving debt to their grandchildren. Then they voted for policies that prioritized the elderly. But unfortunately you’re the grandchildren that the debt was left to.”

The horizon was always inhabited but we, the grandchildren, had not moved in yet. Fast forward to today, and what that dismissiveness in Washington has yielded is a paradigm in which, irrespective of the circumstances in the real economy — war or peace; crisis or stability — debt number go up.

Describing the problem is the well-trodden part. A good share of this sprint has done that; Ron Paul tanked an election doing it; the CBO does it every year. But even the CBO is thinking in (slight) exponentials now:

That is because the math is no longer abstract. It may have been “just a number” if the prevailing policy consensus that rates would be “lower for longer” turned out to be true. But that consensus was wrong and worse, it became a wager, a dangerous one without a margin of safety.1

Instead, the math is now straightforwardly a national security issue: interest payments on the debt exceed (and risk crowding-out) spending on defense. It is a retirement security issue: absent legislative reform, the Social Security trust fund will run dry in under seven years. It is a health security issue: Medicare spending — up 26x since 1967, in real terms — is being fraudulently looted to the tune of hundreds of billions a year while countless Americans avoid care they cannot afford. Alas, absent course-correction, the math now puts us peering over the event horizon — at an impending crisis with the upshot being austerity or inflation.

It is existential, and it is also the hardest problem to vote our way out of. Reform takes a plurality of people who do not depend on what has to be cut, and that plurality shrinks every year the beneficiary rolls grow. Counting on fiscal hawks with nothing personally at stake to assemble into a governing majority amounts to counting on a miracle. Which is why the exit runs through design more than persuasion — something that survives the incentives instead of pleading with them.

Indeed, the way out is the part nobody has nailed, and it is what we want from you. For these reasons…

Our hope is that this extra month yields more substantive and numerous answers to the question “How does America escape its fiscal trap?” — entitlement reform that can engineer a soft landing, a budget process that does not reward deferral, a waste-fraud-abuse commission with actual teeth, a Promethian-pilled productivity-side answer, a constitutional debt brake, or something more radical we have not thought of. Anything but another restatement of the (albeit now slightly parabolic) CBO baseline.

A problem of this size and scale rewards the extra diligence, and because the contest runs in public, the longer window has little cost with substantial upside: more time to write, more essays to learn from, more iteration before anyone has to call their work final. In the meantime, we intend to leverage the extra time by fully transitioning from the descriptive to the prescriptive. We are developing a few bold policy ideas ourselves, and look forward to seeing what you all cook up by mid July as well!

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With that, below is a reminder of the essay contest terms, and how you can participate.

For attribution we ask you put the following blurb at the top of your article:

“This article is part of ’s quarterly policy sprint on the debt and deficit. To learn more about them and the work they do you or submit your own article click here”.

Prizes and Recognition

• Grand Prize: USD $2,500 cash, re-publication and promotion on our Substack, and the honorary title of Boyd Fellow for one year.

• Second Prize (Runner-Up): USD $1,000 and re-publication/promotion on our Substack.

• Third Prize (Runner-Up): USD $1,000 and re-publication/promotion on our Substack.

• Additional Publication: We may offer a USD $300 honorarium to authors whose essays we choose to re-publish beyond the top three.

Eligibility

Human (not AI) entrants aged 18 or older are eligible — one essay per author.

The contest is open worldwide, but the focus of this contest is on identifying novel solutions for the United States.

Essays should either be (a) Published on the author’s personal Substack account, attributed to the Boyd Institute at the top of the submission, with the link shared via THIS Google Form; or (b) Submitted directly to us as a PDF attachment through the same Google Form. Substack publication is strongly preferred.

Submission Guidelines

Format: An article will be considered for the prize pool if it is either:

• (Preferred) Published without a paywall on the author’s personal Substack account before the deadline, with an acknowledgment at the top of the article that it was created as part of the Boyd Institute essay contest; or

• Submitted as a PDF attachment via the Google Form before the deadline.

In either case, the author must submit the Google Form HERE with a link (or PDF), acceptance of terms and conditions, and other contact information.

Language: Submissions must be in English.

Original Work: Essays must be original and authored by the entrant.

AI Assistance Disclosure: If you use AI tools to brainstorm or edit your essay, briefly describe how you used them in a note attached to your Google Form submission. Fully AI-generated essays are not permitted.

Deadline: 11:59 PM Eastern Time on Wednesday, July 15th, 2026. Late entries will not be accepted. We will announce the winners and award prize money at the end of June.

Evaluation Criteria

Our judges will evaluate submissions based on:

• Originality: How novel and creative is the idea? This is a gnarly challenge, and we need outside-the-box thinking!

• Potential for Impact: If your idea were implemented, would it meaningfully address America’s debt and deficit trajectory? We are looking for ideas that substantially move the needle.

• Actionability: Does the proposal offer a concrete and realistic path forward? Is it feasible within existing technological and/or political-economy constraints?

• Clarity and Quality: Is the essay well organized and easy to follow? Is the proposal articulated persuasively for the general public, policymakers, and experts? While polished prose helps, we care most about the strength of your ideas.

How to Submit

1. Prepare your essay following the guidelines above.

2. Either publish the article on your Substack, or prepare a PDF.

3. Complete the online submission form HERE.

4. Provide your contact details.

5. Link to your Substack post or attach your PDF.

6. Confirm that you have read and agree to the Terms and Conditions.

Ready to share your bold, asymmetric idea? Click the link below to submit your essay.

👉 Submit Your Essay 👈

If you have any questions, do not hesitate to reach out via DMs, and we will be sure to respond with clarifications. Best of luck, and may the best essay(s) win!

The reality, in our view, is more nuanced than either camp allows: that is, a slow-moving structural crisis buffered by unique advantages that are powerful but not permanent. What follows, then, are our 14 ground truths on US debt & deficits — these aren’t prognostications per se, nor policy prescriptions. Think of them instead as first principles in the Aristotelian sense: foundational truths, grounded in evidence and analysis, that cannot be deduced from any other proposition, and from which our eventual ideas and solutions are likely to be derived.

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Part I: Fiscal Reality Check

1) America now spends more servicing its debt than defending itself.

For the full fiscal year 2026, net interest payments on the national debt are set to reach around $1 trillion. This amount is more than two and a half times the pre-pandemic level of $375 billion in FY2019. The federal government is now paying about $88 billion each month just in interest. This makes it the second-largest item in the federal budget, behind only Social Security. The CBO projects a total of $13.8 trillion in interest payments from 2026 to 2035. To put this in perspective, that’s about one out of every five tax dollars collected during that time spent purely on paying off past borrowing.

Historian postulates that when a great power’s debt payments exceed its military spending — a point the United States reached in 2024 — it marks a crucial turning point. At this stage, an empire starts consuming resources that sustain it. This pattern reflects a consistent historical trend: the Habsburg monarchy, Bourbon France, the Ottoman Empire, and the British Empire all faced declines after crossing this threshold. The United States has now joined this group, and the divide is expected to grow.

One important caveat deserves acknowledgment. Each of those historical cases operated under hard monetary constraints, gold or silver standards that made debt monetization impossible. The United States, as the issuer of a fiat reserve currency, does not face such limits. It can, theoretically, print money to meet its obligations in ways that no Habsburg treasurer or Ottoman official could. However, this does not solve the underlying structural issue. The crowding-out effect — where debt servicing takes funds away from investment in defense — occurs regardless of a government’s ability to monetize its debt.

The question is not whether the US can service its obligations, but what it must sacrifice, or debase, to do so. The feedback loop that makes this particularly dangerous, specifically America’s dependence on dollar dominance to sustain the very borrowing that now burdens it, will be examined in the sections that follow.

2) Absent a productivity boom, every fiscal exit path is perilous.

The fiscal arithmetic offers only a handful of exits, and none are painless except one.

The first is inflating the debt away by eroding its real value through currency debasement. This is effectively a tax on savers and anyone living on a fixed income. It destroys institutional credibility and, as we will see in our discussion of dollar dominance, is particularly self-defeating for the United States.

The second is austerity: cutting spending or raising taxes to close the gap. This is politically toxic in any democracy and, given the particular political economy dynamics described later in this piece, functionally impossible in the United States.

The third is financial repression: artificially holding interest rates below inflation in order to gradually transfer wealth from creditors to the government. Several countries attempted versions of this strategy in the postwar decades, and the track record is grim. France and Italy ran negative real interest rates throughout much of the 1950s and 1960s, channeling cheap credit to state enterprises while quietly confiscating the purchasing power of private savers. The result was chronic balance-of-payments crises and repeated IMF interventions. Brazil’s experience was even more acute. When the military government attempted to hold nominal rates below galloping inflation in the late 1970s, capital flight was swift and severe. By 1982, the country was effectively shut out of international credit markets. The details differed, but the sequence was largely the same: capital flight, distorted investment, and the destruction of the institutional confidence the strategy depends on.

The fourth — and the only option that does not require imposing visible costs on clearly identifiable groups — is to grow out of the debt by generating enough real GDP growth to outrun the pace of debt accumulation. But this option has a hard constraint that is often obscured in political rhetoric: long-run economic growth comes from only two sources — a larger workforce or higher output per worker.

Immigration, historically America’s most powerful mechanism for demographic replenishment, has collapsed and appears likely to remain heavily restricted for at least the next several years (pending a new pro-immigration referendum of sorts in the upcoming election cycle(s)). Furthermore, organic population growth offers little relief. US fertility has remained below replacement level for decades and has recently fallen even further. The demographic tailwinds that powered postwar American growth are gone.

So, that leaves us with one realistic “grow our way out” path: a productivity boom. The most plausible catalyst for such a path is AI-driven productivity growth fueled by continued hyperscaler investment. Under optimal conditions — a pro-data center construction policy environment allowing for massive and sustained capital expenditure on AI infrastructure, sufficient power generation, limited regulatory obstruction, and continued Wall Street enthusiasm (all eyes on the OpenAI IPO) — it is conceivable.

But there is an important historical caveat. Transformative technologies routinely take far longer to genuinely yield productivity gains than early enthusiasm suggests. The computer revolution began reshaping business in the 1960s and consumer life in the 1980s; yet economist Robert Solow famously quipped in 1987 that “you can see the computer age everywhere but in the productivity statistics.” Indeed, the major productivity gains from computing did not materialize until the second half of the 1990s.

Another example — electricity — became commercially widespread in the 1890s but did not produce broad productivity acceleration until the 1920s. As for AI, the open question is how long the productivity lag will be.

3) Not all debt is equal, and America increasingly borrows to consume rather than to build.

The composition of federal spending has undergone a dramatic transformation over the past half-century. Between 1962 and 2017, federal investment fell by 59% as a share of total spending — R&D spending alone declined from 9.2% to 2.9% of the federal budget.

In that same period, government transfers — Social Security, Medicare, Medicaid, and related programs that write checks directly to individuals — rose by 162% as a share of total spending. By 2025, transfers accounted for 69% of all federal outlays, up from just 28% in 1962.

The economic implications of this shift are significant, because the multiplier effects of different types of government spending are not equivalent. A 2015 meta-regression analysis of 104 studies found that public investment multipliers are roughly 0.5 units larger than those of general spending, which itself runs about 0.3 to 0.4 units higher than tax cuts and transfer multipliers. When the marginal federal dollar is going to consumption rather than capacity, the growth dividend of deficit spending shrinks.

Today’s deficits are financing consumption, not investment — and this matters enormously for the sustainability question, because the only realistic exit from the debt spiral, as established above, runs through productivity growth. Every dollar that goes to bondholders is a dollar that cannot be used to build future capacity through research, infrastructure, education, or public investment. The federal budget should logically be tilting toward these growth-enhancing uses, yet it is moving in the opposite direction.

There is a related point about how this dynamic interacts with discretionary spending cuts. As entitlement programs grow automatically, the dollars available for everything else — state capacity, public science, effective development programs — shrink. The composition of spending deteriorates not through any explicit decision, but through the mechanical expansion of mandatory programs crowding out everything else.

Part II: Why the Root Problems Remain Unaddressed

4) America has made it easy to cut taxes and politically impossible to raise them.

Cutting taxes is easy and politically expedient. Raising taxes is, in practice, near-impossible for either party. The right treats it as ideological apostasy; the left prefers targeting narrow constituencies — the ultra-wealthy, corporations — rather than broadening the base in ways that would meaningfully close the gap.

This asymmetry has a name and an origin story. In 1976, the economist Jude Wanniski articulated what he called the “Two Santa Claus” theory: Democrats win votes by handing out government programs, playing Santa with public money, and Republicans cannot beat that by being the party of “no.” They need their own Santa, and tax cuts are it. The result is a system in which one party hands out spending and the other hands out tax cuts, and neither has any electoral incentive to do the unrewarding work of closing the gap between them.

