Top economist warns US faces Zambia-style debt crisis thanks to Trump budget

A former chair of the Council of Economic Advisers says Republicans and President Donald Trump have set the nation up for the kind of snag that plagues developing and low-revenue nations like Tunisia and Egypt.

Jared Bernstein, a distinguished policy fellow at the Stanford Institute for Economic Policy Research, tells The New York Times that he used to oppose budget hawks fretting “about America’s deficits and debt.”

“No longer,” said Bernstein. “I, like many other longtime doves, am joining the hawks, because our nation’s budget math just got a lot more dangerous.”

Bernstein said he fears U.S. officials are tempting “debt shock,” which periodically hobbles countries like Zambia, if they are forced to address spiraling debt by either aggressively cutting spending or by raising taxes. Both of these tactics would “seriously damage the economy and lower the living standards of everyday people.”

The nation’s debt is sustainable only by the size of its annual deficits, the rate of interest on the debt, and how fast the economy is growing. The U.S. interest rates have traditionally been low relative to its economic growth rate. But now the nation’s interest rate matches its growth rate, which Bernstein warns is “a potential game changer.”

Additionally, Trump’s onerous trade war and recent budget are pushing all three critical variables — interest rates, growth rates and budget deficits — “in the wrong direction,” says Bernstein, with the president’s new budget "significantly" increasing the U.S. debt load. This, he said, is likely to raise the interest rates taxpayers must pay to service it.

“We believe there’s a good chance the legislation could raise the ratio of debt to the G.D.P. by 30 percentage points over the next decade, driving interest rates six-tenths of a point higher than they are now,” Bernstein says. “… It’s not just that Congress won’t stop digging us deeper into debt. It’s that it has moved from shovels to excavators.”

Now, Berstein says even “we doves are fretting.”

Read the full Times report at this link.