Welcome back to From David’s Desk, a newsletter penned by Carlyle Co-Founder and Co-Chairman David M. Rubenstein. Each edition provides insights on public policy, geopolitics, and other topics in and around Washington, DC. Discover past editions on the series' webpage.

For national debt aficionados, or fans of the musical Hamilton, it is not news that the US government started out with debt – about $70 million. Paying that off was the subject of much debate at the beginning of the government under the Constitution.

To review, during the Revolutionary War, each colony essentially borrowed money to help finance its war costs. After the war, and before the United States adopted the Constitution, the Southern states paid off their debt; the Northern states did not.

The first Secretary of the Treasury, Alexander Hamilton, wanted the US government to be seen as creditworthy, and to do that he felt that the US government needed to retire the debt of the Northern states. The Southern states objected, arguing that they had already retired their debt, and the Northern states should do the same with their resources.

So, as the award-winning show depicts, a dinner was convened in “the room where it happened” in Manhattan with Alexander Hamilton and two Southern state leaders, Thomas Jefferson (then serving as Secretary of State) and James Madison (then serving in the House of Representatives), with the ultimate result being an agreement that the Northern states’ debt would be retired by the US government (effectively meaning that the Southern states would be paying for part of it).

In return, the country would move its capital from New York to a Southern location. President Washington was tasked with finding a site for a new national capital south of the Mason-Dixon Line.

Stated differently, the United States has had debt from the very beginning. The only time the US government has not had any debt was in 1835 when Andrew Jackson was determined to eliminate all US debt – and did. We are not likely to see a return to that state of affairs in our lifetime.

As of today, the national debt is over $37 trillion. It’s a staggering figure. Further, the rate of increases in our debt – which is the annual budget deficit – also is a concern. This year, we are projected to run a deficit of about $2 trillion, or around 6% of GDP, which is very high by historical standards, especially in non-recession peacetime.

With the passage of the One Big Beautiful Bill, the US government raised its debt ceiling by $5 trillion, giving us about two years of fiscal breathing room, just enough to get through midterm elections.

Does this mean that we now can breathe more easily, knowing that for another few years we will not have to worry about exceeding the official debt limit? Well, sort of. It does mean that the risk of the US government defaulting on its debt has now been pushed down the road, and we can keep borrowing.

But in reality, no, we shouldn’t feel less concerned. The debt is very high, and our large annual deficits are driving it higher and higher. Over the next 10 years, the national debt is projected to grow to an unprecedented $60 trillion.

Should we worry about our ever-growing debt levels, or should we just go about our normal business, assume the bond markets will still function, and not act like Chicken Little, fearing that the sky is falling? Or is the more realistic concern that, while the bond markets might actually remain functional, new US debt will be issued at exorbitant interest rates, resulting in higher annual interest payments funded by taxpayers, thereby weaking the dollar over time, and ultimately leading to a downgrade of the nation’s credit rating to “junk” status?

No doubt, as our debt has dramatically increased over the past quarter century, dangerous large-debt-caused occurrences have been regularly predicted by many economists and finance experts – though none actually has materialized in a meaningful way – at least not yet. And maybe that can or will continue.

When I worked in the Carter White House, the budget for fiscal year 1981 sent to Capitol Hill (just prior to Carter’s loss to Ronald Reagan in 1980) was seen as overly profligate by some. It projected a deficit of $16 billion. Criticism of such a large deficit forced Carter to recall the proposed budget and submit one that, theoretically, would be balanced, meaning no deficit. In the end, the deficit turned out to be $79 billion for that year. By the time Carter left office, total government indebtedness had risen to what was seen as a dangerous level – more than $900 billion.

So, what will happen when the debt gets closer to the $50 or $60 trillion level in the next decade? No one really knows. The sky-is-falling-soon predictions have not proven accurate over the past few decades. Nor have the predictions for extraordinary GDP growth fueled by tax cuts that were, when enacted, among the largest in history.

I do not know whether the extraordinary amount of US debt will have the harmful effects that so many (including me) have predicted for so long. And I also do not know when or whether we can continue to muddle along with the Federal government carrying enormous debt without any deleterious short-term impact on the economy.

