Wells Fargo Economics has done a Macroeconomic analysis showing that the economy will need to grow at least 3% per year indefinitely to keep the federal debt at a “manageable” level of 3% of GDP. This will be difficult because the current real GDP growth is 2%.
Let me say that Wells Fargo Bank has done some pretty unsavory stuff but these two economists are consistently very good.
Can the U.S. Grow Its Way Out of the National Debt Problem?
by Michael Pugliese and Aubrey Woessner, Wells Fargo Economics, June 24, 2025
Summary
The outlook for the federal budget deficit and national debt is daunting. At present, the U.S. federal budget deficit is nearly double the long-run average and unusually large for an economy that is not in a recession or engaged in a major war.
Reducing the budget deficit via tax increases and/or spending cuts has proved politically difficult. Political developments in Washington, D.C. have time and again shown that meaningful deficit reduction is a challenging undertaking.
Could we grow our way out of the debt problem? Perhaps the least painful solution to the long-run debt situation would be faster economic growth. Both public and private sector forecasters generally believe real GDP growth will average roughly 2% over the long run, but what if they are wrong? What would the long-run fiscal outlook look like if the U.S. economy grows faster or slower than 2%?
We model three different economic scenarios for the next 10 years to derive a plausible range of outcomes for the budget deficit and national debt.… To stabilize the debt-to-GDP ratio around 100%, it would likely take real GDP growth of more than 3% annually for the foreseeable future, all else equal.…
Ultimately, even if real GDP growth is somewhat faster than the consensus forecast in the years ahead, we think it will still take a reduction in the primary budget deficit via higher taxes, lower spending or some combination of the two to reduce the federal budget deficit back to a more sustainable 3% of GDP…
The consequences of ever-growing public debt are real. A survey of the research literature suggests that each percentage point increase in the debt-to-GDP ratio increases long-term rates by two to three bps.3 Applying this rule of thumb to our scenario analysis indicates that the “pessimistic” scenario would produce higher long-term interest rates via the public debt channel of 52-78 bps compared to the “optimistic” scenario. Large structural budget deficits and high debt may constrain future policymakers’ ability to act in an emergency, and in an extreme scenario could lead to a fiscal crisis…[end quote]
It is very unlikely that the U.S. can grow out of growing, very high federal debt. But it’s also very unlikely that the debt can be brought under control by tax increases and budget cuts, due to political reasons.
I’ve long wondered if all this is going to change once the vast majority of the baby boomers are dead in the next 20 years. The boom in entitlement spending will be over once they are gone. Medicare, Medicaid, and Social Security spending will be way down.
Might we no longer need to grow at 3% when that happens?
Not if we increase the Death Tax. That would take care of the debt that we have built up and seems like a fair way to do it. It would also solve a lot of soceity’s problems. IE the wealthy taking over the politics.
That is a separate issue. I am simply wondering if time will fix some of the entitlement problems. Increasing the death tax requires legislation - that is unlikely to pass.
How is it separate? People die over time right? The baby boomers are going to die. We are the richest group of people in history. Maybe the next generations in the legislature will get it right and increase the death tax, if they don’t? Well that is their problem and their fight. But I am sure you would agree it would be an easier way to fix it.
Because it requires action instead of simple inaction. You might as well state that we could increase the income tax, or cut defense spending, as a solution. None of those are the same thing as simply waiting for mortality.
It is a possible solution. That is the reason for my query.
Might the death of the baby boomer generation bring down entitlement spending to the point were we no longer need to grow at 3% indefinitely. I obviously don’t know but I think it a valid topic of consideration.
@Hawkwin I agree with you that this is a valid, interesting question.
The data is available from the CBO, Medicare and Social Security. You’re a smart guy – in fact, one of the smartest on METAR, I think. Why don’t you analyze this and report back to us?
The CBO projects that Medicare spending will reach 7.3% of GDP by 2050. The current ratio is about 4%. My AI query tells me that the ratio should be 6.7% by the end of the century, so it looks like some improvement after Baby Boomers die off, but still higher than today.
The corporate tax rate was 50% in the 50s and 60s.
AI
The average GDP growth rate in the US was strong in both the 1950s and 1960s, with the 1960s showing slightly higher growth overall. In the 1950s, the US economy experienced an average growth rate of around 4%. The 1960s saw an average growth rate of approximately 5%. Some sources say the 1960s growth was even higher, with averages around 5.2%.
That is because no one with power over the press or in politics can think very simple thoughts and express them. This is very simple. Raise the corporate tax rate. Make the case to the public.
Let’s have the press get some sort of grip on reality before it tells us reality.
Increasing the contribution limit of income to $300000, adding a fourth bend point at $12,500 per month of 5% would substantially solve social security funding. The other option to consider might be reduction of benefits for the top ten percent of seniors by net worth or income, or both. There is no political will to solve this, so we will probably fund any shortfall by continuing to borrow money until the scheme collapses under its own weight.
When you’re in a hole, stop digging. As a percent of GDP, the Federal budget surplus:
averaged 0% until 1974
fell to -5.7% in 1983
averaged -4% from 1983 to 1992
rose to 2.3% in 2000
has steadily fallen since to -6.2% in 2024 with periodic massive deficits during fiscal crisis.
Clearly, this is not sustainable, and at some point there will be a crisis that forces action. The timing depends on the 10-year interest rate. Higher rates in the 1980s increased interest payments to about 45% of revenues, and this forced action. Lower rates in the 2010s decreased interest payments to about 25% of revenues. I expect higher tax rates after interest payments increase to 45% of revenues.
Interesting that Congress is pressuring Powell today to lower interest rates.
Federal Surplus or Deficit [-] as Percent of Gross Domestic Product
Federal government current expenditures: Interest payments/Federal government current tax receipts
Well, “might” is not really necessary, it is already in action. Did y’all know that more than a third of all baby boomers are ALREADY dead? Seems like it isn’t working so far.
Yes boomers have died off. But earlier immigrants have kept the number of boomers close to the same.
Approximately 13% of the baby boomer generation in the United States are immigrants. This means roughly 10 million out of the total 76.4 million baby boomers in the U.S. were born in another country, according to the Population Reference Bureau. This generation, born between 1946 and 1964, is a significant demographic group, according to Statista.
Consider if robotics and A.I. remove about 50% of all employees in the next ten years. The entire ss scheme will collapse. I think 50% is the range of realistic.