What this dynamic produces is a one-way ratchet effect.

The Bush tax cuts of 2001 and 2003 reduced revenue substantially over their initial windows and were eventually made largely permanent. The Trump tax cuts of 2017 (TCJA) added an estimated $1.5 to $2 trillion to deficits over a decade. The 2025 “One Big Beautiful Bill” extended and expanded these provisions further. Each round reduces the revenue baseline; meanwhile none is offset by corresponding spending reductions. And the “temporary” provisions become permanent through sheer political gravity — no legislator wants to be the one who “raised taxes” by allowing a cut to expire. (This also corrupts the official fiscal projections, which will be discussed in ground truth five.)

For decades, many Republicans and free-market economists — including Nobel laureates Milton Friedman and Gary Becker — argued that cutting taxes was itself a form of fiscal discipline: “starve the beast,” force Washington to reduce spending by reducing its revenue. A 2006 Cato Institute paper by economist William Niskanen put this theory to the test and found it wanting. Between 1981 and 2005, tax cuts and spending increases moved largely in tandem — lower revenues coincided with higher relative spending, not lower. The beast was not starved; it simply ran up a tab.

The structural deficit thus widens as the political system can only move in one direction on taxes and the promised corrective on the spending side never arrives.

5) The national debt has compounded exponentially while voters — and the CBO — think linearly.

During the early weeks of the COVID-19 pandemic, the writer went viral1 for demonstrating what happens when exponential dynamics collide with linear intuition: people catastrophically underestimate the trajectory until the curve has already steepened past the point of easy intervention.

The national debt crisis is a slow-motion version of the same cognitive failure. People look at the deficit and extrapolate in a straight line. What they fail to grasp is that the curve is steepening — interest payments compounding on a growing principal at higher rates, political-economic barriers to fiscal hawkishness, and mandatory spending accelerating as demographics shift. The problem, as compounding problems do, arrives gradually and then suddenly.

What makes this worse is that the institution designed to translate fiscal reality into smart policy has, in the recent period, suffered from its own version of linear bias. The CBO's own 2024 retrospective was careful to point out that across four decades the agency's deficit projections have been roughly symmetric in error — sometimes too high, sometimes too low. But the same report concedes the most important fact:

"Errors in CBO's deficit projections have been substantially smaller than the estimated budgetary effects of legislation enacted after the projections were made."

When Congress acts, the actuals diverge — and over the last decade Congress has acted almost exclusively in one direction.

The result is a string of underestimates that no longer look symmetric. In January 2014, the CBO's Budget and Economic Outlook projected federal debt held by the public would reach $20.9 trillion by FY2024. The actual figure was $28.2 trillion — a 35% understatement on the level. By FY2025, debt had climbed to $30.2 trillion, $9 trillion (or 42%) past what CBO had pencilled in just a decade earlier.

The issue lies with the CBO’s methodology. It scores under a current-law baseline and therefore cannot anticipate future legislative changes: tax cuts extended, spending bills passed, emergencies, and pandemics. But real-world changes almost always go in one direction: more spending, less revenue. So the very institution whose projections are supposed to impose fiscal discipline on Congress is, by construction, structurally incapable of capturing what Congress is actually about to do.2

The compounding paradox is that the public can't intuit the curve, and the expert institution that's supposed to intuit it for them is methodologically prevented from seeing past the next bill Congress hasn't passed yet. When both main inputs into the political process are biased in the same direction, by the time the numbers become politically salient, the window for painless correction will have long since closed.

6) Status quo bias pushes against entitlement reform.

Human beings experience losses more intensely than equivalent gains. Behavioral economists call this loss aversion, and in democratic politics it creates an overwhelming status quo bias around large entitlement programs. Voters evaluate proposed reforms not relative to long-term fiscal sustainability, but relative to the benefits they currently expect to receive. A future reduction in projected benefits is experienced psychologically as an immediate loss, even if the system itself is unsustainable under current law.

This creates a profound asymmetry in democratic incentives. The benefits of entitlement reform are diffuse, long-term, and often statistical: lower future debt burdens, reduced interest costs, greater fiscal flexibility decades from now. The costs, by contrast, are immediate, concentrated, and politically legible. A retiree notices a higher eligibility age. A worker notices a payroll tax increase. A future fiscal crisis, meanwhile, remains abstract.

The dynamic becomes even more powerful because entitlement beneficiaries are disproportionately politically engaged. The American electorate is older than it has ever been, older voters turn out at substantially higher rates than younger ones, and Social Security and Medicare recipients are among the most reliable voting blocs in the country.

Politicians, therefore, face a straightforward electoral calculation: the people who would bear the immediate costs of reform are far more politically active than the people who would benefit from long-run fiscal stabilization. So any rational politician treats entitlement reform as a non-starter.

7) “Waste, fraud, and abuse,” though not insignificant, is small in comparison to structural deficit drivers.

Ask a voter what's driving the deficit and you will hear about bloated bureaucracies, foreign aid, welfare fraud, and government waste. These problems are real, and they aren't small in absolute terms. The Government Accountability Office estimates the federal government loses between $233 and $521 billion annually to fraud, plus another $186 billion to improper payments. At the upper end, that's more than a third of the FY2025 federal deficit. Any serious fiscal program should be attacking this — and it's one of the more durable points of bipartisan agreement that it should.

But scale matters. Even taking the most aggressive GAO estimate of fraud, adding every dollar of improper payments on top, and then eliminating the entire non-defense discretionary budget — the entire Department of Education, all of NASA, the whole foreign aid envelope, every dollar of it — the combined total still falls short of closing the FY2025 deficit. The arithmetic is the point.

Mandatory spending — Social Security, Medicare, Medicaid, and related programs — plus net interest now accounts for roughly 75% of the federal budget, and rising. Everything else is a small and shrinking share. The deficit-closing math, regrettably, runs through the programs voters most want to protect.

It may be a stretch to call it “cope,” but the waste-fraud-abuse trope is durable in part because, politically, it offers everyone something. Voters get to feel righteous about government inefficiency without confronting the fact that the programs they personally benefit from are the programs driving the crisis. Politicians get to posture about accountability without touching anything that would cost them votes. And reformers get to do real, useful work — every dollar reclaimed from an improper payment is a dollar that didn’t have to be borrowed. The work is necessary; it just isn’t sufficient. The recent flagship attempt to convert this narrative into actual savings made the point unintentionally clear, which we’ll turn to next.

8) DOGE was slopulism, and largely counterproductive.

If “waste, fraud, and abuse” was the popular narrative, DOGE was its institutional apotheosis — the logical endpoint of a populist framing that substitutes the identification of villains for dispassionate budgetary analysis. The core premise was that the deficit is driven by bureaucratic bloat, and that a sufficiently aggressive outsider could close it by axing headcount.

Discretionary overhead — the territory DOGE actually targeted — is a small and shrinking share of federal spending. As the previous section showed, even zeroing out the entire non-defense discretionary budget falls short of closing the FY2025 deficit. DOGE's own topline estimate (last updated Jan. 1, 2026) claims $215 billion in savings, which works out to about 12% of the FY2025 federal deficit — and that was the claim, not the verified figure. Independent reviews documented closer to $2 billion in actual savings: less than one one-hundredth of the claim, and about one-tenth of one percent of the deficit. The most generous third-party estimate (Kellogg's analysis via Fortune, roughly 20% of the claimed total) still tops out around $38 billion — a fraction of what would be needed to materially bend the curve.

Worse, DOGE not only failed to meaningfully chip away at the problem but it created new ones. The FAA case is instructive. In February 2025, approximately 400 FAA personnel were laid off — not air traffic controllers directly, but the support staff who keep the system functional: aviation safety assistants, maintenance mechanics, aeronautical information specialists. Each aviation safety assistant typically supported roughly 10 safety inspectors. Removing them degraded the capacity of the people who remained without producing meaningful fiscal savings. By spring, Newark Liberty was experiencing severe disruptions, with United Airlines cancelling 35 daily round-trip flights as staffing shortages and system failures compounded.3

Perhaps the most consequential damage was to research and science funding. The US attracts world-class talent in large part because of its research ecosystem — NIH, NSF, the national laboratories, the university system undergirded by federal grants. That infrastructure is a direct input into the productivity boom that, as established in ground truth number two, is the only palatable exit from the debt spiral. Cutting research funding to save money on the deficit actively destroys a fundamental driver of the growth needed to outrun the debt. The consequences of this may take decades to fully manifest, and the US’ position as the world’s elite destination for scientific human capital is not something easily rebuilt once degraded.

Meanwhile, to reiterate: the programs that actually drive the deficit — e.g., mandatory spending and entitlements — went untouched.

Part III: It’s the Entitlement Spending, Stupid

9) Social Security has fundamental design issues.

The standard critique of Social Security's unsustainability is demographic: fewer workers per retiree, longer lifespans, an inverted population pyramid. All true. The worker-to-retiree ratio fell from 5.1 in 1960 to roughly 2.7 today, and it is projected to hit 2.2 by 2050.

But there is a deeper architectural feature that rarely gets discussed, one that compounds the demographic problem rather than being caused by it. Social Security indexes initial benefits to wages, not prices. Your initial benefit is calculated based on an index of average wages at the time you retire. So if productivity-driven real wage growth runs at 1.5% annually over a 40-year career, the real benefit level at retirement is substantially higher than it would be under pure price indexing.

This is a deliberate design choice — it was meant to preserve a roughly constant wage-replacement rate for retirees from one cohort to the next, so that successive generations of beneficiaries wouldn't fall behind the living standards of the workers funding them. The problem is the asymmetry: while benefits grow automatically with wages, the payroll tax rate has been adjusted by Congress only sporadically, and the demographic ratio that determines how many workers fund each retiree's benefit is moving the wrong way. Revenues do rise with wages, but given current tax rates and demographics, the benefit formula's generosity now causes promised outlays to grow faster than dedicated contributions.

The irony is that real wage growth is perhaps the single most universally celebrated macroeconomic outcome. Left and right, economists and politicians — everyone agrees it is good. And it is good. But Social Security's designers built a system in which those gains automatically translate into higher benefit promises, without any parallel automatic adjustment on the revenue side. The better the economy performs in exactly the way everyone wants it to, the more aggressively the system needs to be reformed.

Then there is an additional compounding effect from price indexing itself. Social Security benefits are adjusted annually using the Consumer Price Index. Many economists argue that this overstates the true cost-of-living increase, because the CPI does not fully account for consumer substitution — the tendency of people to shift purchases when relative prices rise. The CBO has estimated that switching to the "chained CPI," which does account for substitution, would save $340 billion over a decade, including interest effects. Chained CPI is technocratically attractive but politically loaded: it would slow benefit growth and slow the indexing of tax brackets at the same time, which means it effectively raises taxes over time even as it reduces benefits. That dual hit is why the idea has been on the table for two decades without being enacted.

In 2005, the Bush administration proposed a reform known as "progressive price indexing" — maintaining wage indexing for the lowest 30% of earners while gradually shifting higher earners to price indexing. CBO analysis under its long-term assumptions showed it would have closed roughly 70% of Social Security's long-term financing gap by concentrating benefit reductions on the highest earners over time. The proposal was developed by financial analyst Robert Pozen, was analytically rigorous, and died quickly. The political system identified the design flaw, proposed a technically sound fix, and rejected it because the fix meant future retirees would receive less in real terms than the current formula promises — and the political system would not pay that cost in advance, even when shown the math.

It is difficult to imagine a cleaner illustration of the structural trap. And the trap is more constraining today than it was in 2005. The trust fund was projected to last until 2041 under the 2005 Trustees Report; under the 2025 report, it runs dry in 2034. In a system where benefits ratchet up automatically but contributions and broader budget policy do not, every year of inaction makes the eventual adjustment more abrupt — and more politically explosive.

10) Medicare's cost crisis is an architectural failure dressed up as a demographic one.

Medicare is in many ways a victim of its own success. When it was originally designed in the 1960s, it covered roughly 9.7 percent of the U.S. population — 19.1 million enrollees — a relatively small share for whom medical care at the time often meant either rapid recovery or death. Six decades later, it is financing the chronic disease management of a population using medical technology that didn’t exist when the program was designed, at costs that have outpaced both GDP growth and general inflation for decades.4

The conventional explanation for that is demographic — more retirees, longer lives, an inverted pyramid. But the math doesn’t support this explanation. Our analysis (the decomposition below) splits real Medicare program growth from 1967 to 2024 into three multiplicative factors: new beneficiary inflow, years each cohort spends on the program, and real cost per beneficiary-year. Those factors multiply to the actual 26× real growth in annual spending.5

Demographics — more inflow plus longer cohorts — contribute a combined 3.47×. Real cost per beneficiary-year contributes 7.46×. Played out year by year, the architectural factor overwhelmingly swallows the demographic ones.

