America stands at a fiscal crossroads. Years of unchecked deficit spending - largely driven by sweeping tax cuts, surging defense budgets, and trade disruptions - have pushed the national debt past $36 trillion, a level that is testing the limits of economic sustainability. With interest payments on U.S. debt now above $1 trillion annually, the government finds itself trapped in a dangerous cycle where borrowing begets more borrowing, and the margin for error is shrinking.

The current administration is only adding fuel to the fire. Trump's proposed tax breaks, chaotic trade policies, and deep but erratic budget cuts are injecting even more volatility into an already fragile system. His tariff escalations risk further isolating the U.S. from global trade networks, while his deficit-financed spending priorities threaten to widen the fiscal gap at a time when tightening is needed. In recognition of these trends, foreign investors, once eager buyers of U.S. Treasuries, are retreating. China has steadily reduced its holdings, Japan is reassessing its exposure, and global markets are watching U.S. fiscal policy with growing skepticism. Meanwhile, the Federal Reserve, once able to cushion economic shocks, is constrained by inflation risks and the limits of monetary intervention. Even legendary investor Ray Dalio warns that America's debt trajectory is entering a self-reinforcing spiral, one where rising interest costs and declining investor confidence could trigger a financial reckoning.

How did we get here? And more importantly, what comes next? Let's look at how a looming debt crisis, waning global appetite for U.S. debt, and the diminishing effectiveness of monetary policy are converging into a perfect storm - one that could test America's economic foundations in ways not seen in decades. More critically, let’s explore the urgent policy decisions needed to prevent a crisis before it's too late.

Tariffs: Protection or Peril on the Trade Tightrope

We all know Trump loves tariffs. During his first term, he wielded import taxes as his go-to weapon, insisting they would revive American industry and shrink the trade deficit. It didn’t work out as planned. And this time around, in his second term, it seems he’s doubling down on that tactic. History, however, paints a more cautionary picture. Tariffs have sometimes worked when applied with care - and backfired disastrously when overused. In the 1930s, the infamous Smoot-Hawley Tariff Act hiked U.S. duties on over 20,000 goods to shield farmers during the Great Depression. The outcome was grim: dozens of countries retaliated, world trade plunged, and the global economy worsened. International commerce collapsed by about 66% between 1929 and 1934 as protectionism spiraled out of control. The lesson was searing: excessive tariffs in an interconnected world can boomerang badly.

Yet tariffs aren't always futile. In certain contexts, they've proven effective tools. Many emerging economies - including post-war South Korea - used temporary protective tariffs to nurture infant industries until they could compete globally. Early in U.S. history, high tariffs helped fund the government and spur domestic manufacturing. Economists even theorize that a large economy can leverage "optimal tariffs" to improve its trade terms if other countries don't retaliate. The key is moderation and strategy. Tariffs can work when surgical and temporary, but across-the-board hikes often invite retaliation and unintended pain.

Trump's approach has been anything but surgical. Beginning in 2018, he unleashed sweeping tariffs - on Chinese solar panels and steel, on Canadian aluminum, even on everyday goods from allies and adversaries alike. By 2019, thousands of products (roughly $380 billion worth of U.S. imports) were subject to new duties. It amounted to one of the largest tax increases in decades, though it arrived not via IRS bills but via higher prices at Walmart checkout lines. American consumers and companies paid the tariffs in the form of costlier goods, while U.S. exporters (from Midwest soybean farmers to Harley-Davidson) struggled under foreign counter-tariffs. Academic studies confirm these tariffs raised input costs and hurt employment, creating a net drag on the U.S. economy.

This pattern of economic disruption continues today. Just this week, in March 2025, Trump announced new tariffs: 25% on Mexican and Canadian imports, and a doubling of Chinese tariffs to 20%. The stock market immediately responded with a 4% drop as investors recognized the potential damage to North American supply chains. Canada has already announced retaliatory tariffs on $155 billion worth of American goods, while Mexico is preparing similar measures. In 2018, Economist Paul Krugman warned that Trump’s approach to trade resembles an alarming pattern where bold proclamations lead to economic disruption without achieving stated policy goals.

None of this is new. During Trump's first term, his own advisors saw warning signs. In mid-2019, when he threatened blanket 25% tariffs on all imports from Mexico and Canada, the business community panicked. CEOs froze investment, "unsure whether Trump would resolve market distortions or destroy a global order that has long benefited the U.S.," as one Yale report put it. Manufacturers, farmers, and even normally loyal industry groups howled in opposition. This cycle is now repeating, with companies from Ford to Walmart warning about severe supply chain disruptions and price increases that could cost American families more than $1,000 per year.

