The Tariff Gambit: Rhetoric, Reality, and the Road Ahead - Fiscal Discpline (2/4)

September 2025 

America's Fiscal Crossroads: Debt, Deficits, and Growth

Fiscal discipline has always been about trade-offs: meeting today's social needs without bankrupting tomorrow's economy. Debt itself is not the enemy. When borrowed dollars build bridges, fund research, or finance industries of the future, they expand capacity and often repay themselves many times over. The danger comes from debt that does not earn its keep, borrowing that piles up without generating enough growth to cover the cost. That is the bind the United States now faces.

As of September 2025, the U.S. national debt has climbed to $37.4 trillion, up from about $8 trillion in 2000, a fourfold surge in just a quarter-century. Annual deficits run at 6–7 % of GDP, and interest payments alone now exceed the defence budget.

What matters most is not the headline number, but the debt-to-GDP ratio, which measures the country's capacity to service its obligations through growth. This ratio, currently at nearly 125 % for the U.S., is far beyond the ~90 % threshold that economists Carmen Reinhart and Kenneth Rogoff flagged as the tipping point where debt begins to choke long-term growth. In their research, 20 out of 26 advanced economies that crossed that line endured at least a decade of stagnation. Japan's "Lost Decades" remain the most vivid cautionary tale.

The American record is equally sobering. Since World War II, debt has grown faster than GDP in every era. In the boom years of the 1950s and 1960s, debt expanded 1.5 times faster. After the Great Society programs of the late 1960s, the rate of poverty reduction was 2.7 times faster. Following the Nixon Shock in 1971, when the dollar was cut loose from gold, debt grew 3.7 times faster. After China's WTO entry in 2001, every new dollar of debt bought just 35 cents of GDP. The same dismal math held after the 2008 financial crisis. And since the repo market turmoil of 2019, debt has nearly doubled relative to GDP, while interest costs have exploded at four times the pace.

The U.S. fiscal trajectory is now caught in a self-reinforcing spiral. More debt means higher interest bills, which require more borrowing, which in turn swells the deficit. Since late 2019, interest expenses have surged 135%, nearly four times faster than GDP, which rose just 37%. Net interest now eats up more than 4 % of GDP, or one-sixth of federal spending. If borrowing costs keep outpacing growth, the math tips into crisis.

The second drag comes from the size of government itself. At the start of the 20th century, government spending was just 6 % of GDP. Today, federal, state, and local outlays reach 36–37%, with Washington alone at 23%. Studies suggest that every 10-point rise in the government's share of GDP shaves 0.5–1% off long-term growth. The U.S., once lean by global standards, is drifting toward a European-style fiscal state, with high baseline spending and low dynamism.

The two forces, rising debt costs and rising government share, compound one another. Interest crowds out private investment; heavy state spending suppresses productivity and growth. Targeted programs like infrastructure or energy-transition bills may deliver temporary gains, but without a decisive lift in productivity, the arithmetic locks in lower long-run growth.

The broader picture is starker still. Since 1971, debt has grown 12 times faster than wages. Interest costs have risen 7.5 times faster. GDP itself has grown 3–4 times faster than wages. The average worker is increasingly decoupled from both national income and asset growth. In the 1960s, 10–20 hours of labour could buy a share of the S&P 500. Today, it takes 200 hours, five weeks of work.

For decades, falling interest rates cushioned the blow, keeping borrowing cheap. That reprieve ended in 2022–23, when rates rose for the first time in half a century. Debt service costs are now roughly equal to the economy's growth rate, a precarious balance. History shows that once borrowing costs run above growth, debt snowballs beyond control. The danger line is less the textbook 90 % debt-to-GDP ratio than the 105–110 % range. With deficits at nearly 7 % of GDP in peacetime and interest costs climbing, America is already in the fiscal danger zone.

