On April 16, Moody’s downgraded the United States’ credit rating one notch from AAA, the best rating, to Aa1. This decision was issued just as the House Budget Committee considered the recent reconciliation bill. This bill, dubbed the “Big Beautiful Bill” by President Trump and subsequently passed by the House, is projected to add an extra $6 trillion to the national debt over the next 10 years. Moody’s now joins the other major credit rating firms, S&P and Fitch, which similarly downgraded US debt one notch in 2011 and 2023, respectively.
Like the earlier decisions of S&P and Fitch, Moody’s action has led to criticism from the current administration and its supporters, who argue the downgrade is inappropriate and not indicative of the U.S.’s ability to fulfill its obligations. However, when one looks at the United States’ current fiscal outlook, it’s obvious we are on an unsustainable path.
A Skyrocketing National Debt
Right now, the US national debt is over $36 trillion. While that is a record, what’s more alarming is the size and trajectory of the debt relative to the whole economy. Figure 1 shows the federal debt held by the public as a percentage of GDP from 1900 to 2024 and the Congressional Budget Office’s (CBO) projection of that ratio from 2025 to 2035. We can see that the ratio is currently nearly as high as it was during World War II, and that it’s projected to reach nearly 120 percent by 2035. And these projections likely understate the problem (as I’ll get to below).
Why Today’s Debt Isn’t Like World War II
Comparing the high debt-to-GDP ratio during World War II to today is like comparing apples to oranges. World War II was a national emergency, but after the war, the U.S. ran either budget surpluses or relatively small deficits as a fraction of GDP, as seen in figure 2. While Social Security existed, there was no Medicare or Medicaid. In 1950, there were about 16.5 workers per Social Security recipient. The combination of fiscal rectitude and a large workforce caused the high debt-to-GDP ratio to collapse.
Today, the situation is very different. There is no massive war or crisis that would warrant large deficit spending, but the U.S. continues to run large budget deficits. The economy is generally considered to be at “full employment,” as the unemployment rate is currently 4.2 percent. There are only about 2.8 workers per Social Security recipient. The much smaller ratio of workers to retirees makes financing both Social Security and Medicare more difficult.
Flawed Forecasts
Now, let’s turn to the CBO projections, which, while useful, almost certainly understate the severity of our fiscal woes. As my colleague Jack Salmon points out in a new policy brief, the CBO underestimates the impact of public debt on long-term government interest rates. Therefore, issuing debt will be more expensive than the CBO projects. Also, as Manhattan Institute economist Jessica Riedl points out, the CBO assumes that Treasury yields do not exceed 3.6 percent over 30 years. Yet, as figure 3 shows, many Treasury yields have largely been above 3.6 percent for the last three years. While it’s possible that interest rates could go down, there is little reason to expect this. Yields are rising, and the dollar is weakening as investors observe a reckless fiscal policy and a counterproductive trade war—both of which will likely offset any pro-growth benefits of tax reform.
A Riskier Future
As the U.S.’s grim fiscal outlook continues to worsen, its debt will become increasingly risky. If policymakers cannot turn our fiscal ship around, the U.S. is more likely to either default on its debt or monetize it through inflation. It’s no wonder Moody’s downgraded us.
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