Apart from the broad disruptions to businesses and consumer spending, why sound such a loud alarm? Because Trump's trade war is swiftly moving us toward a self-inflicted isolationism. If the U.S. keeps erecting tariff walls, other nations won't stand idle - they'll forge new ties with each other. As an example, in 2018, after Trump slapped tariffs on some allies, the rest of the Pacific Rim (excluding the U.S.) went ahead with a major trade pact, and Europe inked deals with Canada and Japan. The major concern is that Trump’s "America First" risks becoming America Alone. Trump's advisors like Peter Navarro have previously argued tariffs could restore American jobs, but after the tariffs from Trump’s first term, the reality was more complex. U.S. steel mills did enjoy a brief uptick, yet steel-consuming industries lost jobs as input costs rose. Farmers needed billions in bailouts after China retaliated by halting purchases of U.S. soybeans. Meanwhile, China adapted - sourcing soy from Brazil, semiconductors from other countries, and doubling its steel exports to tariff-free countries like Vietnam (who then resold that steel into the U.S.). Global supply chains simply rerouted around America's barriers.

Trump's tariff experiment has revealed the double-edged nature of protectionism. Yes, tariffs can protect vital industries in the short run or address genuine trade abuses - there is ample evidence to support this. But when tariffs become a constant bludgeon, the backlash can undermine the very economy they're meant to defend. During his first term, as economist Doug Palmer quipped, Trump "won" several tariff battles only to start losing the war: by 2020, U.S. manufacturing was in a slump and the trade deficit he aimed to shrink had actually grown to its highest level since 2008. Indeed, the combined U.S. trade deficit increased to $681 billion in 2020 (up from $502 billion in 2016), and the trade gap in goods alone hit a record $1.19 trillion -- almost 50% higher than when Trump took office.

What's even more concerning is that Trump's latest round of tariffs are being implemented without clear strategic objectives. As former World Bank economist Anne Krueger notes, the concessions Trump demands from Canada and Mexico were already in place or are not even in their power to deliver. Economist Jeffrey Frankel has observed a pattern in Trump's approach to international negotiations: he "declares war, delighting his supporters," then eventually "kicks the can down the road and declares victory, despite few real gains".

The ultimate risk is that this approach to unrestrained tariffs will alienate allies and investors, leaving America isolated. In fact, higher import taxes, if taken too far, could even choke off some of the foreign capital that the U.S. relies on to finance its deficits. History doesn't so much prove that 'tariffs never work' as it demonstrates that tariffs represent a perilous tightrope that should be traversed with extreme caution. Trump's all-in tariff strategy tilts precariously toward the isolationist side, reminding us that in trade — as in foreign policy — building bridges tends to serve a nation better than erecting walls.

Defense Spending: World-Beating Budgets and Fiscal Trade-offs

America's fiscal challenges are not just about what money comes in, but also what goes out - and no expenditure looms larger (or is more politically untouchable) than the U.S. defense budget. The United States has long spent more on its military than any other nation, but the scale of this dominance is staggering. In 2023, U.S. defense outlays neared $1 trillion, accounting for nearly 40% of global military expenditures -- roughly more than the next nine largest defense budgets in the world combined. One country -- the U.S. -- was spending almost as much as everyone else on defense. The U.S. military isn't just one of many; it is the 800-pound gorilla of global security.

What does nearly $1 trillion per year buy? An unparalleled arsenal of hard power: eleven nuclear-powered aircraft carriers, a globe-spanning network of bases, advanced fighter jets and drones, and a standing force of over 1.3 million active-duty personnel. Trump, who often lamented that America's military had grown "depleted," eagerly approved significant budget hikes for the Pentagon. Annual defense spending rose by tens of billions during his first term, reversing the brief spending downturn imposed by the Budget Control Act earlier in the 2010s.

By 2020 the defense budget was near Cold War--era highs in nominal dollars (though a bit lower as a share of GDP). Trump justified the increases as necessary to "rebuild" the armed forces and to keep ahead of rising powers like China. Indeed, China's military budget - the world's second-largest - was estimated around $235 billion in 2024, barely one-quarter of U.S. levels. Other rivals like Russia spend far less (Russia's defense outlays were about $129 billion in 2024), as do U.S. allies such as the UK, Germany, and India (each on the order of $50–80 billion annually). From one perspective, this gap underwrites American global dominance and deters would-be aggressors. From another perspective, it represents an enormous opportunity cost: hundreds of billions that Washington might otherwise devote to domestic needs or deficit reduction.

