Regarding inflation, does only consumption debt raise it? For example, subsidies during COVID increased consumption directly. What about investment debt? It can also raise inflation indirectly by creating jobs and boosting wages, which increase consumption. So, if all debt tends to push inflation up, it’s not truly “free” for current generations. While debt might be fiscally free for the state, in the long term, it can reduce citizens’ real purchasing power in the present time. As you say government deficits can be funded by taxes or debt. Debt may seem fiscally free compared to taxes, but if it fuels inflation, it acts like a hidden tax—often a more unfair one, since inflation hits lower-income people harder. I’m a bit skeptical of Blanchard’s argument, though I plan to read the article! Also, offering younger people a way to save for the future through investing in sovereign debt, doesn't make much sense to me if there's inflation. I mean, look at my US bonds in the last few years and the cost of living. Not nearly growing as much as I need them too.
"Regarding the US, recent research by Mehrotra and Sergeyev (2020) suggested that the US sustainable fiscal limit could be around 150% to 220% of GDP, while it currently sits at around 120%. Mian, Straub and Sufi (2021), on the other hand, believe that the fiscally ‘free’ limit might already have been attained." This is a large discrepancy, how come? What are the assumptions behind these different conclusions?
Blanchard says that we cannot know a priori what level of debt is sustainable: "Give me a specific country and a specific time, and I will use the approach above to give you my answer." After the passing of the BBB and the new trillions in public debt, is the US reaching unsustainable debt? (In other words, is Elon Musk right to panic? I don't really know how to assess these numbers, given the magnitude.)
Also read this today: https://www.theguardian.com/business/2025/jul/08/uk-public-finances-obr-national-debt-gdp I understand the issue around productivity (namely, if the economy slows down then debt can become unsustainable). This might be a very dumb question, but if productivity is defined as how much output (GDP) the economy produces per hour worked, shouldn't we expect an increase in productivity thanks to AI? Aren't we on the verge of a new industrial revolution? (I get that there will be layoffs, but it should push productivity up too?)
The intergenerational analysis of sovereign debt is also very interesting. How does it change if population decreases, and ages up? If we are issuing public debt as an instrument for younger people to save, does it matter that there are in fact less young people? Less demand for investments, it would drive interest rates down, which would make debt fiscally free (assuming higher economic growth). A good thing? On the other hand, if public debt is used for consumption (paying older people pension's) then it won't drive growth, like investment debt, and therefore won't be fiscally free?
I recently learned that Norway has a particularly strong sovereign wealth fund. Is this unusual? It seems to me that this is a valuable tool for managing deficits, but also a way for countries to save collectively. We typically talk about savings as an individual responsibility, not a responsability of the state. This strikes me as odd, wealth does accumulate over generations if properly managed, and could help fund future crisis, like climate change or ageing population. Some countries that are struggling today where once great powers. If these countries had saved properly, they wouldn't be in this situation today. I suppose those profits were either channelled to the very rich or squandered by inefficient or even corrupt governments.
A really hard topic to comprehend, lots of fine-tuning required, it seems to me.
A lot of great points here! I'll try to address a few:
1. Inflation.
On the inflation front, if the debt issued is being bought by individuals, then money is being removed from the economy just like taxes. If the Federal Reserve is buying the debt, that can result in inflation (actually, that is how the Federal Reserve stimulates the economy by buying up assets). Inflation's distributional impacts are often complex, because inflation deflates debt away. So many low income individuals that have debt can actually be better off (debts are denominated in nominal terms - a fixed amount, while wages often grow with inflation). So it makes inflation a bit ambiguous. In terms of bonds as an investment, it is a safe asset. Ultimately, the young person is either taxed (and thus has only a promise in the future that they will receive help from society) or buys a bond (a formalized way of guaranteeing the person receives something in the future.
2. US Debt Levels and Future
The main concern to the current policy proposals are that they ultimately do not lead to the growth they claim to. Cutting taxes is also in a way a spending decision by the government. Previous US government investments have stimulated the economy generating new GDP and income for people. The purpose of this investment in the past was that it would generate this new income. From this new income, we should pay back some of the debt that was taken on before (or use this new income to further grow). The concern around these proposals is that they are neither implying that they are a wasteful decision.
3. Productivity
High level, you've defined spot on. It also includes capital. We typically think an economy takes capital (machines) and labor (hours worked) and makes a product. If we produce more with the same amount of machines and hours worked, productivity went up. Typically, productivity growth is relatively stable. Although AI may result in a bigger jump in productivity, economics research suggests that to be unlikely for now.
4. Population Changes
This is a topic I haven't looked into much. I would add one additional point. If there are fewer younger people, then there is less labor, which in turn means every person will be paid more (labor is scarcer so you pay each person more). This can change some of the dynamics you mention.
5. Sovereign Wealth Fund
Another great topic of interest. There are many different ways to think about it. Some things to consider are that ultimately it is taking people from individauls and investing on their behalf (it's as if one's workplace didn't give you your money and invested it in the stock market on your behalf). This leads to a question why should the state do it. Does it invest better than us? Do people under-save (for example, people under-save for retirement)?
Lastly, where does the fund invest is another question. If abroad, then it becomes a question whether it would be better to deepen the investment domestically.
All great question/comments - hopefully my comments are helpful!
"Who holds government debt is on its own an important question in economics, but in this post we will focus on the impacts of debt on the economy." Please can you write another post on who holds government debt and why it matters?
