Opinion | I Was Obama’s Budget Director. It’s Time to Worry About the National Debt. – The New York Times

To many global investors, the almighty dollar isn’t looking quite as almighty these days, in part because America’s fiscal situation has deteriorated significantly. This fiscal challenge holds one of the keys to the Trump administration’s goals on trade, as the United States will not succeed in reducing its trade deficits materially unless it also reduces its budget deficit.

For years it was reasonable to tune out the worrywarts carping about deficits. With very low interest rates, a lack of particularly attractive alternatives to U.S. Treasuries for investors and a muted market reaction to serial Capitol Hill dramas over raising the debt limit, those who bemoaned the unsustainability of deficit spending and debt levels seemed to cry wolf — a lot. Even as a former White House budget director, I grew skeptical of their endless warnings.

Not anymore.

Two things have changed: First, the wolf is now lurking much closer to our door. Annual federal budget deficits are running at 6 percent of G.D.P. or higher, compared with well under 3 percent a decade ago. Interest rates on 10-year Treasuries have more than doubled — around 4.5 percent now versus just over 2 percent then — and in the current fiscal year the government is projected to spend more on interest payments than on defense, Medicaid or Medicare. That’s right: Our borrowing now costs us more each year than each of these big, essential budget items.

Meanwhile, federal debt held by the public, excluding Federal Reserve holdings, as a share of G.D.P. has increased by about a third since 2015. The Congressional Budget Office, which I once led, projects that by 2029, our debt as a share of our economy will grow to levels unprecedented since the years after World War II. All of this is occurring against a backdrop of an even more polarized political system, increased tension with foreign debt holders and less confidence in American security protections that promoted the dollar as the world’s safe haven.

The risks posed by our heavily leveraged government are higher today than in the past, but it’s also true that none of the feared adverse effects have happened — yet. It is hard to find any modern economy with a freely floating exchange rate and debt denominated in its own currency, both of which the United States enjoys, that has defaulted on its debt. So why raise alarms now?

Because the absence of evidence is not evidence of absence. No other nation has had the combination of factors defining America’s current fiscal position, so precedent is not helpful.

Our ability to sustain large deficits relies on the dollar’s status as the global reserve currency. Close to one-third of our debt is foreign owned, totaling nearly $9 trillion. In this context, reduced appetite for U.S. debt among foreign investors can drive interest rates higher and make our fiscal position even more challenging.

Although Moody’s downgrade of U.S. debt to a level below its former triple-A rating generated headlines and temporarily rattled the bond market, the downgrade itself won’t have much lasting impact on investors. For now, as the saying goes, Treasuries remain investors’ cleanest dirty shirt.

This can change, though, both as other countries’ relationships with ours evolve and as other governments, especially in Europe, expand spending and issue more debt to finance it. If Germany borrows more to finance defense and infrastructure spending, for example, its government bonds may become a more viable alternative to Treasuries for some investors.

A second shift relevant to the budget deficit is the administration’s focus on the trade deficit, which, definitionally, occurs when a country consumes more than it produces. That is, when a nation’s savings are relatively low.

Budget deficits subtract from national savings, and regardless of what happens with the current raft of tariffs, America will struggle to reduce its overall trade deficit meaningfully without reducing its budget deficit.

Unless there is an underlying change in national savings patterns, tariff increases will be offset by exchange rate changes that discourage exports and encourage imports, with little or no net effect on the overall trade balance. Indeed, the most fundamental shift required to alter global trade patterns is for China to reduce its savings rate by running larger budget deficits (which would reduce its trade surpluses) and for the United States to do the opposite by reducing its budget deficit (which would reduce our trade deficit). We clearly cannot pin our hopes on China running larger deficits, though.

To manage the risks associated with our fiscal situation and achieve the administration’s trade goals, what should we do?

First, we should embrace being the world’s reserve currency and appreciate the exorbitant privilege associated with that status. Scott Bessent, the Treasury secretary, has recently said that this is the administration’s position.

Second, we should eliminate the debt limit. Its existence does nothing significant to impose fiscal discipline and only creates unnecessary distractions.

Third, when we had the chance to lock in low long-term rates, we should have extended the maturity of Treasury debt, as Robert Rubin, Joseph Stiglitz and I recommended more than four years ago: “Given deep uncertainty over the future of interest rates and the current slope of the yield curve,” we advised, extending debt maturities would “mitigate the consequences of a relatively sudden change in interest rates.”

Unfortunately, our fears have since materialized. Despite the rise in rates since then, we should still attempt to extend some of our maturities now, both to reduce the risk of having to refinance so much debt each year and to hedge against further rate increases from this point forward. The basic idea is to borrow over 30-year periods or even longer, rather than borrowing over a short period and then having to refinance every few years.

Fourth, higher growth would help. It’s possible that, as the economist Nouriel Roubini has put it, “tech trumps tariffs” and growth will be higher in the future because of the artificial intelligence revolution. But we don’t know much about how to meaningfully affect growth through policy changes, so put this in the hope rather than the strategy category.

Finally, there is plenty we could do — but probably won’t — to generate fiscal savings in our large entitlement programs and raise revenue. We could, for example, move more aggressively to pay for quality rather than volume in health care and promote A.I.-driven support for physician decision making that would narrow the wide and mostly unwarranted variation in how health care is practiced across the nation. The result would lower cost growth in health care without harming health outcomes.

In its current form, the budget legislation moving through Congress would only exacerbate the challenges we face by further expanding the deficit. But the first step toward fiscal health is not any specific bill or policy proposal. It is to recognize that our fiscal risks are alarmingly elevated and that we won’t make much progress on the trade deficit unless we reduce its twin, the budget deficit.