I thought it might be helpful, though, to those perplexed about the US debt situation to have some facts and figures, and I am providing them below through a small self-interview:

What is the total debt of the US government?
The latest Treasury Department numbers, post the One Big Beautiful Bill, show a total debt of $37.4 trillion. That consists of $30.1 trillion of external debt, such as outstanding Treasury bills, and $7.3 trillion of internal debt. The latter is debt owed to one part of the US government by another part of the US government, such as the $2.7 trillion owed by the Treasury to the Social Security Trust Funds. Some argue that the internal debt is not a big problem because it involves money we owe to ourselves.

How much does the US total indebtedness cost the US government to service every year?
The current annual debt service exceeds $900 billion. This is the amount the US government must pay in interest to the holders of Treasury bills and other government securities each year. That amount exceeds what the United States pays annually for its defense. Throughout history, countries that have spent more on interest payments than on national defense have often faced crises from which they rarely recover. For example, historian Niall Ferguson has coined “Ferguson’s Law,” which states that “any great power that spends more on debt servicing than on defense risks ceasing to be a great power.”

As a percentage of the US GDP, is the US debt considered large or out of line?
The US indebtedness is now 120% of GDP. Since 2020, we have had the highest debt-to-GDP ratio in American history. Even during the historical peak of World War II, the level was lower (110-119%). Other countries with high multiples are Italy, at 135%, Greece, at 150%, and Venezuela and Lebanon, at 165%, respectively. These countries are generally not seen as models of fiscal rectitude or safety.

How did the debt and debt-GDP multiple get so high?
The answer is complicated, but it is fair to say that both political parties deserve credit and blame. From 1981 to 1992, the Reagan-Bush years, the annual deficit and debt began to rise to levels well above the historic norm. President Reagan came into office seeking a large tax cut. This came to be known as the Kemp-Roth tax cut, under which income taxes were cut 23% over three years. Reagan subscribed to the theory known as the Laffer Curve (named after economist Arthur Laffer), which held that tax cuts would stimulate entrepreneurial activity and business growth so powerfully that government tax revenues wouldn’t decline. Instead, tax revenues would actually increase, driven by a surge in economic activity and the resulting rise in taxable income.

While the debate continues over whether the Laffer Curve is accurate, the Reagan Administration actually worked with Congress to raise various taxes on eleven separate occasions.

So, what produced the rising deficits during the eight Reagan years and the four years that followed under Bush 41?
The Reagan Administration saw a considerable increase in spending, due in part to large outlays for defense and enhanced Social Security and Medicare benefits. These spending increases far exceeded, in the view of most economists, the enhanced revenue generated by lower tax rates. Indisputably, actual federal deficits increased.

What did Reagan's successor do about the rising deficits and debt?
During his campaign, President Bush pledged “no new taxes.” In 1991, however, he reversed course, much to his political misfortune, after recognizing that the budget deficit and debt were growing to unacceptable levels. But even that reversal did not really solve the problem. In President Bush's last year in office the annual deficit rose to $290 billion, and the total debt grew to more than $4 trillion.

How did Bill Clinton deal with the debt problem?
During his second term, President Clinton negotiated a deal with House Speaker Newt Gingrich, under which spending was to be curtailed through a hard spending cap and the budget was to be balanced in five years. But to nearly everyone's surprise, the budget deficit was reduced much sooner than had been planned. And in the final four fiscal years of the Clinton Administration, budgets produced a cumulative surplus of $559 billion. Those were the first annual surpluses since 1969 and the first time in over 70 years that the United States achieved four consecutive budget surpluses, a streak not seen since 1930.

When President Clinton left office, the US debt was $5.7 trillion and the deficit problem appeared to be going away. Alan Greenspan mused at the time that soon we would not know how to price corporate debt because there would be no US debt to use as a baseline. That turned out not to be a problem because budget deficits soon came back – with a vengeance.

