Trouble with American Exceptionalism

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The writer is the chairman of Rockefeller International

There is increasing talk of “American exceptionalism”, fueled by the strength of the US economy and markets relative to other developed countries, and by a faltering China. But this confidence talk ignores the extent to which US growth is dependent on deficits and debt.

By those measures, America is starting to look awfully extraordinary. Once typical, it is now the largest deficit spender in the developed world. During the pandemic, the US budget deficit tripled to more than 10 percent of GDP, more than twice the peak of other developed economies. In the coming years, the US deficit is expected to average closer to 6 percent of GDP – well above its historical norm, and a full six times higher than the average for other developed economies.

How did America become so deeply in danger? Most countries have ended spending programs that were launched to ease the pain of pandemic-induced lockdowns. But all of the $6.7tn in new spending from the Biden administration came after 2020 was over. Most of these had nothing to do with pandemic relief.

Instead, Joe Biden used the spirit of the crisis to launch a latter-day New Deal, building infrastructure and industry to compete with China and combat climate change. No other government has such a massive spending plan, leaving America alone on the path to a deep deficit. Bidemonics fans see this as a smart investment. But they overlook the curve-exploding scale of the new spending and its potential consequences for US debt, inflation and growth over the long run.

The US has run a deficit almost every year since the 1960s and this has never caused a serious financial crisis. So the conventional wisdom is that the deficit doesn’t matter. Many economists argue that they pay for themselves if the economic growth generated by new public spending exceeds the government’s interest payments. However, this feat was easy to achieve when interest rates were near zero. Now that rates are rising, it’s almost impossible.

Although public debt is at historic highs – more than 100 percent of GDP across the developed world – it is stagnating in Europe but continuing to grow in the US. At the same time as interest rates are rising rapidly, the interest paid on the public debt is rising – and in the US it is rising very rapidly.

Within 10 years, the US government’s interest payments will exceed spending on defense and social programs like Medicaid. The Bank for International Settlements says advanced economies need to reduce deficits faster in this high-rate environment or end up with more new debt than new growth. The Biden team clearly feels that this advice does not apply to the world’s leading economic superpower.

By 2025, the trillions of dollars released by this administration will see government spending reach 39 percent of GDP, much of it not covered by new revenue. In other large developed economies, spending as a share of GDP is expected to decline sharply, while revenues remain relatively healthy.

Last month, under pressure from Congress, Biden signed the Fiscal Responsibility Act of 2023, creating a new set of restrictions. Despite the prospect of major spending cuts of $1.3 trillion over 10 years, the US deficit over the next decade is still projected to hover around 6 percent of GDP.

Although inflation declined last week, it is still running above 2 percent, and Biden’s defenders attribute its return to anything but his spending plans, including the impact of global supply chain disruptions Is. While inflation rose around the world, it rose most sharply in countries that spent the most during the pandemic. Some people spent more than America. A recent study by the Federal Reserve attributed two-thirds of America’s recent inflation increase to excess demand, and deficit spending to half of the increase in demand.

But the positive outlook on American exceptionalism still dominates. Many support Biden’s call for bigger government, dismissing fears of a deficit-induced crisis as crying wolf and preparing for a threat that never arrives. They scoff at the idea that foreigners could ever tire of funding American spending habits or buying American markets. Compared to rivals in Europe and Asia, America’s flaws pale and its technology dazzles.

So why should anyone care about America’s deepening debt and deficit? Because it is now one of the most fiscally irresponsible countries. Its deficit has reached the worst level in the developed world, with its public debt already third behind Japan and Italy. To willfully ignore this new reality is an extraordinarily risky mistake.