The financial backdrop offers little comfort. Consumer debt has surged to a record $18 trillion, with delinquencies at their highest in fifteen years, according to the New York Fed. Traditional safe havens are shifting: investors are rotating out of Treasuries and into gold, now at $3,400 an ounce, as well as bitcoin and stablecoins. Even central banks are retreating; for the first time since 1996, they hold more gold than U.S. government debt. Ahead lies an even darker horizon: more than $100 trillion in unfunded obligations over the next two decades. The so-called "trust funds" for Social Security and Medicare are not reserves at all but pass-through accounts; every contribution is spent immediately. Worse, under the 1974 law tying Social Security benefits to inflation, money-printing only magnifies tomorrow's liabilities, trapping the system in a vicious spiral.

Is there a path out of this fiscal entropy, a term used to describe the current chaotic and disorderly state of the fiscal system? Politicians promise the impossible: cut taxes, cut spending, devalue the dollar, tame inflation, reshore industry, reduce deficits, and still preserve reserve-currency status. In reality, these goals cancel one another out; solving one usually breaks ten others. The hard truth is that reforming the U.S. fiscal system, at least within current structures, is close to mathematically impossible. The only real "fix" would be a systemic reset, some form of default, or unlocking a new wave of growth.

The idea of "inflating the debt away" collapses under arithmetic. With deficits running at $2 trillion a year, it would take $2.5–3 trillion in annual inflationary erosion to keep pace, requiring sustained inflation of 6–10%. But such levels would cripple household finances, destabilise markets, and send interest costs on the $37 trillion federal debt into overdrive. You cannot inflate debt away unless you are already running surpluses.

Tax cuts briefly juice demand, but slashing taxes while running multi-trillion-dollar deficits only deepens the hole. Spending cuts are no easier: government outlays make up 25–30% of GDP, and sharp reductions would trigger contraction, unemployment, and rising welfare costs. Defence is the largest discretionary lever, but cutting it is politically untouchable. You cannot cut taxes, cut spending, and cut debt all at once from today's deficit base.

Currency devaluation is equally illusory. Because the U.S. imports far more than it exports, a weaker dollar simply makes imports costlier. A $1 widget from China might jump to $2 or $3, with no guarantee of offsetting export gains. Worse, as issuer of the reserve currency, dollar devaluation exports instability across the ~95 currencies pegged to it, exactly what fueled food riots during the Arab Spring when the dollar index collapsed to 72. America cannot devalue its way to fiscal health without triggering global contagion.

Sustained 8–12% inflation would not solve the crisis; it would accelerate it. Interest costs would explode, household living standards would collapse, and the financial system itself would wobble. Inflation is not a release valve. It is a fast-forward button to crisis.

Tariffs as a "Fix"?

Tariffs are often cast as an alternative lever, taxes on imports that raise revenue without touching income or payroll taxes. In 2019, tariff collections peaked at $80 billion, the highest on record. Against $2 trillion deficits, that is a rounding error, but every marginal dollar counts. Tariffs also serve strategic aims: nudging reshoring in critical industries like semiconductors and defence, crowding in private investment under programs like the Inflation Reduction Act, and reducing reliance on foreign creditors. They carry political appeal too, offering protection to Rust Belt communities and a veneer of fairness to a frayed social contract.

But the costs are larger. Tariffs are a hidden, regressive tax, hitting middle-class households much like a sales tax. They raise input costs, feeding inflation and forcing the Federal Reserve to hold rates higher for longer, which in turn swells federal interest payments. They chip away at trade efficiency, eroding productivity, the very engine needed to grow out of debt. Retaliation from trade partners shrinks U.S. export markets, worsening the debt-to-GDP ratio. And heavy reliance on tariffs accelerates de-dollarisation, as other countries seek to settle trade in currencies outside the U.S. orbit.

The current administration often points to history to justify tariffs, invoking a golden age when they supposedly made America rich. But the record tells a more complicated story.

In the early republic, tariffs were primarily for revenue. After 1816, they shifted toward protection, defended by the "infant industry" argument. Following the 1819 crisis, farmers and manufacturers allied: farmers wanted a home market, and manufacturers demanded shelter from British goods. Together, they entrenched protectionism.