Critically, defense spending is a major driver of the federal deficit. It consistently comprises over half of all discretionary spending (annually appropriated). Every dollar poured into a fighter jet or warship is a dollar not available for infrastructure, education, or deficit-cutting (unless it's borrowed - which, of course, it has been). The U.S. finds itself in a bind: strategic threats and political consensus demand high defense budgets, yet those same budgets contribute mightily to fiscal imbalance.

The trade-offs are stark. As defense hawks point out, America's security commitments span the world - from deterring China in the Pacific to reassuring NATO allies in Europe - and trimming military resources could invite aggression or instability. But as deficit hawks retort, an overextended empire that goes bankrupt is itself a security risk. Rome's legions were unmatched, but fiscal rot contributed to Rome's fall.

Finding the right balance is tough. One could argue that U.S. defense spending, at nearly $1T, is far beyond what's needed for safety, especially given that allies also spend significant sums. (In 2023, U.S. defense was nearly 3.5% of GDP, compared to roughly 2% for major European allies and about 1.7% for China.) On the other hand, cutting defense carries political peril and uncertain effects on global order. For now, the U.S. has essentially decided to finance its military supremacy with debt - charging the credit card to sustain its role as superpower. But in the long run, even the mightiest military can't compensate for economic weakness. If interest payments crowd out the very R\&D or training that keeps an army cutting-edge, security will suffer. In short, the guns-vs-butter debate isn't abstract: every extra stealth bomber has a real fiscal cost, and every fiscal compromise can shape national security.

Debt and Vulnerability: When External Shocks Meet a Precarious Foundation

Even as the economy hummed in 2019 with low unemployment, storm clouds were gathering on the fiscal horizon. The national debt kept climbing in good times - a highly unusual phenomenon. Traditionally, a booming economy allows a government to pare back deficits (or even run surpluses) and pay down debt. But under Trump, the U.S. ran nearly a $1 trillion deficit in 2019, essentially applying fiscal stimulus at the peak of the business cycle. This left the country more exposed when bad times hit. And hit they did: the pandemic in 2020 forced an explosion of emergency spending, piling on trillions more in debt virtually overnight. Now, in 2025, U.S. gross debt has blown past $36 trillion -- roughly 130% of GDP - as interest costs on that debt are also surging with rising interest rates. America emerged from the pandemic with a rebounding economy but a much shakier fiscal foundation. High debt isn't just an abstract number -- it directly impacts how resilient the nation will be in future crises.

Why does a heavy debt load increase vulnerability? First, it limits fiscal firepower. When debt is already at record highs, it becomes harder to respond to a new crisis with bold deficit spending - markets might not remain so sanguine about lending even more at affordable rates. During COVID, the U.S. was able to borrow trillions at low interest to fund relief efforts; but one can imagine a deeper recession or major war a few years from now, layered atop our existing debt -- at some point lenders could lose patience. In essence, we may have used up much of our cushion.

Second, high debt can unnerve investors about a country's long-term solvency or inflation prospects. If creditors demand higher yields to compensate for risk, interest payments snowball and deficits worsen in a vicious cycle. The U.S. has long benefited from the dollar's status as the world's reserve currency - an "exorbitant privilege" that keeps borrowing costs low. But even that privilege has limits. As historian Harold James warns, "Market sentiment can shift, and when it does, it is usually quite dramatic." Confidence can evaporate overnight in extreme cases. We recently got a mild preview in an unlikely place: Britain. In late 2022, when the UK government under Liz Truss unveiled unfunded tax cuts despite high debt, bond markets revolted and the pound plummeted -- forcing a swift U-turn and the prime minister's exit. It was a bracing reminder that investor faith is not unconditional.

Whatsmore, there are troubling parallels between this pattern of fiscal management and Trump's business history. Just as his companies repeatedly borrowed heavily during good times, only to face severe financial distress when market conditions changed (leading to six corporate bankruptcies), the U.S. economy now shows similar vulnerability from debt accumulated during boom years. It should come as no surprise that the pattern is striking - leveraging heavily during prosperity, rather than building reserves, then facing a severe reckoning when economic shocks arrive. This approach to national finances mirrors the same short-term thinking that characterized many of his private business ventures - most of which have failed in financial ruin.

For now, the U.S. is not on the brink of any Greece-style debt crisis - far from it. But under Trump, the risk profile has undeniably grown. Consider a few plausible external shocks: a global recession that shrinks tax revenues; a rapid spike in interest rates (as happened in 2022–23) that makes refinancing U.S. debt far costlier; or a geopolitical conflict that sends oil prices soaring and stalls growth. Any of these could tip America's finances from troublesome to truly hard-to-manage.