Of the roughly $1.07T in real cost growth above the 1967 baseline, demographics account for about $107B. The other $968B is how much more it now costs to keep one person on Medicare for one year. Three reinforcing dynamics live inside that.

The first is the fee-for-service payment architecture. Medicare’s traditional program pays doctors and hospitals a fixed price for each procedure or service performed. This incentivizes volume — more tests, more visits, more procedures — regardless of whether they improve outcomes. Every time Congress has attempted to implement automatic spending controls, it has simply overridden them. For example, the Sustainable Growth Rate mechanism, created in 1997, required automatic reductions in physician payments when spending exceeded targets. Congress blocked these cuts every single year from 2003 onward, accumulating over $150 billion in additional costs through annual “doc fixes.” The design incentivizes overuse, and the political system refuses to enforce the guardrails.

The second is the steady accumulation of new things to pay for. As we mentioned, part of the expansion in costs include legal expansions in coverage such as Medicare Part D — the prescription drug benefit added in 2006 — which alone costs roughly $130 billion a year, money that didn’t exist as a Medicare line item before. Imaging, biologics, robotic surgery, gene therapies: each new capability, while often adding genuine medical value, adds cost. But the architecture has no built-in way to weigh the new capabilities in cost/benefit terms. The costs just tack on.

The third is fraud at scale, which is best understood not as a separate problem but as the natural output of an open-ended payment system at trillion-dollar scale. HHS estimated over $100 billion in combined Medicare and Medicaid improper payments in fiscal year 2023.6 Jim Chanos has called this “the Golden Age of Fraud” and pointed specifically to Medicare Advantage upcoding as the clearest example. Medicare Advantage pays insurers on a risk-adjusted basis: the sicker your patients look on paper, the more the government pays. MedPAC estimates the federal government pays insurers 20% more for Medicare Advantage enrollees than for similar patients in traditional Medicare — $84 billion in excess payments in 2025 alone, roughly $40 billion attributable to coding differences. Asked why nobody addresses this, Chanos was blunt:

“I don’t know. We have a willingness in the corporate sector and elsewhere, and in the nexus of government and corporate, of just not holding people to account.”

Fraud on this scale is a symptom, with the fee-for-service model being an invitation to overbill, and the “pay-and-chase” enforcement model meaning that fraud is detected only after the money is already out the door. Moreover, the sheer size of the program — well over a trillion dollars annually — means even a “small” fraud rate translates into tens of billions.7

Fixing Medicare fraud would not close the deficit. But the fraud illuminates the deeper dysfunction: a mid-century program architecture that cannot operate at 21st-century scale without hemorrhaging money.

Part IV: Dollar Dominance — Why It Matters, and Why It Hasn’t Blown Up Yet

11) The dollar’s value is only indirectly related to US debt levels.

After ten ground truths’ worth of fiscal pathology, the natural question is: if it’s this bad, why hasn’t the dollar collapsed? It’s a fair question, and the popular answer — that deficits mechanically weaken the currency — happens to be wrong. Understanding why requires understanding the actual basis of dollar strength.

The empirical record makes the point immediately. Over the last two decades, federal debt has roughly doubled as a share of GDP, while the trade-weighted dollar index has simultaneously appreciated.

That the dollar's value has risen in tandem with ballooning debt is evidence that its value, at least in part, rests on a stack of institutional advantages that have very little to do with the US fiscal outlook.

The US has the deepest, most liquid capital markets on earth — the US Treasury market alone is over $28 trillion, roughly an order of magnitude larger than its nearest competitor. It has property rights and legal recourse for investors that no other major economy can credibly match — if you hold a US asset and there is a dispute, you can be confident that a court will uphold your claim. It has a central bank that, despite political pressure, has continued to optimize for its dual mandate rather than the political calendar. And finally, a point that many people overlook is that the US’ private sector is among the most dynamic of any developed nation. If you are a global equity investor, your largest allocation is more likely than not in US stocks. The same goes for US corporate paper.

It is then no wonder why, even in the face of a cascading fiscal imbalance, that foreign demand for dollar-denominated assets continues reaching new highs:

These institutional fundamentals are what global asset allocators are actually weighing when they choose to hold dollars or dollar-denominated assets. The deficit matters to the extent that it threatens those fundamentals over time — through inflationary erosion, institutional degradation, or loss of Fed credibility — but the relationship is indirect and operates on long horizons.

The alternatives reinforce the point. The euro has no fiscal union behind it. The yuan has extensive capital controls and an arbitrary rule of law. The ruble is not a serious candidate. The yen — historically a safe-haven currency — is now, after decades of fiscal expansion and ultra-loose monetary policy, experiencing unprecedented volatility against the dollar. And cryptocurrency cannot settle the $7.5 trillion in daily global FX volume that the dollar handles by default.

Every alternative to the dollar has structural deficiencies that make it unsuitable as a reserve currency at scale. Now, dollar dominance was partly the product of historical luck — the US not being a WWII battleground, Bretton Woods first-mover advantage, etc. — and what was constructed can be deconstructed. But monetary power changes hands over centuries, not election cycles.

It is also worth noting that the dollar's current position reflects trust that has been hard-won. In the early 1970s, Richard Nixon pressured Fed Chair Arthur Burns to maintain loose monetary policy ahead of the 1972 election, contributing to the stagflation of that decade. Restoring credibility required Paul Volcker's painful rate hikes in the early 1980s. Today, despite occasional political noise — including jawboning from the White House — Fed independence holds. But that credibility is a depletable asset, not a permanent feature of the landscape.

12) The dollar’s reserve status also looks a lot like a proof-of-violence mechanism.

The institutional story told above is true but incomplete. Beneath property rights, central bank independence, and deep capital markets sits something more elemental: the US controls a remarkable share of the physical and financial infrastructure through which global commerce moves, and the dollar’s value likely reflects that control.

The juxtaposition is suggestive: the US accounts for 36.7% of global military spending, while the dollar accounts for 57.8% of allocated FX reserves. That doesn’t prove causation, but it does show the same state sitting atop both the hard-power and monetary hierarchies — consistent with the idea that reserve status is partly secured, not just admired.

That relationship becomes more concrete when you look at the map. All ten major maritime chokepoints on the chart sit within operational range of a US fleet, and the four largest — Hormuz8, Malacca, the South China Sea, and Suez — together carry roughly three-quarters of global seaborne trade. Add Bab el-Mandeb, Gibraltar, and Panama, and you are looking at the arteries of the world economy.

American bases and fleets underwrite the movement of energy, manufactures, and commodities through the narrow passages on which global trade depends. The US’ largest trade partners — Europe, Japan, South Korea, the Gulf states — are also the countries that benefit most from the American security umbrella. The monetary relationship and the security relationship are, in that sense, two expressions of the same underlying arrangement: the US provides order, and the world holds dollars.9

Then there is the financial infrastructure layer. In trade finance, 80.7% of SWIFT — the Belgium-based financial network underpinning much of the world’s cross-border banking activity — messaging value is dollar-denominated.

Iran was disconnected from SWIFT under US sanctions pressure; many major Russian banks were removed after the 2022 invasion of Ukraine. In practice, the ability to cut states off from global financial infrastructure functions as a powerful form of economic coercion that can, in many contexts, rival traditional military force in geopolitical significance. The dollar’s reserve status, in this light, functions as a kind of “proof of violence” — analogous to the “proof of work” that underpins cryptocurrency — grounded in physical and institutional coercive capacity. The currency is thus valuable because it is backed by the demonstrated ability to enforce the rules of the system it currently denominates.

This loops directly back to the Ferguson threshold in ground truth number one. If the dollar’s reserve status is ultimately backstopped by America’s capacity to project force, then the moment debt service begins crowding out the defense budget, the collateral that makes the debt serviceable becomes cannibalized — liquidated to service the loan. That is the real feedback loop, and it is more dangerous than any debt-to-GDP ratio considered in isolation.

13) Other major currencies are effectively dollar derivatives.

In 1971, then-Treasury Secretary John Connally told a room of European finance ministers:

“The dollar is our currency, but it’s your problem.”

It was a provocation then, delivered in the chaotic aftermath of the Nixon Shock — the unilateral suspension of the dollar’s convertibility to gold. Half a century later, it has become a structural description of the international monetary system.

The degree of global dependence on the dollar today dwarfs anything Connally could have imagined. After the Global Financial Crisis, the Federal Reserve became the de facto backstop for other central banks, extending dollar swap lines in moments of crisis and functioning as the lender of last resort for the global financial system. The system would seize without dollar liquidity that only the Fed could provide.

The result is not coordination among equals. It is a hub-and-spoke system in which the hub has a monopoly on the thing everyone needs. When the Fed moves, the ECB and the Bank of Japan must respond — whether they want to or not — because capital flows respect yield differentials and risk premiums, not central bank sovereignty in isolation. Indeed, the ECB and BOJ calibrate their entire monetary transmission mechanisms to a world in which the Fed provides dollar liquidity in crises, as their banks hold massive dollar-denominated assets.

The scale of that calibration is itself the proof. Foreign banks hold trillions in cross-border dollar liabilities to other foreign banks — debts that only the Fed can ultimately produce. Thus other major currencies are, in a meaningful sense, dollar derivatives: their value, their policy space, and their crisis-response capacity are all functions of what the Fed does.

This creates a dynamic of mutual assured destruction. If your entire balance sheet is calibrated to dollar dominance, the dollar's collapse is not a liberation — it is a catastrophe. You cannot root for de-dollarization without rooting for the destruction of your own financial system. That is why BRICS rhetoric about alternative reserve currencies never materializes into anything structurally meaningful: the switching costs are existential, and you cannot rebuild the plumbing of global finance without the cooperation of the country whose plumbing you are trying to replace.10

Even the most aggressive de-dollarization scenarios concede the point. A 2024 CFA Institute survey found 63% of members expect erosion within 5 to 15 years — but most envision a multipolar outcome, not displacement. Former IMF Chief Ken Rogoff himself, in his 2025 book Our Dollar, Your Problem, articulates his envisioning of the dollar remaining dominant in the Americas, the euro in Europe, the renminbi in Asia. So the change everyone predicts is gradual and partial — which is what entanglement, not collapse, looks like.

For now, and for the foreseeable future, that entanglement is too deep to unwind without mutual destruction.

14) Rising interest rates create their own demand — but only so long as we don’t squander the trust behind it.

There is one final mechanism working in America’s favor that rarely gets discussed ouside of international trade & finance textbooks. As interest rates rise in the US relative to other developed sovereigns, the dollar becomes more attractive to global capital. Through interest rate parity11, the yield advantage pulls capital inward, supporting the dollar even as the underlying fiscal picture deteriorates. The very thing that makes the debt more expensive to service also makes the currency more attractive to hold.

This is a genuine structural advantage that distinguishes the US from any other highly indebted sovereign. Argentina cannot run this play. Italy cannot run this play. The US can, because the dollar’s institutional and coercive advantages make Treasuries the ultimate safe asset in a world that has no real alternative. Rising yields attract the very capital that finances the deficits that produce the yields. It is, in a meaningful sense, self-reinforcing — and it helps explain why the fiscal situation has not yet produced the crisis that its scale might lead one to expect.

But the “only so long as” in this ground truth is doing all the work. Interest rate parity functions only in a world where global capital believes the US will honor the implicit contract: stable institutions, an independent central bank, rule of law, no expropriation-by-inflation. The mechanism is trust-dependent, and it operates in an environment where that trust is being slowly drawn down.

The most likely way to break it is also the most politically tempting path: deliberate inflation. The moment the US begins inflating to erode real debt burdens, it is telling every foreign holder of Treasuries that the yield they are earning is a mirage. The real return collapses even as the nominal yield rises, and capital starts looking for exits. Interest rate parity stops working because the thing it was pricing — a real return in a credible institutional environment — no longer exists.12

This connects directly to ground truth number two: financial repression and inflationary debasement are always available as exits from a debt spiral. But they destroy the very mechanism that currently allows the US to sustain deficits that would sink virtually any other country.

Thanks, as always, for reading. None of these fourteen ground truths individually closes the case; together, though, they sketch the architecture of a slow-moving crisis that neither the "deficit doesn't matter" camp nor the "dollar collapse is imminent" camp properly explains. If you think we've gotten any of it wrong, the comments below are where to say so.

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10

This is not to mention that the economic unionization of a basket of major economies with such diverging economic and geopolitical interests is unlikely.

He also has an IRL name, Austin. Austin is a neoliberal-maxxing student of economics at the George Washington University, a well-read scholar of political philosophy and economic history, and a damn-talented writer. He hopes to bring his previous institutional experience — as well as his writing talents — to bear at Boyd by helping us raise bolder, more heterodox policy ideas this summer.1

With that in mind, here is Austin’s first Boyd essay.

