Debt fatigue in the wake of the coronavirus pandemic is a worldwide phenomenon. Public debt has risen sharply, and in many countries, including the United States, public debt is expected to continue to rise more rapidly than gross domestic product (GDP). Because the U.S. responded to this century’s two huge economic shocks with big increases in public debt, it will emerge from the pandemic as one of the world’s most indebted nations.

With debt and debt growth at unsustainable levels before the pandemic, the U.S. has already suffered debt fatigue for 50 years. Under current law, even between recessions, it will get worse. We need fiscal policy reform, including well-designed fiscal rules, to end our unsustainable debt growth. Without that reform, we’ll do much more than hand a big tab to future generations of Americans. The current population will bear the burden of debt fatigue in the form of higher taxes, the hidden cost of inflation or higher borrowing costs — likely all three.

As we make clear in our new book, we’re on “a fiscal cliff” because legislators across the globe responded to economic shocks with massive fiscal stimulus policies. That caused central banks, worldwide, to follow the lead of the U.S. Federal Reserve in pursuing unconventional monetary policies such as near-zero interest rates and debt finance by printing money.

Though general inflation has not yet emerged, higher asset prices have been a key side effect of policies designed to shore up the financial system and stabilize economies. Irrational exuberance and appetite for risk are evident across a wide range of asset classes. The potentially speculative bubbles include stocks, real estate, commodities and esoteric assets such as bitcoin. Investors have poured unprecedented amounts of money into mutual and exchange traded funds that track global stocks. Stock values in Europe and Asia, as well as the U.S., have hit all-time highs. Even in Japan, where stocks have been depressed for decades, the Nikkei index rose above 3,000 for the first time in 30 years.

Despite the massive stimulus programs launched in the U.S. in response to the financial crisis and the coronavirus pandemic, the U.S. continues to see reduced economic growth, and inflation far below the target levels of our central bank, the Fed. Despite a new policy framework that allows the Fed to provide substantial monetary stimulus, it has been unable to achieve target levels for inflation and unemployment. Analysts expect the post-stimulus U.S. economy to continue to see slower productivity change and economic growth in the long term.

The underperformance of the U.S. economy appears increasingly like Japan’s last three decades in which Japan saw a significant economic growth slowdown. Japan’s government incurred large deficits over that long period, leaving it with the world’s highest debt levels. The Bank of Japan pursued unconventional monetary policies, purchasing massive quantities of public and private bonds, and pushing inflation-adjusted interest rates well below zero. But those policies failed to jumpstart the Japanese economy, and the Bank of Japan appears to have hit a wall in what seems possible with their unconventional monetary policy.

The U.S. is not unique in catching the Japan disease. It is also become evident in Europe and other developed countries. Those countries experienced deflationary pressures, including low interest rates and “zombie lending.” Zombie lending is the extension of cheap credit to weak firms by weakly capitalized banks. Zombification results when non-viable firms stay afloat, and thus cling to resources better utilized elsewhere in the economy.

Some of the substantial controversy regarding zombification of the U.S. economy may be the result of confusing “zombification” and “secular stagnation.” The term secular stagnation refers to the school of thought that private markets cannot sustain economic activity at the full employment level. Those economic disciples of John Maynard Keynes argue that only countercyclical fiscal and monetary stimulus can sustain full employment. In contrast, much of the recent literature on the Japan disease and zombification argues that the huge expansionary fiscal and monetary responses to the 21st century economic shocks is the source of the widespread productivity change and economic growth slowdowns. In other words, the now rapidly spreading Japan disease — and the increasing zombification of the U.S. economy — is a result of failed macroeconomic policies, not private market failure. The remedy, we fear, as in Japan, will be hard to come by.

John D. Merrifield is a professor of economics at the University of Texas At San Antonio.

Barry W. Poulson is emeritus professor of economics at the University of Colorado.

They are co-editors of the book “A Fiscal Cliff: New Perspectives on the U.S. Federal Debt Crisis (Cato Institute, 2020).



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