In fact, high debt has already made the Federal Reserve's inflation-fighting task trickier - with so much leverage in the system, aggressive rate hikes can rattle financial stability (as seen when some regional U.S. banks failed in 2023). Moreover, a government deep in debt might face awful choices at the worst time: cut vital spending in the middle of a crisis, or risk a bond-market backlash. In short, external shocks now hit a more fragile U.S. economy. That doesn't mean a crisis is inevitable; it means we're playing with a much thinner margin for error. As one Peterson Foundation report noted, debt at today's levels can "crowd out" private investment, dampen long-term growth, and amplify the pain of economic volatility. If a major shock strikes, we want to be prepared - not find ourselves one crisis away from catastrophe.

History shows what can happen when debt and credit risks are ignored. In the 1980s, a group of major Latin American countries drowned in debt when U.S. interest rate hikes made their dollar-denominated loans unsustainable - triggering a wave of defaults and a "lost decade" of economic pain. More recently, the 2008 global financial crisis revealed how quickly overextended financial systems can collapse once confidence evaporates.

It's in this context that investors like Ray Dalio have issued stark warnings. Dalio has cautioned that the U.S. is at risk of a looming debt heart attack - comparing the massive buildup of debt to plaque clogging the arteries of the financial system. Unless deficits are reined in (he argues the U.S. must cut its fiscal deficit from ~6% of GDP to 3% within a few years), we could see a glut of Treasury bonds that overwhelms demand - driving interest rates up sharply and sending the Treasury market "out of control". Such a trauma, Dalio warns, would reverberate through all markets and even threaten money "as a storehold of wealth as we know it". In other words, if the U.S. keeps testing the limits of its creditors' patience, the consequences could be dire - a scenario in which investors lose faith in America's ability to manage its finances, with parallels to past crises but on a potentially larger scale.

Declining Appetite for U.S. Treasuries: The World's Willing Banker No More?

For decades, a critical pillar propping up America's debt binge has been eager foreign lenders. Countries like China and Japan have consistently bought U.S. Treasury bonds, effectively lending America the dollars to finance its deficits. This arrangement let the U.S. government spend more than it earned without immediately feeling the pain - foreigners were footing part of the bill in exchange for a "safe" investment. By 2011, at the peak of this trend, foreign investors held 49% of America's publicly held debt. It was a symbiotic loop: Americans bought goods from export powerhouses like China, and China lent a chunk of those dollars back by buying U.S. Treasuries. Trump has often railed against this dynamic - decrying America's dependence on foreign creditors - yet under his watch the reliance continues even as trade relations are quickly souring in response to his trade tactics.

In recent years, however, the tide has shifted. Foreign demand for U.S. debt is no longer keeping up with America's voracious borrowing needs. By the end of 2023, the foreign share of U.S. debt had fallen to just 29%. What's been happening? In part, the Federal Reserve's own massive bond-buying (quantitative easing) during the pandemic meant the Fed itself soaked up a lot of new Treasury issuance, and now holds about a third of domestically held debt. These actions by the Fed reduced the relative share held by outside investors.

But it's also true that key foreign players have been pulling back. China, in particular, has steadily reduced its U.S. Treasury holdings over the past decade. After peaking at around $1.3 trillion in 2013, China's portfolio of Treasuries has dropped to roughly $760 billion - the lowest level since 2009. Beijing's logic is clear: too many eggs in the U.S. basket is a geopolitical risk, especially when the relationship with Washington is fraught. This slide accelerated amid Trump's trade war and has continued as China diversifies its foreign exchange reserves (buying gold and investing in other currencies/assets).

Japan, now America's largest foreign creditor, has been steadier but is not immune to change. Japanese investors hold about $1.1 trillion in Treasuries - roughly the same as a few years ago - but lately even Japan has trimmed its holdings. In October 2024, for instance, Japan sold over $20 billion in U.S. bonds in a single month, a reminder that its support can't be taken for granted. Part of Japan's motive is domestic: as its central bank signals higher interest rates at home, U.S. bonds become relatively less attractive. Across the Atlantic, European investors (in places like the UK, Switzerland, Ireland, and Luxembourg) have actually increased their U.S. debt holdings in recent years. The UK, for example, now holds around $650–700 billion in Treasuries, making it the third-largest holder after Japan and China. But Europe too faces competing needs for capital -- rebuilding military capabilities, investing in green energy -- which could limit how much excess cash they funnel into U.S. bonds going forward.

