US 2026 Debt Forecasts: Is $40T Too Much?

CNN just reported (here) that US "National debt reaches grim $40 trillion milestone. Here’s why that matters..." says the article: "The United States is digging itself into an ever-deeper debt hole." This post explores the issues surrounding US Debt from the standpoint of Systems Theory.

First, Treasury Secretary Scott Bessant proclaims, in the video above, that we can "...grow our way out of Debt".

Let's look at a DEBT -> GROWTH shock using the USL20 DEBT model (see below). Growth, in fact, increases debt and Bessant is quite wrong.

From the standpoint of World-Systems Theory, it might be argued that as long as US Debt keeps in line with growth of the US Economy (which it is, see below) the debt should be sustainable. On the other hand, if US Debt was growing in an unstable, Business-as-Usual (BAU), fashion without regard for economic conditions, it might be considered a problem.

Unfortunately, if you think $40T in Debt is unsustainable, the other models (expect the Random Walk, RW) continue to much "worse" levels in the future (see the graphic at the start of this post)!

According to ChatGPT and Wikipedia, the Classic Debt Crisis is presented above as a Directed Graph. A shock to the Economy increases deficit spending which increases the issuance of TBILLS which increase Bond YIELDS which increases interest rates (i) which makes it hard to finance the DEFICIT. If the loop is unstable, DEFICITs will continue rising forever until there is some SHOCK that allows DEBT to be retired.

If we bring the US Federal Reserve (FFR) into the Path Model, and if their policies lower interest rates, (i), a measure of control is possible by creating negative feedback loop. Notice that this model describes the operation of the US2 = (TBILL+CPAPER+FFR+QOIL-KOF) historical Controller with the added effects of Commercial Paper, Oil Production balanced by Globalization (KOF).

Unfortunately, ChatGPT is quick to add that the mission of the US FED does not include controlling the debt. DEBT is an output of the Political System and, in the US at least, the Political System seems unable to control debt, maybe because they all accept Scott Bessant's mistaken idea that growth will reduce debt.

Notes

Wikipedia Links

• Modern Monetary Theory (MMT)  a heterodox macroeconomic theory concerning the role of fiscal and monetary policy in sovereign governments that borrow and issue government debt in their own currency.

USL20 DEBT Model US-Input

The US Debt Model with input from the USL20 MM (see below) is stable and shows (1) US1 (Growth) increases debt, (2) only US2 (The Financial Market-Globalization Controller) reduces debt (3) The complicated Globalization (KOF)-Housing Start historical controller (US3) also increases debt.

Shocks from US2 and US3 are presented above. Again, only shocks from the Financial System reduce debt. The USL20 Input Model is stable using US Debt Data from the FRED Database.

USL20 Measurement Models

The USL20 Measurement Model has three components that explain 90% of the variance of the indicator variables. US1 = (Growth). US2 = (Historical controller balancing Monetary policy and Oil Production with Globalization. US3 = (A complicated historical controller balancing Exports and Unemployment with Housing Starts).

Notice that Government Expenditure (G) which controls debt is not weighted heavily in any of the Historical Controllers, either US2 or US3.

DEBT AIC Statistics

The best stable model, using the Akaike Information Criterion (AIC, smaller-the-better) is driven by the USL20 Model. You can run the USL20 BAU Model on my Google Site using R-code.

 

How Might a Technocracy Govern Italy's Steady-State Economy?

Italy has had a number of Technocratic Governments and the Italian Constitution allows for "...a cabinet (Council of Ministers) made up of experts not officially affiliated to any political party or political coalition (Wikipedia)." One criticism of Technocratic Governments is that they are anti-Democratic. Allowing all decisions to be made by Technocrats is extreme and unnecessary. But, how to decide which decisions might be given over to Technocrats? This blog posting investigates the question.

Italy is already on the way be being a Steady-State Society (see the graphic above, especially the IT1 state-space component). The path of least resistance would be for a technocratic government to facilitate the steady state and focus on the important historical controllers (IT2 and IT3).