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Liberalism: Its Meaning and Application For The 21st Century

Words often have ambiguous and unstable meanings, especially in politics. For most of the 19th century, a liberal was someone who believed in individual rights, limited government, and, from those principles, free market capitalism.

Classical liberalism held that economic freedom and political freedom were not merely compatible but inseparable: that secure property rights, voluntary exchange, and the rule of law were the material foundations on which human dignity and self-governance depended. A free market was not just an efficient mechanism for allocating resources. It was an expression of the belief that individuals, not governments, should be the primary authors of their own lives.

By the early 20th century, liberalism still broadly embraced those commitments but also came to include support for an assertive labor movement, an active regulatory state, and a generous welfare state to check the perceived excesses of capitalism. The Great Depression further discredited laissez-faire in the eyes of many, and the New Deal coalition that followed remade the Democratic Party into a vehicle for managed capitalism rather than free markets. Thinkers like John Maynard Keynes and John Kenneth Galbraith provided the intellectual scaffolding; politicians like Franklin Roosevelt and Lyndon Johnson built the modern regulatory and welfare states. By mid-century, a liberal in America meant something nearly the opposite of what it had meant a hundred years earlier.

I find myself caught between these two philosophical paradigms. My study of economic history has led me to conclude that capitalism has the strongest track record of lifting people and nations out of poverty — yet I also recognize that very same economic system responsible for lifting billions of people out of extreme poverty has left large segments of the population behind while imposing short-term harm on many others.

The immense progress facilitated by capitalism over the past two centuries means little to the Nottinghamshire Luddite whose livelihood was destroyed when power looms displaced his craft, the Massachusetts mill worker put out of a job during the Second Industrial Revolution, or the Michigan factory worker left without work amid automation and globalization.

These are not abstractions. They are real human costs borne by real people who had little say in the matter and fewer resources to cushion the blow. Any honest defense of capitalism must reckon with them squarely — not wave them away as casualties of progress or acceptable tradeoffs. But any fair overview of global trends since the emergence of modern market institutions must also account for the immense progress that the slow, steady, uneven rise of liberal capitalism has coincided with and often been causally responsible for producing.

The 1,000-Foot View

A country’s level of economic freedom — the extent to which it upholds private property rights, free trade, and minimal state interference in the economy — is one of the strongest predictors of its material living standards, poverty reduction, life expectancy, and countless other measures of human flourishing.

In every inhabited region of the world, freer societies outperform their more statist counterparts. The countries in the top quartile of economic freedom have average per capita incomes roughly eight times higher than those in the bottom quartile, and crucially, even the poorest citizens in market-oriented economies are dramatically better off in absolute terms.

Capitalism won the Cold War because Soviet communism collapsed under the weight of its own internal contradictions. The United States has outpaced nearly every other developed economy in recent decades largely because it has remained more dynamic, entrepreneurial, and open to innovation than its peers. Meanwhile, socialist central planning in Venezuela has failed to deliver prosperity and freedom in the 21st century, just as it did in the 20th.

Reactionary right-wing politics, of the sort represented by leaders like the recently defeated former Hungarian Prime Minister Viktor Orbán and President Trump, have similarly poor track records. Under Orbán, Hungary slid from a promising post-communist democracy into what he proudly called an “illiberal state”: eroding judicial independence, muzzling the press, and replacing free markets with crony capitalism, all while delivering economic stagnation rather than the promised prosperity. The United States remains the world’s premier superpower, but economic growth is slowing, populism is rising, and our broadly liberal institutions seem increasingly fragile. Authoritarianism of the right is no more a solution to the failures of liberalism than authoritarianism of the left. Both trade the difficult, open-ended work of self-governance for the seductive simplicity of a strongman with answers.

Liberalism in Retreat

Turn on the news anywhere in the world, and you will see freedom in retreat and a globe that seems to be on fire. As Billy Joel put it in his 1989 classic: “We didn’t start the fire. It was always burning since the world was turning.”

There is real comfort in that observation. The threats to liberal order are not unprecedented, and liberal democracy has survived worse — fascism, communism, the Great Depression, and two world wars. But history also teaches us not to be complacent. The period from 1870 to 1914 looked, to those living through it, like a permanent condition of progress and openness. It ended with the assassination of an archduke in Sarajevo and spiraled into catastrophe within weeks. The blessings of a liberal order are fragile, and they have been squandered before. As the economist John Maynard Keynes wrote in his timeless 1919 book The Economic Consequences of the Peace:

The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighboring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.

Nevertheless, the growing sense — and, in many cases, the reality — that our country and the world are headed in the wrong direction threatens to undermine the gains liberalism has delivered over the past two centuries. Global democracy has been in retreat for a decade, and global capitalism since 2019. In the meantime, classical liberalism has become a convenient scapegoat for members of both parties. Populists on the left blame markets for the persistence of poverty amid plenty, while populists on the right blame immigrants and international trade for the grievances of a working class that feels left behind by the very globalization liberals championed.

Source

Neither diagnosis is serious, and neither prescription would survive contact with history. It is therefore imperative that my generation rediscovers, reaffirms, and reasserts liberal values in our public discourse before the vacuum is filled by something far worse.

The Case for a New Liberal Center

Revolutionary sentiment may be chic among my generation, but it has failed across the ages and across the world. The French, Russian, Chinese, and Iranian revolutions each promised liberation and delivered tyranny.

Today’s democratic socialists would do well to confront that record honestly rather than insisting, as each successive generation of true believers has, that this time will be different and that real socialism has simply never been tried. Similarly, a new generation of conservatives ought to remember to conserve the founding values — the rule of law, separation of powers, and a free press — that are being actively undermined by the current administration, rather than cheering their demolition. Both impulses deserve to be actively countered. Not ignored, not accommodated. But countered with better ideas.

What would those better ideas look like in practice?

Our courts must uphold the Constitution against illiberal authoritarians on both the left and the right. Checks and balances are not bureaucratic obstacles to progress; they are the hard-won institutional architecture that prevents any single faction — whether a revolutionary vanguard or a demagogic president — from concentrating power at the expense of everyone else. The right to dissent must also be protected, regardless of the speaker, the speech, or the powers that be.

Policymakers at every level of government must learn to embrace market solutions to our most pressing problems. The affordability crisis gripping housing, healthcare, and higher education is not a failure of markets — it is largely a failure of policy. Supply-side restrictions and demand-side subsidies have created the very conditions that make socialism seem attractive to a generation of young people who cannot afford to buy a home or pay off their student loans. The answer is not more intervention. The answer is to remove the interventions that broke things in the first place.

Source

Fiscally, the federal government must get serious about the national debt. Default, hyperinflation, and financial collapse are not hypothetical — they are the predictable destinations of a trajectory we are already on. That means entitlement reform, reductions in military spending that do not serve genuine national security interests, and a welfare state that is targeted toward those truly in need without becoming a fiscal albatross that crowds out investment in the future.

Culturally, we need a revival of the liberal virtues that made this country’s progress possible: free speech, open debate, tolerance for dissent, and a commitment to judging individuals on their merits rather than on their racial or ideological identity. The woke left’s insistence on collective guilt and equality of outcome is not a more compassionate form of liberalism — it is a betrayal of it. It replaces the hard work of building a genuinely colorblind meritocracy with a zero-sum scramble over identity that inflames resentment and corrodes the social trust that democratic institutions depend on to function.

None of this is easy. Liberalism has never been easy. It asks us to live with uncertainty, to accept imperfect outcomes, and to resist the temptation of leaders who promise to cut through the complexity and deliver justice by force. But the alternative — the long, bloody ledger of the 20th century — should concentrate our minds.

The world liberalism built, for all its flaws and contradictions, is the most prosperous, most free, and most humane world human beings have ever inhabited. That achievement is worth defending. And defending it begins with saying so, forcefully and without apology.

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If you’d like to become more familiar with Austin’s style of thinking and writing, as well as his classical-liberal worldview, here are a few additional pieces he’s published that encapsulate such vibes:

The Mont Pelerin Review

My Political Development Over The Past 10 Years

My first political memory was on Tuesday, November 8, 2016, when my sixth-grade social studies teacher told our class that, regardless of the outcome, we would discuss the election results the next day. When we returned to class, that same teacher—an openly partisan Clinton supporter and ardent Trump opponent—announced that she needed time to process wh…

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7 months ago · 48 likes · 42 comments · The Mont Pelerin Review

The Mont Pelerin Review

The MPR's Philosophical Influences

I have written little that is truly original. What I have done is take the ideas of thinkers far more accomplished than myself, synthesize their insights, apply them to novel contexts, and, to the best of my ability, infuse those ideas with my own personality…

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8 months ago · 51 likes · 16 comments · The Mont Pelerin Review

The Mont Pelerin Review

Deregulation Worked

The 1980s and 1990s feel almost quaint today, yet the deregulation of that era is now widely blamed by populists on both the left and right for many of our economic woes. Rising market concentration is pinned on the deregulation of industry; the 2008 financial crisis is attributed to financial deregulation; and the rise of populism is supposedly the res…

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9 months ago · 36 likes · 8 comments · The Mont Pelerin Review

Starting in the 1970s and accelerating thereafter, the Soviet growth model — extensive capital accumulation poured into new urban factories, power plants, steel mills, and machine tools — had effectively run out of low-hanging investment opportunities, resulting in persistently diminishing marginal growth potential. This dynamic was compounded by a total lack of market-driven capacity for productivity-driven growth or creative destruction on one side, and ballooning imperial obligations on the other (Easterly and Fischer 1995).

To paper over these holes, the Soviet Union financed its civilian consumption and military spending — along with the subsidies it paid to its puppets — through oil rents made possible by the global energy crisis of the 1970s. But when oil prices normalized again in the mid-1980s, the regime was forced onto international debt markets, where it was eventually strangled.

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Soviet/Russian oil and gas “rents”:

I’ll develop the argument below, but the most important thing to take from it is that this pattern — fiscal exhaustion under inelastic obligations — is among the most legible and predictable failure modes in the historical record, and that the contemporary United States, while not in the Soviet position, lies on the same structural axis, with buffers that are real but not infinite.

Debt crowding meets central planning

The USSR’s balance sheet was dominated by three items, each of which was load-bearing to the state’s legitimacy. Together they accounted for ~30% of Soviet GNP in 1985, although because of the way planned economies work this is definitionally an estimate.

One, the military. Since the victory of the communists in WW2, the Red Army had acted as a backstop against exit by both its puppets — as seen in Hungary and Czechoslovakia — and domestic dissidents. Western estimates put real Soviet defense spending at 15% to 17% of GNP through the late 1970s and 1980s — triple the US share at the time. More recent estimates have pushed this number even higher.

Two, the Empire. In the initial post-War years, the USSR extracted huge amounts of booty from their conquered western territories — most notably East Germany — but by the 70s this dynamic had reversed. Increasingly, the Soviets were subsidizing their allies through the sale of cheap electricity and petroleum by way of a barter system in exchange for their manufactured goods. Beyond just this were, within the union republics themselves, large variations in endogenous productivity creating a perpetual transfer to Central Asia and the Caucasus as well as Siberia from the more productive western provinces. These transfers channeled through the central government which, in turn, became more and more politically unpopular as resources became zero-sum when growth slowed.

Third and finally, there were direct household consumption subsidies. In order to win compliance from the population, the government directly controlled the distribution of basic goods like housing. But food in particular became extremely expensive; since the USSR was unable to produce enough calories to feed itself, the state imported huge amounts from the globe. Retail subsidies rose from 4 percent of state budget expenditure in 1965 to roughly 20 percent by the late 1980s.

This worked, in a manner of speaking, until it didn’t. Specifically, when Brent crude oil prices halved — from ~$30 a barrel in 1985 to ~$15 in 1986 — it cratered Soviet hard-currency income. The CIA's 1988 retrospective put Soviet hard-currency export earnings at $32B in 1983–84, falling to $25.1B in 1986, with oil earnings alone collapsing from a 1982–84 average of $15.2B to roughly $7B by year-end 1986. In turn, gross hard-currency debt nearly doubled, from ~$22B in 1984 to $41.2B by year-end 1987.1

The result was that the budget deficit, which had traditionally run at 2–3 percent of GNP, blew out to roughly 10 percent by 1985, where it remained. To try and balance this, the USSR began to shift more and more of their oil sales onto the global market and away from the CMEA barter system, starving their puppets. Between 1980 and 1990 the CMEA share fell from 46 percent to 16 percent. Although this did buy the regime breathing room, it played a significant role in accelerating the breakdown of the Eastern European communist regimes.