From the Civil War to 1913, tariffs stayed exceptionally high. The Wool and Woollens Act of 1867 taxed both raw wool and finished goods, granting "double protection" to farmers and manufacturers, with consumers footing the bill. The McKinley Tariff of 1890 raised duties to record levels, but public backlash helped unseat Republicans in two successive elections. The Wilson–Gorman Tariff of 1894 promised reform but collapsed under lobbying; its inclusion of an income tax (later struck down) only deepened disillusion. The Dingley Tariff of 1897 restored extreme protection, cementing the U.S. as one of the most closed economies in the industrialised world. The Payne–Aldrich Tariff of 1909, sold as reform, preserved the status quo and fractured the Republican Party, strengthening the progressive revolt.

The lessons are clear. Tariffs in that era were less about economics than politics; they bound coalitions of farmers and manufacturers, delivered votes, and sustained party machines. Excessive protection entrenched inefficiencies, inflated consumer prices, and made genuine reform nearly impossible. By 1912, tariffs had become a political liability, helping Democrats win power on a platform of genuine reduction.

The U.S. of today is not the agrarian-industrial republic of the 19th century. Its competitive advantage lies in research, intellectual property, and advanced technology, not wool, steel, or avocados. Tariffs may scratch the itch of "reindustrialization," but they do little to fix the fiscal math. They look like a revenue tool but behave like a growth tax: buying time for narrow constituencies while making the broader debt and growth equation harder, not easier.

The Strategic Paradox

The United States sits in a paradox. Every lever policymakers pull —whether it's inflation, devaluation, slashed spending, reshoring supply chains, or imposing tariffs —runs into structural or mathematical limits. Tariffs may serve as bargaining chips or fit within a broader industrial strategy, but they are no substitute for systemic fiscal reform. The hard truth is that the only durable path lies in growth. Spending cuts alone will not suffice. Unless real growth rises toward 3%, rather than today's 2% baseline, deficits will steadily overwhelm the system.

The arithmetic is unforgiving. At 2% real growth, debt expands faster than income and deficits compound more quickly than GDP. At 3% or higher, the economy doubles in size every 24 years instead of 36. Revenues climb, the debt-to-GDP ratio stabilises, and fiscal space opens up without draconian retrenchment. That single % age point marks the difference between gradual erosion and sustainable prosperity.

The most promising route to higher growth runs through productivity. Automation and artificial intelligence can raise output per worker, compress costs, and scale services across logistics, healthcare, finance, and manufacturing. By automating routine work, labour can shift toward higher-value creative, managerial, and technical roles. But productivity gains matter only when they diffuse broadly. That demands reskilling, capital investment, and clear regulatory frameworks.

Unlocking growth also requires faster investment cycles. Multi-year permitting delays on energy, infrastructure, and industrial projects choke momentum. Streamlined approvals and public-private partnerships could channel capital into infrastructure, clean energy, and advanced manufacturing. At the household level, Americans must move from being passive creditors, holding deposits and Treasuries, toward active participants in growth industries. Retirement account reforms, tax incentives, and broader access to capital markets can nudge savings into equity-like investments that fund expansion.

Growth, in turn, solves fiscal arithmetic. A larger economy automatically broadens the tax base. Higher wages, profits, and consumption yield trillions in additional revenue over a decade, far more than most spending-cut packages. Rising prosperity also makes entitlement and tax adjustments more politically palatable. Fiscal health rests not on accounting tricks, but on catalysing a fresh cycle of expansion.

The risk is paralysis. Washington could stay mired in debates over tariffs and tax cuts while foreign creditors hold a quarter of Treasuries, trade wars escalate, and the dollar's dominance slowly erodes. Without bold action to raise productivity and unlock growth, the U.S. will remain trapped in its paradox: armed with levers that look powerful on paper but fall short of the structural change that only sustained growth can deliver.