• To manage IT1 (Growth), select Ecological Economists, not Monetary or Neoclassical Growth Economists.
• To manage IT2 (KOF-HDI-LU-EF), select Alter-Globalists and Environmentalists. 
• To manage IT3 (LU-N-CO2-EG), select Green Economists and Environmental Scientists.

There are a wide range of experts to choose from in areas that will help Italy reach a Steady-State Economy. Notice particularly that the Historical Controllers (IT2 and IT3) allow for balanced Globalization, Population growth and Energy use. Radical solutions are not needed at this point in Italian Development  and all aspects of Political Development need not be given over to Technocrats.

 

Notes

Wikipedia Links

• Green Economists  advocates of an economy that aims at reducing environmental risks and ecological scarcities, and that aims for sustainable development without degrading the environment.
• Environmentalists  a broad philosophy, ideology, and social movement about supporting life, habitats, and surroundings. While environmentalism focuses on the environmental and nature-related aspects of green ideology and politics, ecologism combines the ideology of social ecology and environmentalism. 
• Alter-Globalists a social movement whose proponents support global cooperation and interaction, but oppose what they describe as the negative effects of economic globalization, considering it to often work to the detriment of, or to not adequately promote, human values such as environmental and climate protection, economic justice, labor protection, protection of indigenous cultures, peace and civil liberties. The movement is related to the global justice movement.
• The Economy of Italy a highly developed social market economy. It is the third-largest national economy in the European Union, the 8th-largest economy in the world by nominal GDP, and the 12th-largest by PPP-adjusted GDP
• The Economy of Fascist Italy the economy in the Kingdom of Italy during the Fascist period.
• The Politics of Italy conducted through a parliamentary republic with a multi-party system. Italy has been a democratic republic since 2 June 1946.
• The History of Italy inhabited by humans since the Paleolithic. During antiquity, there were many peoples in the Italian peninsula, including Etruscans, Latins, Samnites, Umbri, Cisalpine Gauls, Greeks in Magna Graecia and others.
• Giorgia Meloni an Italian politician who serves as Prime Minister of Italy since October 2022. She is the first woman to hold the office and the head of the third-longest government in the history of the Italian Republic.
• Technocratic Government in Italy (Italian: governo tecnocratico), also called technical government (governo tecnico), government of technicians (governo dei tecnici), or government of experts (governo degli esperti), is the term used to refer to a cabinet (Council of Ministers) made up of experts not officially affiliated to any political party or political coalition. This is probably Italy's best hope, politically, for managing a Steady-State Economy.

ITL20 Measurement Model

The IT_L20 Model State Space has three components that explain 97.3% of the variation in the indicators which are taken from the World Development Indicators. The first component, IT1 = (Overall Growth). The second component, IT2, is an historical controller balancing the KOF Index of Globalization and Human Development Index against Unemployment and the Ecological Footprint, (KOF+HDI-LU-EF). The third component, IT3, is another historical controller balancing Unemployment against Population, CO2 emissions and Energy use.

David Easton's Political System

David Easton (1917-2014) is best know for the application of systems theory to political science. His definition of the Political System (above) as "..the authoritative allocation of values for the society," has had a deep influence on political science.  Unfortunately, I have struggled with the definition of inputs and outputs. I think I have finally come to a resolution, but let me work through the steps in this post. 

My first struggle was where to put the economy in this system: is it an input or an output? In Marxist thinking, the material conditions created by the Economy drive the Political System. In Keynesian thinking, decisions made in the Political System drive the economy. In reality, it is probably both. 

Typically, I take Economic Growth as an input and Financialization (FINZ) as an output because I have empirical support that the two are separate components (see the USL20 Measurement Model below).

The next output that fell into place was Hardship (HARD). An article in the Medium by Cory Doctrow Good Politics just makes People's Lives Better suggested to me that a political system that did not reduce hardship (HARD) could not survive. Other output, such as DEBT and Austerity (AUST) were suggested by Neoliberalism. Finally, Environmental concerns (ENV) and policy programs such as the Green New Deal (GREEN) would also be considered outputs of the Political System.