The overarching trend is that the rest of the world isn't buying U.S. Treasuries at the pace it once did. Between 2003 and 2011, China and Japan together held nearly 45% of all foreign-owned U.S. debt; by 2023 their combined share was down to about 25%. Foreign governments and investors still view U.S. bonds as among the safest assets on Earth - there's still no real alternative to the dollar's dominance in global finance. But the degree of reliance on foreign funding has lessened.

This has two big implications for the U.S. economy. First, if foreign buyers don't pick up the slack, domestic investors or the Federal Reserve must finance America's deficits. We've seen a glimpse of this: in April 2020, as the Treasury issued a flood of new debt to fund COVID relief, total foreign holdings actually fell - essentially none of the new debt that month was bought by overseas investors. The Fed and U.S. institutions filled the gap. Second, reduced foreign demand can put upward pressure on interest rates. When China was binge-buying Treasuries in years past, it helped keep U.S. rates ultra-low. Now, with China in selling mode and others lukewarm, the U.S. Treasury may have to offer slightly higher yields to attract buyers. Higher interest rates, in turn, mean higher interest costs on the debt - and an even tougher squeeze on future budgets.

The consequences of confrontational trade policies extend beyond immediate economic impacts. Trump's latest tariff announcements have already provoked retaliatory measures from Canada, which plans to impose 25% tariffs on $150 billion worth of American goods over a 21-day period. Mexico is expected to follow suit. These actions will further dampen international goodwill at a time when America needs cooperative global partners to help finance its growing debt. Each new trade conflict effectively raises the cost of America's borrowing by eroding confidence among the very nations whose financial support the U.S. Treasury depends on.

Trump's fiscal legacy is tangled up in this story as well. His confrontational policies arguably made U.S. debt less appetizing to its biggest foreign creditors. One unintended (and ironic) consequence of his trade war was to spur China to accelerate its "de-Americanization" of reserves - reducing exposure to U.S. Treasuries in favor of other assets. Likewise, threatening tariffs on close allies hardly encourages them to invest more of their surplus savings in U.S. bonds. If America is seen as weaponizing its economic power - through tariffs, sanctions, or financial controls - other countries have a strong incentive to reduce their vulnerability to U.S. assets over time.

We already see glimmers of this shift: countries are exploring alternatives to dollar assets, from increasing holdings in euros and Chinese RMB to even experimenting with digital currencies. Some U.S. rivals and emerging economic blocs (for example, the BRICS+ nations) have openly discussed developing alternative reserve currencies or payment systems outside the dollar's orbit, aiming to diversify away from over-reliance on U.S. Treasuries. The dollar isn't about to lose its reserve-currency throne tomorrow, but the cracks in the edifice are visible.

The bottom line: running large deficits year after year requires willing lenders. If big players like China, Japan, and others become less willing, the U.S. will face a choice of paying more to borrow or leaning even harder on domestic sources of finance - neither of which is comfortable or sustainable for the long run. The era of easy money from abroad is fading, and America must adjust to this new reality.

A failure to adjust could have grave consequences. Ray Dalio's warnings tie directly into this dynamic of supply and demand for Treasuries. He notes that if the U.S. continues issuing debt at its current clip without sufficient demand, it will end up with an oversupply of bonds - essentially too much Treasury paper chasing too few buyers. In such a scenario, bond prices would fall and yields would surge, creating a self-perpetuating debt crisis. Dalio cautions that this kind of spiral - a "financial heart attack" - could undermine not only the Treasury market but the broader financial system and even the credibility of the dollar. We're not there yet; as emphasized, the dollar and Treasuries still hold a premier place globally. But the trajectory is worrisome. The U.S. has been fortunate that for decades the world's savings flowed generously its way. That luck may be running out. In effect, America's credit card is hitting its limit, and the lender (global investors) is starting to balk. Whether we avert a crisis will depend on recognizing this new landscape and changing course before it's too late.

Steering Toward Sustainability: Policy Solutions and a New Course

By now, it should be clear that the status quo is unsustainable. The U.S. can neither tax-cut nor tariff-war its way to fiscal health. Tough choices and proactive policies are needed to defuse the ticking debt bomb and fortify the economy against future shocks. Below, I propose a few policy solutions - each addressing a facet of the problem - and why they are essential in the current fiscal landscape. I recognize that these proposals will surely face significant political challenges in the current environment, but they represent necessary steps forward. These measures won't just plug budget holes; they aim to undo the excesses of previous decades and put the country on sounder footing for generations to come.