Ultimately the state was unwilling to either cut domestic subsidies or curb military spending sufficiently, and was in turn forced to borrow from the international market. Gross hard-currency debt, which the CIA placed at about $16.5 billion in 1980 and $20 billion by 1982–83, rose to roughly $54 billion by the end of 1989, and approximately $105 billion at dissolution two years later. Although this was in nominal terms a relatively affordable debt load, because of the closed nature of the Soviet economy they had extreme difficulty raising the hard money to service it — by 1989 Soviet debt servicing alone had risen to ~30% of hard-currency exports.

To add to the woes of international debt, years of money printing had created enormous, and unpayable, domestic obligation. Since output had been static but paper wages had continued to grow during the era of stagnation, families were forced to “save” an increasing share of their income in the state banks. There was nothing worth buying for their money. From this era came the famous aphorism:

“We pretend to work, and they pretend to pay.”

As the state ran out of cash to pay its lenders, the rollover environment decisively deteriorated, and in 1991, the Soviet foreign-trade bank, Vneshekonombank, suspended principal payments on the external debt. Only four days later, on December 8, the Belavezha Accords formally dissolved the Union. The successor states opted to liberalize price discovery in January 1992, and the shortages which characterized the final years of the USSR were immediately replaced by hyperinflation, which wiped out both the domestic obligations and household savings.2

Debt was not the only vector of decline in the USSR — ideological hollowing among the apparatchik class and national unrest were accelerants. But without the loss of fiscal leeway both dynamics would probably have remained manageable; what sharply accelerated them was the collapsing elite payoff matrix that fiscal exhaustion itself produced.

Option one was loyalty to a central regime that was now metaphysically dead, financially insolvent, and unable to enforce its writ. Option two was alignment with the republican nationalists and participation in the anticipated plunder. Unsurprisingly this resulted in a textbook preference cascade where the climbers who would have been ideological communists in the 1960s became intrepid nationalists in 1991.

Once the Baltic states — which had always been restless — declared independence in 1990–91 and immediately began to liquidate state assets and economically privatize, the ball was thoroughly in motion and nothing could stop its momentum.

How does this apply to America?

Direct comparison between the contemporary United States and the late USSR would of course be naive. The US borrows in its own currency and not only regulates, but is funded by, the deepest and most liquid capital markets in the world. Unlike the Soviets, we do not lack access to hard currency or have generally atrophied foreign trade. Countries can persist with huge debt burdens. Japan, for example, has carried general government debt of nearly 250 percent of GDP for more than a decade without much sovereign distress to speak of, and Soviet-style financial repression has no analog in the American economy.

But still the mechanism at play here is one of the most binding in history and has shown up again and again, from the Crisis of the 3rd century in Rome to the collapse of the Ancien Régime. Since debt is a claim on future cash flows, once interest obligations grow beyond the capacity of revenues to pay them while also continuing to maintain the essential services of the state, governments are forced to either squeeze out vital spending or default on their borrowing — formally or through inflation.

Nothing about our current position is a law of nature. America’s “exorbitant privelege” — the dollar’s global reserve currency status — is, and always has been, conditional. Instead, it reflects the high degree of trust the international community currently places in the stability and accountability of American institutions, and that trust can be lost.

Seriously ask yourself what it would actually take for you personally to start holding savings in euros, Swiss francs, or bitcoin. Sustained inflation? Routine debt-ceiling theater in which sovereign payment becomes a domestic political bargaining chip? A pattern of monetary accommodation of fiscal demands? Capital controls floated as a serious policy option? Whatever the threshold is for you, every other holder of dollars is running the same calculus in parallel. The Soviet position in 1980 was one where international creditors were willing to lend at favorable rates, but by 1989 that was no longer true, and by 1991 they could no longer get money from anyone at any rate.

Even if the US doesn’t collapse from our debt, we are already facing the price of crowding out vital spending. Every dollar spent on interest is a dollar that could have been used to provide public services or returned to taxpayers. In 2025, net interest outlays rose to $970 billion — roughly $3,000 per citizen. That figure is approximately equal to the combined budgets of Defense, Homeland Security, Interior and EPA, Agriculture and FDA, and the legislative branch. The United States has tools and time, but it does not have unlimited amounts of either.

To recap, the TL;DR of the piece was as follows. The central operational claim of Modern Monetary Theory — that government bond yields are a policy choice rather than a market outcome — was institutionalized by the Federal Reserve over the post-2008 period through quantitative easing, regardless of whether the Fed accepted the MMT label. The apparatus held while inflation remained dormant. When inflation returned in 2022, the Fed had to dismantle it, and the structural costs the framework had insisted no longer applied — rising interest expense, a maturity wall on long-dated debt, and a constrained monetary lever — are now reasserting themselves.

The comment section revealed four distinct clusters of feedback.

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1) QE ≠ MMT

This, in one form or another, was the most common objection. It was also where I think the article was either misread or its framing not articulated in a clear enough way, or both.

The perennial Substack commenter states it plainly:

In all fairness, while the title of the article is “MMT is dumb, and dangerous,” its contents are laden with the detrimental upshots of QE. So the conflation is reasonable. However, the article never actually argues that QE is MMT. It argues, rather, that QE operationalized MMT's core claim even as Bernanke and his successors would have firmly rejected the MMT label. That's a different proposition than "the Fed adopted MMT's policy package," which it certainly did not.

The distinction matters because if MMT's claim is that government bond yields can and should be set by policy rather than discovered by markets, and if the Fed spent fifteen years suppressing long-end yields by becoming the marginal buyer of long-dated Treasuries, then the MMT framework's central premise was being empirically tested by an institution that would have denied any theoretical kinship with the framework. That’s what’s analytically important; deciding whether to label the resulting regime "MMT-adjacent," "post-monetarism," or simply "the QE era" amounts to a vocabulary preference.

Semantics aside, perhaps “MMT is pervasive, and dangerous” would have been a more apt title, as my arguments were closer to “MMT-adjacent monetary policy is bad” than “MMT is here, and we should reject it.” But in any case, the substance remains the same.

Moving on to ’s comment. This specific line is worth addressing first:

Sure, it is true that there is no public documentation of the FOMC timing QE purchases to match Treasury auction calendars for the purpose of making deficits cheaper. Fed and BIS research1 consistently describes the Covid-era actions as “parallel responses” to the same shock rather than “fiscal dominance” (i.e., the subordination of monetary policy to fiscal needs). So, if “coordination” requires an Epstein files-esque transcript where Yellen calls Powell and asks him to buy more long bonds… no, that did not happen, or at least did not happen in a way that has surfaced.

But the de facto coordination was extensive, and is well-documented. Several of the major Covid-era credit facilities — the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, the Municipal Liquidity Facility — were joint Fed-Treasury creations, with Treasury putting up equity through the Exchange Stabilization Fund and the Fed lending against it under Section 13(3) authority.2 That is explicit, formal, on-the-record coordination on risk-taking and macro-stabilization design.

Beyond the joint facilities, the temporal overlap was striking. Treasury issued over a trillion dollars of new debt in Q1 2020 alone while the Fed bought over a trillion dollars of Treasuries in the same period, including daily purchases averaging $72 billion in the two weeks beginning March 19, 2020.3 Greenwood, Hanson, Sunderam, and Stein have documented that in both 2008–09 and 2020, the Fed was a net buyer of long-term Treasuries while Treasury was increasing overall supply.4

In other words: the Chinese wall (i.e., information barrier) that is supposed to discipline the monetary side did not need to be formally dissolved for the apparatus to operate as if it had been.

Later on in Kinahan’s comment, he also objects to the article’s framing on the basis of the Fed's actions being “inevitable,” arguing that the Fed had no choice but to do what it did under exceptional conditions:

This is the strong form of the inflation-targeting-orthodoxy defense, and it's the part I'd really like to push back on.

The Fed had choices at every step. QE1 was a crisis response. QE2 and QE3 were unequivocally not — they came at times of unemployment healthily trending lower, markets functioning quite well, and long after the immediate crisis had already been resolved. Granted, inflation held stubbornly below the Fed’s 2% target, and the conventional rate-policy lever had been exhausted at the zero lower bound. So Kinahan's premise is partially right: the Fed faced genuinely constrained conditions and was operating on the unconventional edge of its toolkit. But "constrained conditions" is not the same as "inevitable choice.”

I recall in mid-2016 reading Mohamed El-Erian’s book The Only Game in Town, an extended (and prescient) warning that the Fed's continued aggressive accommodation was not, in fact, the only available response to weak demand. The reason the Fed kept being the only game in town, in his framing, was that Congress and the executive had abdicated, leaving the Fed as the only institution willing to act. And that the Fed's continued action under those circumstances was creating institutional and asset-price distortions5 that would compound over time and become difficult to unwind.

Kinahan's binary framing that the Fed had no choice except to abandon its inflation target collapses the relevant question. The Fed's continued aggressive accommodation was a choice, made under political constraints that were themselves choices, with consequences that doubtlessly compounded. Whether the Fed should have eased less aggressively, or held the line and forced Congress to act, or done something else entirely, is a separate debate worth having. But the framing that there was no other choice forecloses that debate before it can begin.

The post-pandemic balance sheet expansion exemplifies this point as it was also a discretionary policy decision, and another puzzling one given the sheer mass of fiscal stimulus coming down the pike. By mid-2020, Congress had already authorized roughly five trillion dollars in pandemic fiscal support, financed primarily through Treasury issuance. The Fed’s decision to absorb a substantial share of that issuance through expanded asset purchases — rather than letting Treasury supply meet market demand at market-determined yields — was a discretionary policy choice. The constraint cited in defense of that choice, that the inflation target was still binding from below, became progressively harder to defend as inflation expectations began to rise through 2021. The Fed nevertheless continued to expand its balance sheet through March 2022, ending net asset purchases only after (the backward-looking) headline CPI had crossed seven percent.

Inflation targeting warrants central bank easing in a deflationary environment but it does not dictate the form that easing must take. The decision to ease through trillions of dollars in long-dated government bond purchases — rather than through forward guidance, term funding facilities, direct lending programs, or some other instrument — was a discretionary one. It is also the choice whose structural consequences the article was arguing that we are now living with.

Setting up the second cluster of objections is the distinction between what the inflation-targeting regime required and what the Fed actually chose. These objections take the gap between MMT proper and what was operationalized as the starting point.

2) “MMT proper would have done the opposite”

This cluster of commentary was most analytically uncomfortable because on the whole, the pushback was hardly a misreading of the article.

’s comment articulates the objection well:

A separate part of ’s comment makes an objection on similar grounds:

This is not wrong. MMT proper — Kelton, Wray, Mosler — does advocate fiscal tools rather than monetary tools for inflation management. The 2022 Fed response, with rate hikes as the primary instrument, is closer to what MMT theorists have criticized than to what they would have prescribed. To that extent, the article probably treated "MMT" and "the popularized intuitions of MMT that diffused into the mainstream consensus" as more interchangeable than they should have been.

also chimes in:

Notwithstanding the fact that rate hikes were not the only response to inflation (balance sheet taper), Flaherty is also not wrong. Neither is :

But here’s where I'd basically push back on all of the above.

The only piece of MMT that ever stood a chance of being institutionalized in the modern American political economy was the operational premise about yields. The full package (including Congress legislatively managing inflation in real time through tax policy) requires a fiscal policy apparatus that simply does not exist in the US. Anyone who has watched Congress for fifteen minutes would find this proposition laughable. So saying "but MMT proper would have done X instead" is essentially demanding that the framework be evaluated against a counterfactual that was never going to happen and that nobody seriously proposed implementing.

The deeper point, though, is that the disagreement between rigorous MMT and what was actually operationalized is a disagreement about means, not ends. Both reject market discipline as the appropriate constraint on government borrowing and on the price of money. Both treat yields as a policy variable that ought to be engineered rather than discovered. They differ on the engineering: rigorous MMT prefers fiscal instruments — taxation, demand management, the job guarantee — while the operationalized version preferred monetary instruments — QE, balance sheet expansion, suppression of long-end yields through Fed asset purchases.

This amounts to only tactical disagreement within a shared bias against market discipline, not disagreement about whether the price of money is a thing the state should engineer. The Fed under Bernanke and his successors chose the monetary path, probably in part because it was politically tractable in a way the fiscal path was not. But the ideological premise was always the same.

It’s a similar objection to arguing that Zohran Mamdani is not really a (democratic) socialist because New York City still operates within a highly capitalistic system — that because the full programmatic package has not replaced the existing structure, the ideological orientation is not relevant to evaluating his policies. A socialist-absolutist would say of Mamdani what MMT-rigorous theorists are saying of post-2008 monetary policy: directionally yes, but not properly so. But the directional point is what matters for evaluating operational consequences. It is true that New York remains capitalist; the relevant question is what direction Mamdani’s actual policies move it. Post-2008 monetary policy was not MMT proper; the relevant question is what direction it moved the institutional apparatus. You do not need full system replacement for the ideological framework to matter.