Since I have indexes for each of these outputs (FINZ, HARD, DEBT, AUST, GREEN and ENV) in addition to an index for the World System (WL20 Measurement Model below), it is at this point that the Political System came together for me. It should also be clear that this is just a partial list; Political System outputs can be whatever issues or programs generate government funding or legislative action. My only constraint is that I be able to create measurable indexes for each output.

And, once inputs and outputs have been defined, Feedback is defined within the framework of Systems Theory (see Blog Roll: Dynamic Components Models).

Notes

USL20 Measurement Model

World System Policy Forecasts for the UK (1960-2100)

 

Notes

See David Easton's Political System for a description of Policy Inputs and Outputs.

Policy Wedges and State Space Simulation Models

 

Policy Wedges first gained attention as Climate Stabilization Wedges. However, the application is broader and has been applied to Monetary Policy Wedges and Health Care Policy Wedges. The idea can be applied to any macro-policy agenda using State Space models.

George W. Pasdirtz’s “Policy Wedges” Approach to U.S. Health Care

George W. Pasdirtz’s 2007 paper “Controlling the US health care system with policy wedges” 

proposes a state-space modeling framework to address the long-term growth of the U.S. 

health care sector, which has expanded faster than the economy Springer+1.

Core Methodology

Pasdirtz developed two state-space models:

U.S. economy model (1950–1999)

U.S. health care system model (1950–1999)

The economy model’s output was used as a reference input to control the health care model’s 

growth. This allowed him to simulate a “controlled” scenario where health care growth matched 

economic growthSpringer.

Policy Wedges

A policy wedge refers to a targeted intervention that shifts the growth path of the health care 

system toward the economy’s growth rate. Pasdirtz’s simulations showed that over the late 20th 

century, the U.S. health care system grew faster than GDP, with health care spending as a share 

of GDP rising from 3.4% in 1950 to nearly 14% in 1999 Springer.

To align health care growth with the economy, his model suggested:

13% reduction in capital expenditure
15% reduction in drug prices
32% reduction in physician service prices Springer+1

These wedges represent policy levers—changes in investment, pricing, and service delivery—

that could slow health care growth without eliminating care.

Designing Universal Health Care

Pasdirtz also applied the framework to universal health care design:

Use planning and economic incentives rather than over-engineering benefits

• Avoid centralized, command-and-control approaches
• Balance coverage and cost control through targeted interventions Springer+1

Key Takeaways

Policy wedges are measurable, targeted interventions to slow health care growth.
They can be applied to both cost control and universal coverage design.

The approach combines macroeconomic modeling with policy simulation to test 

counterfactual outcomes.

It offers a data-driven alternative to ad hoc or politically charged reforms.

In short, Pasdirtz’s “policy wedges” framework provides a quantitative, simulation-based 

roadmap for aligning health care growth with economic growth, with practical implications 

for both cost containment and universal coverage policy.

UKL20 Financialization Dynamics

 

Notes

• A Green New Deal First Report of the Green new Deal Group
• Stern Review (2006): The Economics of Climate Change
• The Global Justice Report A plan for equality and prosperity within Planetary boundaries.
• Kalman, R.E. (1980) A system-theoretic critique of dynamic economic models.

UKL20 FINZ Codes

UKL20 FINZ US Model

UKL20 FINZ BAU Model

UKL20 FINZ BAU Model Stabilized

UKL20 FINZ EU Model

UKL20 FINZ Models AIC Statistics

What Should the Labor Party Do?

From Google AI:

The above graphic shows a very long list of things for the Labor Party to do in the future. If the list becomes larger or proves unwieldy, BAU is probably the best prediction for the future. Another option is for the Labor Party to begin preparing for a Steady-State Economy. Unfortunately, such a policy agenda is likely not realistic and will always be associated with Economic Stagnation.