1. Reinstate Corporate Tax Rates

One of Trump's signature moves during his first term was the 2017 Tax Cuts and Jobs Act (TCJA), which slashed the federal corporate tax rate from 35% to 21%. This was cheered by businesses, but it blew a sizable hole in the Treasury. In 2018, corporate tax revenues plunged by roughly one-third, coming in far lower than even pessimistic forecasts. Over a decade, the corporate tax cuts were projected to cost the U.S. around $1.3 trillion in lost revenue - money that instead padded company profits and shareholder returns. Crucially, this windfall did not unleash an investment boom as promised; business investment actually declined in the two years following the cuts. Meanwhile, budget deficits climbed -- "largely triggered by the massive corporate tax cut," according to one analysis.

Now, in his second term, Trump is adamant that he will permanently extend these cuts. However, that's the exact opposite of what needs to be done. Permanently extending these expiring tax cuts will reduce federal tax revenue by $3.6 trillion over the subsequent decade.

Instead, reversing some of these cuts -- for example, restoring the corporate rate to 28% (still well below the pre-2017 level) -- would significantly boost revenues. It would require corporations to pay a fairer share for the infrastructure, educated workforce, and security that they enjoy in America. Every percentage point increase in the corporate tax rate yields tens of billions in additional revenue. Beyond the dollars and cents, such a move would signal that fiscal responsibility is back. It would help correct course from an era when tax giveaways were simply financed by debt.

Importantly, even at 28% the U.S. corporate rate would remain competitive (many advanced economies hover around ~25%, and they don't have our state-level taxes). Reinstating some corporate taxes is a prudent first step to reduce deficits and demonstrate a commitment to sustainable finances. Notably, the U.S. has done this before: in the 1990s, a bipartisan deficit-reduction push (including President Clinton's OBRA-93 that raised taxes on the wealthy) helped turn a large deficit into a budget surplus by the decade's end. It showed that asking businesses and the wealthy to contribute more can go hand-in-hand with economic growth and fiscal improvement.

2. Roll Back Tariffs and Re-engage on Trade

Just as Trump's tax policy (TCJA) has eroded revenue, his trade policy has increasingly erected costly barriers. His tariff war acts as a self-imposed tax on American consumers and exporters, raising prices and undermining jobs. While some of Trump's tariffs addressed real concerns (for instance, China's unfair trade practices), maintaining blanket tariffs on broad categories of goods has proven counterproductive, and there are better tools to address unfair trade practices.

Rolling back the most damaging of these tariffs - especially those targeting close allies and everyday consumer items - would immediately help ease inflation (by lowering import costs) and restore goodwill with trading partners. It would remove the economic drag that the trade war created in the first place, and help mend our foreign relations. The Tax Foundation estimated that the 2018-2019 trade war tariffs imposed by Trump, and still in place (even after some adjustments under Biden), reduced the long-run U.S. GDP by about 0.2% and have cost roughly 140,000 full-time jobs. What's more, the Tax Foundation also estimates that the newly imposed tariffs against Canada, Mexico, and China will further reduce long-run GDP by another 0.2%, reduce hours worked by 223,000 full-time jobs, and reduce after-tax incomes by an average of 0.6%.

By eliminating these barriers, American manufacturers could source inputs (like steel and components) more cheaply, and U.S. firms would face fewer retaliatory hurdles when exporting abroad. The goal is to spur trade, not suppress it, because expanding trade feeds into GDP growth and thus higher tax revenues. Beyond the economic boost, rolling back tariffs would be a strategic reset. It would curb the slide toward trade isolationism that had threatened to leave the U.S. on the outside of new trading blocs.

A more cooperative trade stance could even entice foreign capital - for instance, U.S. allies might feel more inclined to invest in America if they aren't being targeted by its tariffs. Historically, the U.S. has benefited immensely from an open global trading system (the post–World War II trade liberalization under GATT, for example, coincided with decades of growth that lifted American living standards). In short, tearing down the tariff walls can help grow the economic pie and reduce the risk of a self-defeating spiral of retaliation that would harm U.S. fiscal interests.

3. Adopt a Modest Value-Added Tax (VAT)

The United States is virtually alone among advanced economies in not having a nationwide Value-Added Tax (VAT) – a small consumption tax applied at each stage of production (ubiquitous in Europe, Asia, and much of the world). Introducing even a low-rate VAT in America, like that proposed by Andrew Yang in 2020, could be a game-changer for revenue.