So, what went wrong?
President George W. Bush was able to get a very large tax cut passed at the beginning of his Administration and the Iraq-Afghanistan wars pushed the defense budget to elevated levels. Large parts of the war spending were not budgeted, which meant it was not counted in the official budget but still had to be paid for. And the Great Recession occurred in 2008, leading to enormous deficits because the economic slowdown reduced revenues and increased spending on things like unemployment benefits and, eventually, stimulus programs.

Did the debt begin to go down under President Obama?
While annual deficits decreased as we recovered from the Great Recession, US debt continued to rise because we continued to have an underlying structural deficit problem in which revenues remained lower than the level of spending. The Bush tax cuts largely stayed in place, entitlement spending continued to grow gradually due to demographics, the Afghanistan war dragged on, and the cost of the Affordable Care Act began to kick-in.

Did anything change under President Trump during his first term?
President Trump implemented a very large tax cut at the beginning of his first term, and there were enormous expenditures associated with moderating the economic impact of COVID. This drove the debt substantially higher during his first term.

Did this pattern change under President Biden?
The increase in debt continued without much change due to further COVID-related expenditures and increased spending for programs associated with the CHIPS and Science Act, the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act.

How did debt increases compare in recent presidencies?
At the beginning of 2001, debt of the United States stood at $5.7 trillion.
Under Bush, debt increased by $4.9 trillion (eight years).
Under Obama, debt increased by $9.3 trillion (eight years).
Under Trump, debt increased by $7.8 trillion (four years).
Under Biden, debt increased by $8.5 trillion (four years).
As of September 2025, total debt of the United States stands at $37.4 trillion.

How will the One Big Beautiful Bill affect the total debt of the United States?
No one knows for certain. The Congressional Budget Office estimated that the One Big Beautiful Bill would add an additional $4.1 trillion to the debt over 10 years, though many Republicans dispute that number. The Republicans promoting the Big Beautiful Bill argued that the net increase over ten years would be just $2.1 trillion.

It should be noted that all of these budget discussions presume that there will be many billions in new tariff revenues coming into the Treasury over 10 years, thereby reducing overall indebtedness. Initially, CBO estimated that the tariffs would raise $3.3 trillion over eleven years. The revised number is $4.4 trillion. In other words, whatever a future Administration might think about the desirability of the tariffs, the total indebtedness of the United States will actually increase a fair bit if the tariffs are removed or struck down by the Supreme Court.

Of course, it should be noted that making 10-year budget projections is not an easy task – and past CBO projections have not always been accurate. Revisions along the way are inevitable as new legislation gets passed and the economy grows (or does not grow) at varying rates.

What is the annual budget deficit?
The annual budget states that the US government collects about $5 trillion in revenue and spends about $7 trillion, producing a deficit of roughly $2 trillion. On the revenue side, $2.6 trillion comes from individual income taxes; $1.7 trillion from FICA; $524 billion from corporate taxes; and $172 billion from excise taxes and tariffs.

On the spending side, the three largest categories represent roughly 85% of the annual budget and are the ones that are most politically difficult to cut, which is why they are rarely touched. The three are:

1. Entitlements – The four principal entitlement programs are Social Security, Medicare, Medicaid, and Veterans Benefits. Collectively, the major entitlement programs represent 60% of the entire budget and are growing at a total rate of about 4% a year.
2. Defense - The defense budget is widely seen as the symbol (and reality) of the country's security. Protecting that security is widely viewed by many as the country's highest priority. So, cutting this area is very difficult for government officials. Defense spending is now around 13% of the government budget – and there are many Republicans in Congress who feel it is an insufficient amount. There is a widespread view among a number of Republican leaders that $1 trillion needs to be spent annually on defense.
3. Interest on the Debt – Currently, the budget includes roughly $900 billion, or about 14% of total spending, of interest payments on the national debt. Due to the high annual deficit and resultant rapid growth in our debt balance, interest costs are growing fast. In the last ten years, interest costs have totaled $4 trillion. In the next ten years, they are projected to be $14 trillion.

The rest of the budget
If entitlements, defense, and interest are 85% of the budget, what makes up the other 15%? That 15% – about $1 trillion – goes to fund every other part of the federal government: Cabinet departments, the Executive Office of the President, the Judiciary, Congress, and the scores of independent regulatory agencies and boards.

