[Danzig]

Moreover, the fundamental cause of the rapidly rising debt in CBO’s long-term scenarios is not economic fluctuations resulting from business cycles. Instead, debt soars because of unrelenting growth in federal spending on health care programs and a rise in Social Security spending as a share of GDP, combined with a much smaller increase in tax revenues. The ever-greater budget deficits projected under those scenarios would negatively affect the economy through several channels. More government borrowing would drain the nation’s pool of savings, reducing investment in the domestic capital stock and in foreign assets. In addition, a worsening fiscal situation might put pressure on monetary policy, potentially endangering the Federal Reserve’s ability to keep inflation low and stable. If the budget continued along the path of rising debt, serious concerns about fiscal solvency would arise. Investors would require the government to pay an interest premium on its securities to compensate for the risk that they might not be repaid or that the value of their securities would be eroded by inflation. Such a premium would drive up the cost of borrowing. Finally, the longer the growth of debt persisted, the larger and more costly would be the policy changes needed to control debt, which could further increase the burden of fiscal tightening on future generations.

Most economists agree that greater government borrowing would raise interest rates and lead to greater private saving. But the offset would be far from complete, so national saving would decline.10 That decline would in turn reduce investment in the United States but not on a one-for-one basis (at least initially), because higher interest rates would attract foreign capital to the United States and perhaps induce U.S. investors to keep more of their money at home. As investment was displaced by government debt, GDP would grow more slowly and eventually decline. In the longer run, as the debt continued to grow and unless the interest premium was very large, capital would probably flee the United States, further reducing investment.