Why is a VAT worth considering? Because relying solely on income taxes – especially after decades of tax rate cuts – has proven insufficient to fund the level of government services that Americans seem to want. A VAT would diversify the tax base and capture revenue from consumption, including spending by wealthy individuals who sometimes manage to avoid income taxes but inevitably spend lavishly on goods. It’s also efficient: hard to evade and broadly applied. Critics argue a VAT is regressive (hitting the poor relatively more), but that can be offset with measures like expanding the Earned Income Tax Credit or providing a rebate (“prebate”) for basic goods. In fact, most countries use VAT proceeds to help fund robust social safety nets.

Politically, a U.S. VAT has long been considered taboo – but the grim fiscal math may help change minds. Some traditional anti-tax voices have warmed to it, seeing no realistic alternative to raise the huge sums needed. Even former Fed Chair Paul Volcker once remarked that a VAT might be the only way to deal with the debt. Implementing a VAT (done right) would help stabilize the debt by adding a reliable revenue stream that grows with the economy. It’s a bold step, but many experts believe a VAT must be part of any “grand bargain” on U.S. fiscal sustainability.

In short, a VAT would align the U.S. with how virtually every other wealthy nation finances its government – tapping into consumption – and provide the kind of revenue boost that income taxes alone have struggled to deliver.

4. Prioritize Spending and Reform Entitlements (The Smart Way)

Fiscal sustainability isn’t just about raising revenue – it’s also about wise spending. The Department of Government Efficiency (DOGE), led by the world's richest person, Elon Musk, has taken a disruptive approach to federal spending that goes far beyond efficiency improvements. Rather than surgical reforms, DOGE has pursued a sweeping dismantling of government functions that even conservative Republicans like Brian Riedl at the Manhattan Institute have described as "an erosion of our democracy". Their actions have included freezing federal funding to states and nonprofits, breaching privacy protocols to access Treasury Department payment systems, locking workers out of computer systems, and pushing government workers to resign—all while operating outside normal congressional appropriations authority.

Instead of this constitutionally questionable approach, America needs thoughtful, evidence-based spending reforms. Defense, as discussed, is ripe for scrutiny: without compromising security, even a modest 5-10% gain in efficiency or a scaling back of certain Cold War-era programs could save tens of billions. After the Cold War ended, the U.S. indeed captured a “Peace Dividend” - reducing defense spending from about 6% of GDP in the 1980s to roughly 3% by the late 1990s - which helped shrink deficits while maintaining military preeminence. We should similarly ensure today that Pentagon dollars are spent on genuine security needs, not outdated systems or wasteful overhead.

The bigger elephants in the budget, however, are healthcare and retirement programs:

Medicare, Medicaid, and Social Security. These programs represent significant portions of the federal budget. In 2024, Medicare and Medicaid together accounted for 24% of the federal budget, or $1.7 trillion, with Medicare alone making up 36% of this spending and Medicaid 25%. Whatsmore, these grow each year as the population ages, putting ever-increasing pressure on the debt. Although Trump has vowed to never cut Social Security or Medicare, the reality is that adjustments will be needed to keep these programs solvent for future generations.

This doesn’t mean slashing benefits; it means calibrated steps to curb the growth of costs. For example, gradually raising the Social Security retirement age for younger workers (as was done in the 1983 reforms that averted a near-term insolvency) can improve the program’s finances since Americans are living longer. Likewise, raising or eliminating the cap on taxable earnings (so that higher earners pay more into Social Security) could boost revenue for the trust fund.

In healthcare, measures to restrain cost growth are key – such as allowing Medicare to negotiate lower prescription drug prices in bulk. In fact, Congress took a step in this direction in 2022, and the Congressional Budget Office estimates that just a first round of drug price negotiations will save nearly $100 billion over 10 years. More can be done on this front – for instance, expanding those negotiation powers or incentivizing the use of generic and biosimilar drugs.

These kinds of measures can significantly improve the long-term debt outlook by slowing the rise of entitlement spending without reneging on core promises to seniors and vulnerable citizens. At the same time, the government should protect (or even expand) smart investments that yield long-run returns – things like infrastructure, education, and R\&D – because these help grow the economy (and thus future revenues).

In essence, the federal budget needs to be reoriented from consumption to investment. Every dollar spent should be evaluated for the value it provides to society and to future growth. This kind of rigorous prioritization was largely absent during the debt-fueled spree of recent years. Bringing it back will ensure that scarce public dollars address genuine needs and build future prosperity, rather than simply paying interest on yesterday’s excesses.