And to that end, again, the article was meant to be a critique of what was actually operationalized.

3) On the question of Japan, and the dollar

Debates on MMT frequently end up invoking the question of Japan (usually from the pro-MMT side). For the sake of brevity, I opted out of a Japan tangent in the article.

Nevertheless, these points deserve real engagement because the absence of crisis so far is the strongest empirical evidence available against any sort of “MMT is bad” thesis. Several comments raised the topic of Japan or, as a corollary — given the yen’s persistent status as a safe-haven currency despite Japan’s insanely high debt-to-GDP — the broader question of where global money would go if not into dollar assets.

I’ll start with (paid Boyd subscriber!)’s comment:

This is worth dwelling on because Japan is the empirical test case in real time. The Bank of Japan ran a version of the post-monetarist (dare I say, “MMT-adjacent”) apparatus longer and more aggressively than the Federal Reserve did — including formal yield curve control since 2016. Now its government's debt-to-GDP ratio is roughly 250 percent, much of it held by the BoJ itself, and a sustained tightening cycle would explode interest costs and crater government finances in a way that would force the BoJ to choose between credibility and fiscal solvency. It’s the dilemma the Fed increasingly faces, but on steroids.

Frattaroli goes on to mention , saying he is monitoring and covering this situation well. After reading a few of Brooks’s pieces on the topic, I agree. His framing, drawn from years of emerging-market sovereign analysis, is that Japan is exhibiting the kind of fiscal-monetary bind historically associated with EM rather than DM economies. In his view, the BoJ cannot normalize policy at the pace inflation would otherwise warrant without triggering a fiscal-cost spiral, and the yen’s persistent weakness is the market’s expression of that constraint. The asymmetry he highlights is that DM central banks have historically been able to ignore this dynamic, while EM central banks could not; Japan is the first DM case confronting it directly.

Put more simply: not tightening means the yen continues to depreciate against any currency whose central bank is allowed to act (i.e., raise interest rates in response to inflation without breaking its government's fiscal arithmetic). This is because international investors will always allocate money in assets with the highest risk-adjusted rates of return.

To that end, ’s comment raises a fun thought experiment:

This thought experiment is one that former IMF chief Ken Rogoff does in extended form in his latest book, Our Dollar, Your Problem (highly recommend reading it for anyone interested in this topic). Rogoff's framing in the book is that the dollar's reserve-currency status is real and durable, but not unconditional. His specific argument on Gu's question is that the relevant comparison is not "the dollar versus a single alternative" but "the dollar versus a basket of marginal alternatives." If holding dollar assets becomes incrementally less attractive — because of inflation risk, fiscal arithmetic, political pressure on the Fed, sanctions risk for foreign holders — the marginal reserve manager does not need to sell dollars and buy yuan or euros wholesale. They just need to slow their accumulation of dollar assets and tilt new flows toward gold, toward yuan-denominated assets at the margin, toward other currencies with relatively better risk-adjusted profiles.

None of that necessarily looks like a moment-in-time crisis, but all of it shows up as a few extra basis points of yield demanded for the same paper, and over time, as a structurally weaker bid for new Treasury issuance. So the honest answer to Gu’s question is: probably the dollar, ten years from now, for most purposes. But “probably the dollar” is consistent with a dollar that costs the US meaningfully more to fund obligations in than it has historically. And Japan — with its (heretofore) safe haven currency, the yen — seems to be an empirical test case of this in real time.

4) The deeper agreement that MMT is, in fact, “dumb and dangerous”

Finally, despite much of the pushback, almost every comment was in anti-MMT agreement on some level. offered a refined version of the argument the article was making:

delineated between MMT as a descriptive theory, and as a prescriptive one, arguing that the latter is:

closed his commentary with:

Look, I think MMT has proven dangerous insofar as its central premise has given license to and inspired institutions like the Fed to experiment in dangerous ways. I remain unconvinced that the 'QE era' was unrelated to MMT in any meaningful way.

What the engagement clarified is that the actual calling of MMT “dumb and dangerous” was, surprisingly, hardly a controversial claim among the people who pushed back hardest. Whatever framework you bring to it, the institutional architecture the post-GFC policy apparatus built is now constraining policy in ways that compound over time, and there is broad consensus on this point even among readers who otherwise disagreed with much of the article’s framing.

What that consensus implies is that the live questions for the next several years are not really about MMT or post-monetarism in the abstract. They are about how the US will pay down the debt the apparatus accumulated. The Fed's balance sheet is still north of seven trillion dollars. The federal debt stack reprices in real time with every monetary policy decision. The federal interest bill is the fastest-growing line item in the budget and cannot shrink without either a fiscal contraction Congress will not deliver, a tax increase Congress will not deliver, or a return of inflation the Fed will not aggressively fight. Each of those paths has political constituencies that will resist it. Some combination is going to be extracted from American voters and bondholders in the coming years through a negotiation that has not yet begun.

And that negotiation is what the article was really getting at. Thanks to everyone who engaged — we’re sharper for it.

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What follows is the story of how MMT’s central operational claim — that government bond yields are a policy choice rather than a market outcome — went from fringe heterodoxy in the 1990s, to operational practice under Ben Bernanke’s Fed, to the “new normal” by the late 2010s, to the foundation of a roughly fifteen-year experiment in what monetary policy could be made to do.

It is also the story of how that experiment was rapidly dismantled in 2022 when inflation came back, and how the constraints the framework had insisted no longer applied came rearing back with a vengeance. We are now living inside the institutional wreckage of the MMT experiment.

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Infinite money glitch?

MMT starts from a premise that’s true — that a government issuing debt in its own currency is not financially constrained in the way an individual or household is, nor even the way a eurozone member (e.g., Greece) is. Such an unconstrained government — one that controls its own currency — can always create new money to service its obligations. So, in the MMT view, the real limit on deficit spending lies in the economy’s productive capacity and inflation, not in the mechanical question of whether a sovereign bond auction “goes through.”

The post‑GFC world seemed to validate this. When Treasury markets buckled in 2008, and again under stress episodes since, the Federal Reserve’s expanded policy toolkit — large‑scale asset purchases / an ever more elastic repo backstop — meant that failed or fragile Treasury auctions could be rescued with Fed support. The central bank could, in practice, ensure that the government’s paper cleared by just… buying it!

From this, MMT draws its central claim: deficits are effectively self‑financing as long as the interest rate on government debt remains a policy choice rather than a market outcome.

If that is true, a rationale emerges for running up debt and deficits. If interest rates and demand for government debt can be set by policy rather than discovered in markets, why shouldn’t policymakers simply set parameters such that the cost of financing deficits is minimized? And, pushed one step further, why should ballooning national debt be thought of as a problem at all?

The answer, if simple, is a rejection of the premise: policymakers can influence rates for a time; but alas, they cannot control them forever. So the wrongness of the whole MMT rationale is not in its chain of reasoning but in the core premise itself.

The wrongness of MMT also lies in its sleight of hand about how deficits are actually funded. The economist Stephanie Kelton’s 2020 book, The Deficit Myth, was profoundly influential in the popularization of MMT. In it, she invites readers to see the government’s budget constraints as — and I’m slightly paraphrasing here — fake and gay. In her cartoonish telling during a 2025 podcast appearance:

“The government’s bank, its fiscal agent, is the central bank in the US — that’s the Federal Reserve. And the Federal Reserve’s job is, in part, to carry out the payments that have been authorized by Congress on behalf of the US Treasury. Now ask, how does it do that? It uses a computer keyboard to change the numbers in the appropriate bank accounts. It types them in, and that’s where the money comes from.”

What Kelton is saying is technically accurate at the settlement level. She’s referring to the Treasury General Account (TGA), the checking account Treasury uses at the Fed. But the extremely important and existential caveat she neglects to mention is that Treasury cannot run an overdraft at the Fed; the TGA must — legally — have a funded balance in order for the transfers to clear. And that balance is funded by taxes and debt issuance, not by the Fed arbitrarily deciding to credit the account.

Kelton goes on:

“But that’s the strength of MMT, is that we’re willing to have that honest conversation so that we don’t talk to people as if they’re children. We don’t dumb it down and pretend as if the government has to go out and find money and collect it from rich people or other taxpayers or borrow it from savers. They create the money in the act of spending, and that’s just how it works.”

So MMT suggests that the government can always conjure money out of thin air to finance its spending, and that “that’s just how it works,” by essentially collapsing Treasury and the Fed into a single entity.1 This consolidated view is the load-bearing assumption of the entire framework. When the government spends, it issues new liabilities to the private sector, and bond sales just swap one form of government IOU for another. In such a view, one where money basically lacks scarcity, Treasury bond issuances must be nothing more than a trivial formality.

But in order for a Treasury auction to be considered trivial, there needs to be a… what? A guaranteed buyer.

It’s QE all the way down

Now, former Fed Chair Ben Bernanke would hardly characterize himself an MMT-adherent. Even at its peak in popularity, MMT carried a certain stigma within serious policy circles. But he oversaw the operationalization of its central intuitions — that the Fed can always just “change the numbers in the appropriate bank accounts,” and that rates and government bond yields are a policy choice, not a function of market discovery. He oversaw the transition of these tenets from MMT-derived intuition to institutional imperative — and ultimately institutional instantiation.

In the throes of the financial crisis, inducing relief via conventional monetary policy had run out of room at the zero lower bound — short-term rates being held “lower for longer” was unlikely to provide enough easing of financial conditions for the economy to recover. Fiscal stimulus was authorized by Congress in short order, but beyond the scope of ZIRP existed a real gap: the risk of a bond market rejection of Treasury’s post-GFC stimulus packages.2 (That is, the risk that not enough investors show up to bid in a Treasury auction and yields soar.)

Bernanke’s Fed opted to plug this gap with what, at the time, was a radical experiment: quantitative easing (QE), or the large‑scale purchases of hundreds of billions (and eventually trillions) in securities by the Fed. It was designed to stabilize key fixed income markets like Treasuries and agency MBS — and, by extension, the real economy — by suppressing longer term rates3 when short-term rates were already pinned at zero. It was designed to make money cheap, the wholesale way.

In practice, it seemed to be working extraordinarily well. Treasury was able to seamlessly finance a litany of massive spending bills and corporate bailouts with newly issued long-term paper. This coincided with markets stabilizing and the real economy recovering to new highs in shockingly short order.

The technical reason QE worked in those moments of economic desperation is pretty straightforward: the Fed stopped merely influencing government borrowing rates and started being the marginal buyer of the actual debt. Krishnamurthy and Vissing‑Jorgensen (2011), looking at the first couple tranches of QE, estimated that the programs reduced longer‑term Treasury yields on announcement by on the order of 90 to 200 basis points across maturities, with much of that effect coming through lower term premia rather than changes in expected short rates.4

More recent work by Haddad, Moreira, and Muir (2025) pushes this further. In models where asset purchases follow transparent rules, QE not only generates a one‑off “stock” effect from absorbing bonds, it creates an insurance effect, because investors come to expect that the central bank will step in whenever stress emerges. (A lasting axiom on Wall Street is that you simply “Don’t fight the Fed” — if the central bank is buying en masse, you, the investor, should be too.) That expectation, according to the empirical literature, lowers term premia by something on the order of 75 to 100 basis points on a persistent basis, transforming long‑dated Treasuries into an unusually safe, quasi‑insured asset.

Pre‑QE, the basic relationship was simple: more long‑dated debt relative to GDP and income tended to mean higher long‑term yields, because someone had to be compensated to hold the extra duration. But with what seemed like a defensible proof-of-concept, successive rounds of quantitative easing — including and especially the pandemic-era “bazooka” — coincided with lower long‑term yields, tighter credit spreads, and a decade (plus) in which debt service costs stayed low even as public debt soared.

Under this new normal monetary regime, the Treasury market supply‑yield relationship has meaningfully weakened and sometimes even inverted.5 As the Fed absorbed duration from the market, increases in Treasury supply — new government debt issued — no longer showed up as higher yields to the same degree. Indeed, the QE era of cheap debt was a heyday for borrowers abound, not least governments.

However, the problem that arises when the entire monetary environment hinges on the existence of an infinite buyer of last resort to artificially suppress rates is… What happens to the party once the music stops and the punch bowl is taken away?

