THE BOY WHO CRIED WOLF ABOUT GOVERNMENT DEBT - Policy Note - 2024/1

Aug 26, 2026

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Policy Note examining how rising U.S. government debt is portrayed in a New York Times editorial and reassessing the claims about deficit hawks, austerity, and Modern Monetary Theory. The note highlights the role of high interest payments on outstanding debt, discusses inefficiency and distributional impacts, and evaluates inflation concerns under debt financing or quantitative easing. It argues that government debt functions as a safe asset and that deficits reflect normal fiscal dynamics, not runaway largesse.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages7

Reading Time18 min

AccessFree to download

Policy Note Overview

Debt-to-GDP and Historical Change

Interest Payments, Inefficiency, and Distribution

MMT Views on the Fed and Quantitative Easing

Reframing Debt and Deficits

Levy Economics Institute of Bard College Policy Note 2024 / 1 THE BOY WHO CRIED WOLF ABOUT GOVERNMENT DEBT yeva nersisyan and l. randall wray In a New York Times editorial, David Leonhardt (2024) recounts Aesop’s apocryphal story about the boy and the wolf, warning that while deficit hawks have so far been wrong, the growing government debt will eventually bite. He reports the economic plans of both presidential candidates would add to the debt that will soon exceed GDP and grow to 130 percent of annual output under a President Harris, or 140 percent with a Trump presidency. He rightly points his finger at high interest payments on the outstanding debt—that already exceed spending on Medicare—as a major cause of the rising debt. He concludes by arguing that austerity is the only long-term solution, targeting Social Security and Medicare to bear the brunt of budget cuts, along with tax increases to rein in deficits. Table 1 Change in Gross Public Debt Relative to GDP, 1791–2023 | | Change in Debt/GDP Ratio Is | | Average Size of Change in Gross Public Debt | | --- | --- | --- | --- | | Time Period | Positive | Negative | % of GDP | | 1791–1930 | 66 | 74 | 0.31% | | 1931–2023 | 86 | 7 | 4.16% | | 1791–2023 | 152 | 81 | 1.85% | Sources: Treasury Direct, Bureau of Economic Analysis, Tymoigne (2019) Research Scholar yeva nersisyan is department chair and associate professor of economics at Franklin and Marshall College. l. randall wray is a Senior Scholar at the Levy Economics Institute. The Levy Economics Institute is publishing this research with the conviction that it is a constructive and positive contribution to the discussion on relevant policy issues. Neither the Institute’s Board of Governors nor its advisers necessarily endorse any proposal made by the authors. Copyright © 2024 Levy Economics Institute of Bard College ISSN 2166-028X Leonhardt dismisses what he claims tobe MMT’s solution—“that the Treasury can simply print enough money to repay the debt”—because it would cause inflation. The story of the boy and the wolf was a fable, although it was within the realm of possibility. The fable of the debt wolf is not. It is interesting that Leonhardt is not able to point to any downside of budget deficits except that the debt is growing faster than GDP. But it has been doing that since the founding of the nation—as shown in Table 1, the growth rate of the federal debt ratio has averaged nearly 2 percent since 1789 (Tymoigne 2019). In the 2019–23 period, on average the debt-to-GDP ratio grew at a rate of 3 percent. MMT points its finger at the Fed for high interest payments—and it is not just the Treasury that is spending more on interest as we can see in Figure 1, which shows personal interest income and private spending on interest quickly grew after Fed rate hikes, as did Treasury interest spending. While high interest payments by government do not threaten the solvency of the Treasury, they are inefficient (in terms of promoting growth and employment), can increase inequality (interest payments mostly go to the already rich), and can be inflationary (by boosting spending of those rich folk) . High interest rates also hurt the private sector—by raising business costs (interest is a major business expense that must be covered by prices charged—potentially adding to inflation pressure) and by increasing payments on mortgages and consumer debt. Figure 1 Federal Interest Expense and Private Sector Interest Expense and Income, 2000–2024 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18 Jan-21 Jan-24 Federal Government Interest Payments Personal Interest Income ~~ ~~ Personal Interest Payments Source: US Bureau of Economic Analysis, Retrieved from FRED MMT does not say that the Treasury can print money to pay off the debt. The Treasury does not “print up money” to pay for any of its spending 1—and there is no chance that it would do so to pay off the debt. The Fed is the Treasury’s ban

FAQs

What does the policy note identify as a major driver of rising government debt?

High interest payments on outstanding debt are presented as a major cause, already exceeding spending on Medicare.

How does the note respond to the claim that the Treasury can repay debt by simply printing money?

It rejects that solution, explaining that the Fed can purchase Treasury debt via quantitative easing, which would shift interest payments and address inflation concerns differently.

Why does the note argue that government debt is not the “big bad wolf”?

It characterizes government debt as a safe asset supporting financial markets and saver/retiree portfolios, and it treats deficits as normal outcomes in the U.S. fiscal system.

Aug 26, 2026

Upload by Rhys