Sometime in the next few weeks, U.S. federal government debt will reach $40 trillion. The United States now owes roughly as much as all the other major advanced countries combined. With Washington adding another $2 trillion, or six percent of national income, to the figure each year, it has long been apparent that the U.S. debt trajectory is unsustainable. Or is it?

According to some proponents of artificial intelligence, today’s remarkable technological advances could soon make the problem disappear. In this view, the spread of AI through the economy will generate such tremendous growth that it will generate huge new tax revenues that will help pay off the debt. But any reduction in the debt burden will require not only that those tax revenues actually materialize, but also that the government avoids overspending any bonanza it gets. This will be especially challenging given that the AI boom will likely drive up interest rates, making servicing the debt more expensive.

Of course, Washington’s debt troubles do not translate immediately into a crisis. Thus far the country has continued to have no trouble placing its debt, as long as it is willing to pay a higher price to do so. The United States, after all, is already a spectacularly rich country and can easily afford to pay the higher interest rates—if the government is willing to adjust long-term tax and spending trajectories accordingly. Yet investors have become increasingly attuned to signals that Washington is not eager to tackle the problem. A reasonable view is that until there is a debt crisis of some form—generally starting with either sharp or sustained rising interest rates—neither party is going to make a serious effort to trim deficits when it is in power, not if it wants to stay there.

Of course, if growth surpasses expectations, it will indeed help create surpluses, as long as favorable surprises keep rolling in. But if our impecunious government confidently anticipates getting sustained higher revenues for many years to come, there is every risk that tax cuts and spending hikes will get out in front of the boom, which in turn may never fully materialize. Over the long history of sovereign debt and inflation problems, the inability to pay has almost never been the root cause of a crisis, at least not for a middle-income or high-income country. That suggests important lessons for the United States as it enters the AI age.

“THIS TIME IS DIFFERENT”

The United States’ debt problems go back many decades. But to understand how the country got to the present situation, it is sufficient to start with the 2008–9 global financial crisis. Back then, governments around the world, in sensible Keynesian fashion, leaned into stimulus plans to mitigate the postcrisis recessions. At first, it was thought that over time, governments would want to allow growth to organically whittle down debt-to-income ratios, which is the ideal way to pay down massive peacetime spending and tax cut binges.

After World War II, the fact that growth consistently outstripped interest rate costs and helped bring down debt-to-income ratios. Even so, it is now understood that interest rates in the United States, the United Kingdom, and other advanced economies were held down by having highly regulated financial markets that favored government debt.........

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