How much did DOGE cut from the budget?
President Trump and the Department of Government Efficiency (DOGE) have made unilateral cuts in these areas, but the actual spending and savings involved is not that large. To illustrate, the US Institute for Peace was visibly shuttered, but that saves just $55 million a year or 0.0008% of the Federal budget. USAID was closed, and while some of the money will now be used for overseas projects funded by the State Department, the total USAID budget was $21.7 billion, or just 0.3% percent of the US budget.

Elon Musk said initially that DOGE would cut about $2 trillion from the federal budget. He later revised that to $1 trillion. Upon leaving the government, Musk claimed that DOGE had saved more than $170 billion. That figure is hard to verify. But even the most aggressive budget cutters, like DOGE, struggle to implement reductions in a way that ensures those cuts are both meaningful and lasting.

For decades, politicians have said they will go to Washington to eliminate “waste, fraud and abuse” in Federal spending. But there is no line item for “waste, fraud and abuse.” What’s more, finding and rooting out that unpopular trio is hard, as Elon Musk learned.

In short, it is essentially impossible to eliminate the budget deficit by trying to make cuts in the non-entitlement, non-defense, and non-interest parts of the government.

Are there realistic, and even bi-partisan, ways to reduce the debt? What are the options available to reduce the annual deficit and, thus, the total debt?
The good news is that there are many budget reform options that could successfully address our fiscal challenges. They are all politically difficult, but we know how we could fix the budget if the political will existed. Additional revenue can come in many forms. And there are a wide range of spending reforms that could stabilize the debt.

So, there are good options available, but we all know that politics can get in the way. Given the challenges, what are some realistic ways that we can reduce the deficit and the debt?

Here are some options:

1. Cut Spending – While spending cuts need to be part of any serious effort to stabilize the debt, spending cuts are always met with little appetite on Capitol Hill. As noted, 85% of the budget consists of spending on entitlements, defense, and interest payments on the debt, which are the hardest to cut. And the remaining 15% covers everything else the Federal government spends. As DOGE experienced, it is hard to make a truly meaningful dent in either part of the budget.
2. Increase Taxes – Other than some Democrats who want to increase taxes on the wealthy, Congress has shown no inclination in recent years to increase taxes overall. The opposite is much more popular, and the One Big Beautiful Bill reflects the political path that seems to appeal to Presidents and Congress – cutting taxes for many Americans and companies.
   
   Fifteen years ago, there was effectively a tax increase to pay for part of the Affordable Care Act, but that was a rare occurrence. So, raising taxes is also not likely to result in deficit or debt reduction. Since no one wants to vote for tax increases, there are other ways to accomplish the same end. One way to shrink the budget deficit each year, for instance, would be to remove the cap on Social Security taxes. If every American paid the FICA rate on all of their income, rather than just up to the current cap of $176,100, about $3.2 trillion would be raised over a decade. But politicians would be unlikely to support this if they wanted to get re-elected.
   
   Unfortunately, if we don’t increase taxes or cut spending, we face some catastrophic options. These include:
3. Seeking a Bailout – The International Monetary Fund (IMF) has bailed out many countries in recent years, including Greece and Argentina. Obviously, the IMF does not have the resources to bail out the United States, which would need more assistance than the IMF could afford. So this is not a real option.
4. Default – Companies and countries default on their debt from time to time. Is it possible that the United States at some point would say it cannot afford to keep its commitments, default on its debt, and then – as many companies do – restructure the debt? The United States is the cornerstone of the global financial system. A default by the US government would be an economic/financial hydrogen bomb, disrupting global markets for decades, and permanently crippling the role of the United States as the world’s economic and finance leader. So, this is not something worth discussing at all.

Are there any better options?

5. Increase GDP Growth – This is always the dream of policymakers seeking to justify tax cuts: the idea that greater revenue retained by individuals and companies will enable more investment, increase production, and ultimately achieve stronger economic growth, thereby growing federal revenues.
   
   There are many who believe the large Reagan, Bush, and Trump tax cuts had this impact. But the evidence supporting this view is not widely accepted. And of course we are still running large deficits, so clearly there was not enough growth to balance the budget. To do so, the resulting economic growth would need to be significantly larger than even the proponents of those tax cuts claim.
   