5. Restore Trust in Fiscal Governance

Finally, a less tangible but crucial solution is rebuilding credibility and a bipartisan commitment to fiscal discipline. One reason the U.S. can borrow cheaply (thus far) is investors’ faith that America will ultimately get its fiscal house in order. That faith has been undermined under Trump, with many self-proclaimed deficit “hawks” in Congress suddenly going quiet as deficits continue to explode - revealing a willingness to put politics over prudence. The repeated brinkmanship over debt ceilings and government shutdowns in recent years has also frayed nerves, eroded creditworthiness, and nudged borrowing costs higher in some episodes.

To change course, leaders of both parties need to signal that fiscal sustainability is a shared priority, not a political football. This could involve reintroducing budget rules like pay-as-you-go (PAYGO) requirements for new legislation (so that any tax cuts or entitlement expansions are offset elsewhere), and perhaps forming a bipartisan commission to recommend deficit-reduction measures (as was done in 2010 with the Bowles-Simpson commission).

Just as importantly, it means leveling with the American public. Politicians are often loath to deliver hard truths about taxes and spending, but honesty is needed: we cannot have European-level social benefits with Reagan-era tax rates and Cold War-level military spending – the math simply doesn’t add up. If voters understand the stakes, they might grant a mandate for tough choices. Restoring trust also requires showing that everyone will share the burden of adjustment – that means tackling government waste and asking corporations and the wealthy to contribute more, so the middle class isn’t left carrying the load alone.

There is precedent for better governance: the Budget Enforcement Act of 1990 (a bipartisan deal under President George H.W. Bush) created PAYGO and spending caps, which helped enforce the deficit reductions of that era – and budget experts agree it worked extremely well through the 1990s, contributing to the emergence of a surplus by decade’s end. By reinstating such guardrails and embracing a spirit of compromise, Washington can reassure credit markets that the U.S. is serious about its fiscal future.

In effect, good governance itself is a form of insurance against crisis. If we can depoliticize the debt issue and return to a culture of planning for the long term, we stand a much better chance of avoiding drastic fixes later.

Conclusion: A Narrative of Peril and Opportunity

The United States stands not merely at a fiscal crossroads but at the edge of a precipice. The last several years have revealed a stark dichotomy: record-low unemployment and technological innovation on one side; unprecedented debt accumulation and policy volatility on the other. Trump's presidency has intensified this contrast- his tax cuts, trade wars, and spending hikes aim to deliver a momentary economic sugar rush while planting fiscal time bombs that now threaten to detonate.

The consequences of inaction are no longer theoretical. We face imminent threats: interest payments cannibalizing critical government functions, depleted emergency response capabilities, and the gradual erosion of America's economic leadership as global investors quietly diversify away from U.S. Treasury securities.

The parallels to Trump's business history are impossible to ignore - a pattern of leveraging assets during boom times, followed by catastrophic failures when market conditions shift. The nation now risks becoming his seventh bankruptcy, only this time on a scale that would devastate global financial markets.

Yet America's fiscal story need not end in economic calamity. Our history demonstrates remarkable resilience - from the Revolutionary War debt crisis resolved by Hamilton to the post-WWII debt reduction to the budget surpluses of the late 1990s. Each time, the country has found its way back from the brink through disciplined leadership and difficult choices.

The path forward requires immediate action: transforming tariffs from blunt instruments of economic destruction into precision tools for fair trade; restoring tax rates that actually fund the government services Americans demand; and prioritizing spending that builds future prosperity rather than servicing yesterday's excesses. These are not merely technical adjustments but fundamental reforms that would signal to markets, allies, and citizens alike that America remains capable of responsible self-governance.

The debt crisis facing America is both financial and moral - a reflection of our unwillingness to pay for the government we want and our refusal to acknowledge fiscal reality. Unlike a corporate bankruptcy, there will be no court protection or debt discharge when a sovereign crisis hits. The pain will be felt by ordinary Americans through skyrocketing interest rates, collapsing retirement accounts, and diminished global standing.

Our current trajectory represents nothing less than intergenerational theft - borrowing against our future, and that of future generations, to finance current consumption. The time for half-measures and accounting gimmicks has passed. Just as no family can indefinitely spend more than it earns, no nation - not even America - can defy economic gravity forever.

The crossroads before us demands more than policy tweaks; it requires a fundamental reset in how we govern. Will we choose the path of responsible stewardship, making hard decisions today to ensure American prosperity tomorrow? Or will we continue the cycle of fiscal recklessness that threatens to transform our nation from the world's indispensable economic power into its largest defaulted debtor? The choice is ours - but the window for making it is rapidly closing.