Fascinating article, thank you!
Regarding inflation, does only consumption debt raise it? For example, subsidies during COVID increased consumption directly. What about investment debt? It can also raise inflation indirectly by creating jobs and boosting wages, which increase consumption. So, if all debt tends to push inflation up, it’s not truly “free” for current generations. While debt might be fiscally free for the state, in the long term, it can reduce citizens’ real purchasing power in the present time. As you say government deficits can be funded by taxes or debt. Debt may seem fiscally free compared to taxes, but if it fuels inflation, it acts like a hidden tax—often a more unfair one, since inflation hits lower-income people harder. I’m a bit skeptical of Blanchard’s argument, though I plan to read the article! Also, offering younger people a way to save for the future through investing in sovereign debt, doesn't make much sense to me if there's inflation. I mean, look at my US bonds in the last few years and the cost of living. Not nearly growing as much as I need them too.
"Regarding the US, recent research by Mehrotra and Sergeyev (2020) suggested that the US sustainable fiscal limit could be around 150% to 220% of GDP, while it currently sits at around 120%. Mian, Straub and Sufi (2021), on the other hand, believe that the fiscally ‘free’ limit might already have been attained." This is a large discrepancy, how come? What are the assumptions behind these different conclusions?
Blanchard says that we cannot know a priori what level of debt is sustainable: "Give me a specific country and a specific time, and I will use the approach above to give you my answer." After the passing of the BBB and the new trillions in public debt, is the US reaching unsustainable debt? (In other words, is Elon Musk right to panic? I don't really know how to assess these numbers, given the magnitude.)
Also read this today: https://www.theguardian.com/business/2025/jul/08/uk-public-finances-obr-national-debt-gdp I understand the issue around productivity (namely, if the economy slows down then debt can become unsustainable). This might be a very dumb question, but if productivity is defined as how much output (GDP) the economy produces per hour worked, shouldn't we expect an increase in productivity thanks to AI? Aren't we on the verge of a new industrial revolution? (I get that there will be layoffs, but it should push productivity up too?)
The intergenerational analysis of sovereign debt is also very interesting. How does it change if population decreases, and ages up? If we are issuing public debt as an instrument for younger people to save, does it matter that there are in fact less young people? Less demand for investments, it would drive interest rates down, which would make debt fiscally free (assuming higher economic growth). A good thing? On the other hand, if public debt is used for consumption (paying older people pension's) then it won't drive growth, like investment debt, and therefore won't be fiscally free?
I recently learned that Norway has a particularly strong sovereign wealth fund. Is this unusual? It seems to me that this is a valuable tool for managing deficits, but also a way for countries to save collectively. We typically talk about savings as an individual responsibility, not a responsability of the state. This strikes me as odd, wealth does accumulate over generations if properly managed, and could help fund future crisis, like climate change or ageing population. Some countries that are struggling today where once great powers. If these countries had saved properly, they wouldn't be in this situation today. I suppose those profits were either channelled to the very rich or squandered by inefficient or even corrupt governments.
A really hard topic to comprehend, lots of fine-tuning required, it seems to me.
A lot of great points here! I'll try to address a few:
1. Inflation.
On the inflation front, if the debt issued is being bought by individuals, then money is being removed from the economy just like taxes. If the Federal Reserve is buying the debt, that can result in inflation (actually, that is how the Federal Reserve stimulates the economy by buying up assets). Inflation's distributional impacts are often complex, because inflation deflates debt away. So many low income individuals that have debt can actually be better off (debts are denominated in nominal terms - a fixed amount, while wages often grow with inflation). So it makes inflation a bit ambiguous. In terms of bonds as an investment, it is a safe asset. Ultimately, the young person is either taxed (and thus has only a promise in the future that they will receive help from society) or buys a bond (a formalized way of guaranteeing the person receives something in the future.
2. US Debt Levels and Future
The main concern to the current policy proposals are that they ultimately do not lead to the growth they claim to. Cutting taxes is also in a way a spending decision by the government. Previous US government investments have stimulated the economy generating new GDP and income for people. The purpose of this investment in the past was that it would generate this new income. From this new income, we should pay back some of the debt that was taken on before (or use this new income to further grow). The concern around these proposals is that they are neither implying that they are a wasteful decision.
3. Productivity
High level, you've defined spot on. It also includes capital. We typically think an economy takes capital (machines) and labor (hours worked) and makes a product. If we produce more with the same amount of machines and hours worked, productivity went up. Typically, productivity growth is relatively stable. Although AI may result in a bigger jump in productivity, economics research suggests that to be unlikely for now.
4. Population Changes
This is a topic I haven't looked into much. I would add one additional point. If there are fewer younger people, then there is less labor, which in turn means every person will be paid more (labor is scarcer so you pay each person more). This can change some of the dynamics you mention.
5. Sovereign Wealth Fund
Another great topic of interest. There are many different ways to think about it. Some things to consider are that ultimately it is taking people from individauls and investing on their behalf (it's as if one's workplace didn't give you your money and invested it in the stock market on your behalf). This leads to a question why should the state do it. Does it invest better than us? Do people under-save (for example, people under-save for retirement)?
Lastly, where does the fund invest is another question. If abroad, then it becomes a question whether it would be better to deepen the investment domestically.
All great question/comments - hopefully my comments are helpful!
"Who holds government debt is on its own an important question in economics, but in this post we will focus on the impacts of debt on the economy." Please can you write another post on who holds government debt and why it matters?