The permanent emergency

By the late 2010s, the circular monetary apparatus had been running long enough that a generation of economists and policymakers had come to treat it as the infinite money glitch MMT suggested it was. Minneapolis Fed president Neel Kashkari, in a 60 Minutes interview in 2020, said as much and was subsequently meme’d into oblivion:

At the time he was simply voicing the prevailing consensus among his peers at the Fed, in academia, and on Capitol Hill. Inflation had remained stubbornly below the Fed's 2 percent target for nearly the entire decade despite the central bank’s balance sheet having swelled from under a trillion dollars to over four. The “natural rate of interest,” by some estimates, had drifted toward zero or below.6

Also around this time, former Treasury Secretary Larry Summers popularized the secular stagnation thesis, which framed chronic demand shortfall and depressed real rates as a structural condition rather than a transient post-GFC phenomenon. Olivier Blanchard, in his 2019 American Economic Association presidential address, argued that when the safe interest rate sits persistently below the growth rate, the fiscal cost of public debt "may be zero" — giving MMT's practical conclusions academic respectability without requiring anyone to sign onto MMT itself.

The professional mood had shifted decisively. Many well-respected economists — famously , Nobel laureate for trade theory turned blogging polemicist — argued time and again, sparing no conviction, that the US had entered something like a post-inflation world.7

Meanwhile those who dissented, voicing caution around the insistence that rates could remain "lower for longer" indefinitely, or warning that the explosion in money supply would eventually spell inflation, were sidelined.

Kenneth Rogoff, the Harvard economist and former IMF chief economist (and chess grandmaster!), was among the most prominent dissenters. Throughout the 2010s he warned that ultra-low rates and subdued inflation were not the new permanent state of the world, that mounting debt loads would constrain monetary policy when inflation eventually returned, and that a regime of "fiscal dominance" — where central banks lose the operational freedom to fight inflation because tightening would crater government finances — was the foreseeable consequence of complacency. The profession was, by and large, uninterested.8

Indeed, the dominant worry was no longer debt sustainability or an inflation-inducing overheating of the economy, but under-investment, insufficient fiscal support, and the risk of a Japan-style deflationary trap. In other words, the emergent consensus held that the primary constraint on fiscal policy was political dogma rather than economic fundamentals.

The most telling expression of this consensus was the discussion of “yield curve control” (YCC) — first posed at an FOMC meeting in July of 20199 — as the natural next step in expanding the central bank’s toolkit. YCC, essentially, is the explicit operational endpoint of MMT's logic: rather than influencing long rates indirectly through asset purchases, the central bank simply “names” target yields across the curve — not unlike how it “names” its Fed Funds Rate target range — and commits to buying or selling whatever quantity of bonds is necessary to enforce their target yields.

Mind you, this discussion was taking place during a time of all-time highs in markets, historically low unemployment, and a genuinely broad-based economic expansion in the US. Nevertheless the Bank of Japan had been running a version of YCC since 2016. And the Reserve Bank of Australia adopted it in 2020. The Federal Reserve, under Powell, openly studied whether to follow. The discussion was framed as the natural extension of what QE had already accomplished — and at the time, it was hard to convincingly argue otherwise. If the Fed could already suppress rates on the long end of the yield curve through purchases, why not just do it explicitly?

The distinction between MMT's operational claim and Fed practice had, by this point, functionally collapsed. What had begun as an emergency response to the 2008 crisis was now being theorized as the permanent architecture — the “new normal” — of monetary policy.

In the end, the Fed never formally adopted YCC. It didn't need to. When the pandemic hit, it launched a round of asset purchases that dwarfed every previous QE program combined; its balance sheet ballooned from roughly $4 trillion in early 2020 to nearly $9 trillion by 2022, with the Fed at one point absorbing nearly the entire net new issuance of long-dated Treasuries.

The effect on the yield curve was indistinguishable from what an explicit YCC regime would have produced. Long yields stayed pinned near historic lows even as the federal deficit hit double-digit percentages of GDP and Treasury issuance reached unprecedented levels. The Treasury market’s supply-yield relationship, already weakened by a decade of QE, had broken entirely.

And so for a moment in 2020 and 2021, the MMT project looked not just empirically validated but operationally complete. The Fed had demonstrated that it could absorb essentially any level of Treasury issuance the federal government chose to throw at the market without yields rising. The framework's central premise — that long term rates and demand for government debt are a policy choice rather than a market outcome — appeared to have been confirmed at scale.

Then came inflation and the infamous “Fed pivot.”

The reckoning

By mid-2022, headline inflation was running above nine percent and was top of mind for every American in a way that the country hadn’t seen since the 1970s. Many of the same voices that had spent the previous decade arguing for ever‑higher government spending backed by a complaisant Fed treated the surge as “transitory” — that is, a supply‑chain story, a base‑effect story, a one‑off energy shock. The honest accounting is that "helicopter money" — the trillions in post-Covid fiscal stimulus absorbed by the Fed’s balance sheet — created a demand shock that drove a meaningful share of the inflation. Larry Summers, to his credit, was an early and loud dissenter from the “it’s transitory; keep printing the money” consensus.10 Most of the profession was not.

Eventually, given the Fed’s pesky dual mandate, and given that the economy had already returned to full employment, the inflation reality forced a break with the MMT script. The Fed raised rates at the fastest pace in four decades and began letting its balance sheet run off (i.e., “quantitative tightening”). The “infinite money glitch” was no more.

Predictably, long yields backed up, the supply‑yield relationship reasserted itself, and the comforting assumption that the central bank could always keep debt service cheap evaporated. This was Jerome Powell’s belated Volcker moment, which was, in effect, a rejection of MMT’s core promise. But by then the emperor had already spent a decade without clothes.

In principle, what the yield curve is supposed to reflect is the market's collective expectations about growth and inflation, plus a term premium tacked on for the risk of getting either wrong. For most of the QE era, it reflected something closer to the Fed's preferences than the market's expectations. Today it remains unmoored from conditions in the real economy — only this time the distortion runs in the opposite direction, with long yields elevated above what market-based growth and inflation expectations alone would justify.

That distortion now collides with a very old-fashioned constraint: maturity. The QE era provided a golden window for issuing long-dated debt, and Treasury did. But that paper is now rolling off into a "maturity wall" — trillions in long-dated debt issued during the cheap-money era reaching maturity over the next 5-7 years — at exactly the moment when long yields are again expensive relative to growth and inflation expectations.

Treasury has responded the only way it can: by leaning heavily on T-bill issuance, refinancing maturing long paper with short paper rather than locking in current long rates. This is perhaps rational debt management given the menu of options available, but the structural consequence is that an ever-larger share of the federal debt stack now reprices continuously at the short-term spot rate (the one rate the Fed can actually control outright). Given that the entirety of the yield curve is now well above the rates on Treasury’s maturing debt, the weighted average interest rate on its outstanding debt is climbing — and is likely to continue climbing — as more long-dated paper rolls off and gets refinanced at a higher rate in the spot market.

Translation: interest payments as a % of GDP will continue soaring and are projected to eclipse 8% by 2050:

What the MMT framework's adherents are now reckoning with — to the extent they are reckoning at all — is that the “infinite money glitch” apparatus not only failed to predict the reckoning, it is now feeding the reckoning. It also created a dangerous potential credibility loop for the Fed (which is set to undergo a leadership change in May):

Any way we slice it, the US is now staring down the barrel of a vicious cycle that many an emerging market central bank has feared — and unironically one that developed market central banks have historically been able to ignore. The reason the US can no longer ignore it is precisely because of the institutional architecture MMT gave license to: a Fed balance sheet still north of seven trillion dollars, a government debt stack with rapidly shortening average maturity, and a federal interest expense that continues to grow faster than any other major budget category.

The framework's adherents argued for fifteen years that we had transcended the constraints of money. We had not. We had only suspended them, and the suspension came with a bill that compounds.

Conclusion

Milton Friedman was the godfather of monetarism, which claims that the supply of money is the first order determinant of inflation. He famously characterized monetary policy as having “long and variable lags.” While this was accurate when he said it, monetary policy no longer bites fiscally with a long lag as old long-dated paper slowly rolls over. In the new paradigm created by the operationalization of MMT, monetary policy bites immediately.

This is the part of the post-monetarism legacy that its architects never really reckoned with. The framework's central operational claim — that the central bank can keep rates suppressed and remain a perpetual buyer of government debt — works in only one direction that can be sustained as long as inflation stays dormant. The moment inflation arrives, the Fed must do one of two things:

1. Abandon its dual mandate of maximum employment and price stability; or

2. Do the exact opposite of what the MMT framework prescribes: tighten financial conditions, become a net seller of government bonds rather than a net buyer, and absorb whatever fiscal pain that creates.

In other words, absent the erosion of central bank independence, there is no version of the MMT apparatus that survives a return of inflation, because containing inflation definitionally requires dismantling the apparatus.

When that happens — and 2022 demonstrated that it can and does — fiscal policy had better be in a position to absorb the shock. That is, the federal government had better not be running large structural deficits financed primarily by short-dated debt that reprices continuously with the policy rate. Unfortunately but not surprisingly, this is the exact position the United States now finds itself in. Interest payments are already the fastest-growing line item in the federal budget. The maturity wall guarantees they will keep growing for at least the next several years, regardless of what the Fed does next. And every basis point of additional Treasury yield — whether driven by inflation expectations, term premium expansion, or the credibility loop discussed earlier — translates almost immediately into additional fiscal cost.

Which brings us to a strange but necessary reframe. We typically think of taxes as a way to fund government spending. But under the post-monetarist apparatus, with the monetary lever now exhausted and the fiscal stack vulnerable to every Fed decision, taxes have to be reconceived as something else as well: the only remaining policymaking tool with which to combat inflation. Higher taxes pull spending power out of the economy, which is exactly what the central bank is trying to do when it tightens — only without compounding the federal interest bill in the process. This is not a politically convenient conclusion. It is, however, where the math leaves us.

The architects of MMT’s institutionalization (Bernanke chief among them) myopically argued for fifteen years that we had transcended the constraints of money. We had merely suspended them. And the cost of resuming them, having let the apparatus run for as long as we did, is going to be paid one way or another — through inflation, through fiscal contraction, through monetary tightening, or through taxes.

The only remaining question is which combination, and at what political cost.

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More from the Boyd Institute’s ongoing sprint on debt & deficits:

How the national debt works

When the federal government spends more than it collects in taxes, it covers the gap (deficit) by issuing Treasury securities. Mechanically, the buyer of these bond securities pay the face value of the bond and in turn receives a fixed dollar payment, called a coupon, usually twice a year. After a predetermined period, when the bond “matures,” the government returns the principal. The interest rate then is the ratio of annual coupon to face value.

The market for Treasury securities is the largest and most liquid bond market on the planet. In practice, though, almost no one transacts one bond at a time. The action starts with institutional bidding in the primary market, where the government auctions off new debt directly (wholesale) to a small group of primary dealers and other authorized bidders.

The secondary market — the main locus of liquidity — is where everyone else trades those securities afterward. It’s here where daily Treasury prices and yields are quoted, where the Fed conducts its Treasury-related open market operations, and where the vast majority of price discovery and trading volume occurs (including retail or ‘mom-and-pop’ buying and selling).

The final technical piece of information you need to know about is “the yield curve”, or the relationship between Treasury yields and time to maturity. The short end — T-bills ranging from 1 to 12 month maturities — tracks the fed funds rate closely. But the long end — Treasury notes and bonds with maturities ranging from 1 to 30 years — is a different beast. Long-dated yields reflect things the Fed may influence but does not actually set, namely market expectations of long-run inflation1 and, more generally, the balance of supply and demand for long-dated paper.

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Who holds it

The debt is mostly held by three groups.

The first is the government itself.2 The Social Security trust fund, the Civil Service and Military Retirement funds, Medicare’s trust fund, plus the Federal Reserve, together hold roughly twelve trillion dollars in Treasury securities.

The second is foreign investors, who hold roughly nine trillion dollars, nearly a fourth of the total outstanding debt. Most of this represents holdings by foreign central banks and sovereign entities that buy Treasuries as a safe, liquid store of dollar value. A world that trades in dollars needs a place to park them. This is the Hamiltonian case for the existence of federal debt.

The third group is domestic private holders — US banks, hedge funds, pensions, mutual funds, insurance companies, IRAs, 401(k)s, etc. Unsurprisingly, this relatively cleanly to the ownership distribution of assets in general, and so is extremely skewed toward the wealthy. Sandy Brian Hager’s Public Debt, Inequality, and Power documents this in a comprehensive empirical study of US bond ownership.

Why debt is “bad”

It isn’t. The US has always carried debt, and post-Bretton Woods, the global financial system is one big oroborus of the Treasury market. But it does involve a specific tradeoff that, although everyone seems to grasp in principle, is rarely openly discussed. If it were financing investments that raise future growth and productivity, it could be justified as an asset-building tool. It could also be justified on the grounds of “macroeconomic stabilization,” as it was nearly two decades ago in the wake of the Great Financial Crisis.