   To illustrate, if the United States were to grow at 4% in real terms rather than 2% (roughly the current growth rate), the increased growth would produce roughly $100 billion in additional revenues. But economies of $30 trillion are very hard to grow at that level unless they're coming out of a COVID-type low-growth period. Nearly all credible forecasts show the US growing at about 2% over the coming years. And even an additional $100 billion per year would not really make a dent in the deficit or debt problem.
6. Form a blue-ribbon committee to study the debt problem and to make recommendations to the President and Congress – This method has been used over the decades to provide political figures with “cover” for making difficult decisions – i.e., being forced to do what the good government commission “made” them do. The ongoing work of the Base Realignment and Closure (BRAC) Commission that enabled us to close some military bases and the 1983 Social Security Commission are successful examples of such an effort.
   
   But this technique has proven more difficult to do in the current highly partisan Washington environment. For instance, in 2010, President Obama appointed the Simpson Bowles Commission to develop solutions to the growing debt problem. Inevitably, the Commission recommended changes in some of the entitlement programs, reductions in discretionary spending, and some tax increases. And while the changes would not have gone into effect until well into the future, the recommendations were so incendiary that President Obama ultimately distanced himself from the Commission. Most of the proposals were never enacted, but a few were quietly incorporated into policy over time.
   
   There is a twist on this kind of commission. Over the years, the US Government has established certain commissions under terms that allow their recommendations to take effect automatically unless Congress affirmatively votes to reject them. This has been done with some proposed military base closings and Congressional salary increases. But in recent years, Congress has typically voted, contrary to what was intended when the commissions were created, to overturn these recommendations, thus nullifying the way in which the commissions were established.
   
   Any new commission that included a go-into-effect-automatically provision would likely meet the same fate, especially in the current hyper-partisan environment.

So, if one takes a pessimistic – but realistic – view of Washington’s ability to reform the budget, a reasonable forecast of likely economic growth, and rules out a bailout or credit default, then there is only one remaining outcome:

Pay in Devalued Dollars. This is the outcome most likely to occur: the debt is essentially paid down over many years with dollars that are worth less than the dollars which were borrowed. In short, we inflate our way out of our debt. This is currently the course the US government is essentially pursuing, knowingly or not. Stated more clearly, my grandchildren and unborn great grandchildren will be paying off today’s debt in dollars that are worth less than the dollars we borrowed.

This is the by far most likely outcome – unless some cataclysmic event forces the US government and the private sector to say we have to deal with the debt problem now and cannot kick it down the road any longer. Hope springs eternal, but alternatives seem unlikely at the moment.

In sum, it seems that the debt will likely grow and effectively be paid in devalued dollars down the road. I hope this conclusion is wrong, but experience suggests that it is more likely to occur than any of the other options.

Missed Opportunity
Saying the sky will probably not fall or that future generations will repay the debt with devalued dollars overlooks the serious opportunity cost of allowing the debt to continue growing. When tax revenues or borrowed funds are used to pay current obligations – many of which are entitlements – resources are not being invested in the future.

If tax revenues or borrowed funds were used to make investments – in technology (including AI and quantum computing), energy transition, education, manufacturing, infrastructure, housing, and biotech – the result would likely be a larger US GDP over time, a more robust private sector, higher employment, a better standard of living, and more effective competition against countries seeking to challenge the United States in building a future-ready and globally competitive environment for the remainder of the 21st century.

It must be remembered that the United States is not ordained to be the leader in technology or income or finance forever.

Paying interest on debt, and incurring new debt for old obligations, is obviously necessary. But we need to recognize that paying for the past will not produce much for the future. To remain competitive with countries like China and India, the US must commit its available resources to forward-looking investments that strengthen its long-term economic position.

The lack of available funds for future investments is the real cost of the current large debt payments. This should be kept in mind when we pat ourselves on the back for having solved the “debt limit” problem for the time being or borrowing enough new money to meet entitlement obligations. Our children and their children won’t thank us.

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