The problem, however, is that much of today’s borrowing is not going to growth-inducing public capital, but to financing the welfare state and current consumption, which leaves future taxpayers with the bill yet no corresponding productive return. And the sobering reality is that interest payments now consume 18.5 percent of federal revenue — nearly one in five dollars collected by the IRS goes to servicing coupon payments on government bonds. So regardless of whether there is some universally optimal debt load, every borrowed dollar commits the state to a stream of interest payments that displaces other spending.

You can see this clearly in the current US budget. The total deficit, at 5.8 percent of GDP, is abnormally high almost entirely because of interest payments, which run at roughly 3.3 percent of GDP. Strip those out and the primary deficit — the gap between revenues and non-interest spending — is 2.6 percent of GDP, a historically normal figure. Before the state can fund anything, it is obligated to pay bondholders out of tax receipts.

This phenomenon, where interest payments displace other government spending, restricts the state’s capacity to deliver the services it once delivered regularly: things like public works projects and investment in infrastructure. And this is only half the picture. The other half is that interest payments amount to an extremely regressive transfer from taxpayers to capital holders.

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Conclusion

The honest framing is this: every dollar of new debt is simultaneously a decision to fund something now and a decision to transfer tax revenue to bondholders for decades after. Politicians on the left argue in favor of funding transfers with debt the entire time committing to future transfers to the rich. And the right denounces spending while hypocritically presiding over exploding deficits. Something needs to change or soon we won’t be able to afford anything but redistributing taxpayer dollars to asset-holders, foreign and domestic.

We are very excited to be running our third sprint at the Boyd Institute, and want to thank everyone who has followed us into this new sprint on debt and deficits in America. As we laid out in the topic announcement and our recent piece, the fiscal pressures accumulating in this country are as urgent as anything we could be working on, and today wanted to open the floor to you, the reader, once again.

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With the success of our previous essay contest format in mind, we are running it back again this quarter with the same core structure but with one small change we’ll get to in a moment.

The question we are asking this time is:

“How does America escape its fiscal trap?”

This one is narrower than “problem-solving capacity,” but it is still plenty broad by design. You can come at it from any number of angles. Is the answer entitlement reform — and if so, what does a politically viable path look like? Is it tax policy, or the structure of the budgeting process itself? Would a fiscal commission with real teeth work where past ones have failed? Do we need constitutional debt brakes of the kind Switzerland and Germany have adopted? Or is the answer on the growth side — deregulation, immigration, productivity — such that we grow our way out rather than cut our way out? Is it something more radical still: a sovereign wealth fund, partial monetization, a rethinking of dollar privilege?

We’ll leave it to you to decide the angle you think is best. Many, many smart people have tried to address this problem before, and what we are looking for are bold, asymmetric ideas that actually move the needle — not another restatement of the CBO baseline.

One Small Change

As we did last quarter, we are asking people to publish their articles on their own Substacks as soon as they are ready, and we will reward the best essays at the end of the sprint. The reasoning is the same as before: information silos are bad, and publishing in public lets everyone iterate and learn from one another. As with last time, we will only allow one final submission per applicant, but if you want to update or even write an entirely new essay after reading someone else’s work — or for any other reason — you are encouraged to do so up until the deadline.

The one change this time: if you would genuinely rather not publish on Substack, you may instead submit your essay to us as a PDF via the submission form.

That said, we strongly recommend the Substack route. The whole point of the format is to turn the contest into something like an online salon rather than a black box, and a PDF sitting in our inbox doesn’t do that. Publishing in public is how you bring other people into the conversation, how you get feedback before the deadline, and frankly how you build your own audience around ideas you clearly care about.

It is our promise that, whichever route you choose, if you submit something, we will read it, internalize it, and judge it on its merits.

In our last iteration, we awarded a total prize pool of $6,900, meaning eight honorariums. We expect our final payout this time to be roughly the same, so there is real money to be made for participants.

If you have any questions, do not hesitate to reach out via DMs, and we will be sure to respond with clarifications. Best of luck, and may the best essay(s) win!

For attribution we ask you put the following blurb at the top of your article:

“This article is part of ’s quarterly policy sprint on the debt and deficit. To learn more about them and the work they do you or submit your own article click here".

Prizes and Recognition

• Grand Prize: USD $2,500 cash, re-publication and promotion on our Substack, and the honorary title of Boyd Fellow for one year.

• Second Prize (Runner-Up): USD $1,000 and re-publication/promotion on our Substack.

• Third Prize (Runner-Up): USD $1,000 and re-publication/promotion on our Substack.

• Additional Publication: We may offer a USD $300 honorarium to authors whose essays we choose to re-publish beyond the top three.

Eligibility

Human (not AI) entrants aged 18 or older are eligible — one essay per author.

The contest is open worldwide, but the focus of this contest is on identifying novel solutions for the United States.

Essays should either be (a) Published on the author’s personal Substack account, attributed to the Boyd Institute at the top of the submission, with the link shared via THIS Google Form; or (b) Submitted directly to us as a PDF attachment through the same Google Form. Substack publication is strongly preferred.

Submission Guidelines

Format: An article will be considered for the prize pool if it is either:

• (Preferred) Published without a paywall on the author’s personal Substack account before the deadline, with an acknowledgment at the top of the article that it was created as part of the Boyd Institute essay contest; or

• Submitted as a PDF attachment via the Google Form before the deadline.

In either case, the author must submit the Google Form HERE with a link (or PDF), acceptance of terms and conditions, and other contact information.

Language: Submissions must be in English.

Original Work: Essays must be original and authored by the entrant.

AI Assistance Disclosure: If you use AI tools to brainstorm or edit your essay, briefly describe how you used them in a note attached to your Google Form submission. Fully AI-generated essays are not permitted.

Deadline: 11:59 PM Eastern Time on Monday, June 15th, 2026. Late entries will not be accepted. We will announce the winners and award prize money at the end of June.

Evaluation Criteria

Our judges will evaluate submissions based on:

• Originality: How novel and creative is the idea? This is a gnarly challenge, and we need outside-the-box thinking!

• Potential for Impact: If your idea were implemented, would it meaningfully address America’s debt and deficit trajectory? We are looking for ideas that substantially move the needle.

• Actionability: Does the proposal offer a concrete and realistic path forward? Is it feasible within existing technological and/or political-economy constraints?

• Clarity and Quality: Is the essay well organized and easy to follow? Is the proposal articulated persuasively for the general public, policymakers, and experts? While polished prose helps, we care most about the strength of your ideas.

How to Submit

1. Prepare your essay following the guidelines above.

2. Either publish the article on your Substack, or prepare a PDF.

3. Complete the online submission form HERE.

4. Provide your contact details.

5. Link to your Substack post or attach your PDF.

6. Confirm that you have read and agree to the Terms and Conditions.

Ready to share your bold, asymmetric idea? Click the link below to submit your essay.

👉 Submit Your Essay 👈

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Federal budget deficit as % of GDP

The US has run a budget deficit in all but four of the past 45 years, with the lone surpluses appearing briefly at the end of the Clinton administration. The two largest gaps in modern history came during the 2008 financial crisis and the 2020 pandemic response, when deficits exceeded 10% and 14% of GDP, respectively. Post-Covid, the government has continued to run deficits in the high-single-digit % range — historically enormous.

Federal debt as % of GDP

Federal debt spiked to roughly 106% of GDP at the end of World War II, then steadily declined for three decades as the postwar economy grew faster than the debt stock. Starting in the 1980s the trend reversed, and today debt is approaching the WWII peak. CBO’s projections have it blowing past that record and heading toward 175% of GDP by the mid-2050s.

Treasury is in the midst of rolling through a maturity wall.

Publicly held Treasury debt1 totaled $31.41 trillion as of April 3, 2026. Of that sum, roughly 33% will be maturing within 12 months. Much of these maturities are ZIRP-era (lower-rate) issuances which must be rolled over at current rates in the spot market.

T-bills have become the path of least resistance.

Since the yield curve is currently sloping upward — meaning that current short-term rates lower than long-term bond yields — Treasury is electing to “refinance” the longer dated maturities by increasingly issuing Treasury bills (or “T-bills,” the shortest-term debt). But by replacing long-term funding with short-term rollovers, the US is effectively setting a policy where a large portion of its debt will have to be refinanced every few months on a go-forward basis.2 This probably helps explain the president’s urgency for a Federal Reserve in rate-cutting mode in the near term.

Still, the average interest rate the US pays on its debt has more-than doubled since 2021.

Even though T-bill rates have come off their 2023-24 peak as the Fed has eased, short-term rates are still considerably higher than the average coupon on the maturing debt. Thus the blended average rate on federal debt, which in 2024 climbed back above 3% for the first time in over a decade, could very well continue to climb as maturities continue to be rolled.

Up, up, and away!

And so the above explains why interest payments on federal debt have climbed back to roughly 3% of GDP, matching the previous peak set in the early 1990s. The difference is that the 1990s peak was followed by a long decline as rates fell and growth caught up to the debt; today’s climb is happening with a much larger debt stock and no obvious catalyst for rates to return to the zero-bound levels of the 2010s. Interest is now the fastest-growing major line item in the federal budget, and on current projections will soon be the single largest.

Mandatory spending and interest eats everything.

This may be the single most important chart in the deficit story. Starting next year, CBO projects that mandatory spending (Social Security, Medicare, Medicaid) plus net interest on the debt will, absent structural reform, permanently exceed all federal revenue. In practical terms, every dollar of discretionary spending — defense, infrastructure, research, federal agencies, i.e. everything but pure transfers — will be financed entirely with borrowed money.

We even spend more on interest than defense now.

Year-over-year spending is up across nearly every major category. Social Security led the increase at +$43B, followed by Medicare (+$33B), Health (+$31B), and net interest on the debt (+$30B). Defense rose modestly, and the only category showing a meaningful decline was “All Other” — the catch-all bucket for the rest of the federal government, which includes almost all investments (the type of spending that actually carries a meaningful economic multiplier).

Who pays our taxes?

The federal income tax is steeply progressive in practice. The top 1% of earners took home 22.4% of all adjusted gross income but paid 40.4% of federal income taxes, while the bottom half of filers earned 11.5% of income and paid a small single-digit share of the total. The top 10% of earners collectively cover roughly 75% of the federal income tax bill. This concentration is worth keeping in mind in any debate about raising or cutting rates — the revenue base is heavily dependent on a small group of high earners.

Our deficit is driven by increased spending.

Over the past 50 years, federal outlays have averaged 21.2% of GDP and revenues 17.3%. But as revenues have remained near historical average, outlays have systematically crept up.

It’s basically just income (and payroll) tax.

Washington's revenue base is less diversified than many people assume. Individual income taxes supply 51% of federal revenue and payroll taxes another 33%, meaning about five of every six federal dollars come directly out of workers' paychecks. Corporate income taxes contribute just 9%, with customs duties and miscellaneous receipts splitting the remaining 8%.

We spend much more on the elderly than the young.

Americans' relationship with the federal balance sheet shifts dramatically over the life cycle. People under 25 and over 65 receive substantially more in government spending than they pay in taxes, while working-age adults (roughly 35 to 54) are net contributors. The imbalance is especially pronounced for Americans over 75, who receive tens of thousands of dollars more per year in benefits than they pay in.

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Debt and Deficits

For decades the question of US federal debt has come and gone politically, but it is now — when, ironically, there is the least political capital to deal with it — that we are truly beginning to pay the price. The simple reason is that under the Zero Interest Rate Policy world following the 2008 financial crisis, the federal government accumulated enormous levels of debt at very low prices. Now that interest rates have moved up again, and plausibly could move higher, we are beginning to pay the price for that policy decision. Today nearly 14% of all federal spending — roughly $970 billion in FY2025 alone — is consumed by interest payments, making them the third-largest line item in the entire federal budget, behind only Social Security and Medicare.

This is to say nothing of our impending entitlement crisis. Both Social Security’s primary trust fund and Medicare’s Hospital Insurance trust fund are projected to run dry in 2033, at which point we will be forced either to shift those expenses into the general fund — out of their arithmetic fantasy — or to accept the statutory cuts: a 23% across-the-board reduction in Social Security benefits and an 11% cut to Medicare hospital payments.

Our accumulating debt burden is creating a fiscal cliff and crowding out government investment, all while undermining confidence in the US dollar as a safe haven and so jeopardizing our exorbitant privilege. Figuring out how to solve it, then, is one of the most important questions we face. Many people, including many think tanks, have tried to address this problem before, and so what we are looking for are really bold, asymmetric ideas on how we can begin to get ourselves out of this mess.

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The Essay Contest is Back

The single best thing we did last sprint was the essay contest format, and we’re running it again the same way: you will publish on your own Substack as you go, iterate in public, learn from each other, and submit your best work by the deadline.

We will be publishing another article with the full rules, prize pool, and submission instructions later this week, but you should start thinking now.

Onwards and Upwards!

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