Why Growing Out of $40 Trillion in Debt Probably Won't Work

The U.S. national debt just hit $40 trillion, and the Trump administration's answer is pretty straightforward: grow the economy fast enough that the debt becomes manageable relative to GDP. Treasury Secretary Scott Bessent said it directly on CNBC last week: "We can grow our way out of that."

It's an optimistic pitch, and compared to the alternative—cutting government spending across the board—it's way more politically palatable. The problem, according to Kent Smetters at Wharton, is that the math doesn't actually work. "People often get the causality kind of opposite," Smetters told Fortune. "They think more growth, less of a debt problem, and in reality, it's just the opposite."

The real issue isn't the $40 trillion number itself. What matters is the debt-to-GDP ratio, which currently sits at 122%. That tells you how much the U.S. has borrowed relative to its capacity to pay it back. To bring that ratio down, you either cut borrowing or increase GDP growth fast enough to outpace the debt accumulation. The White House is betting on the second option.

Here's where the plan runs into mechanical problems. In a perfect world, borrowed money gets invested in things that expand the economy—AI infrastructure, skills training, productivity tools. But most of the federal budget doesn't work that way. The biggest chunks go to Social Security, Medicare, and Medicaid, and those programs have a structural quirk that makes growth a double-edged sword.

Smetters explained it like this: "A lot of people don't realize this, but the initial calculation of benefits actually includes productivity growth on top of inflation. So what happens is that hypothetically, even if we double the impact of, say, AI on productivity, it barely moves the balance because the initial benefits go up."

So if the economy grows and wages increase, Social Security payouts adjust upward based on that same productivity gain. The ratio doesn't improve much because both sides of the equation are moving.

Then there's the healthcare labor market. If the broader economy is booming and wages are rising across sectors, doctors and healthcare workers can get better pay outside of Medicare and Medicaid. To keep them servicing public programs, the government would have to raise reimbursement rates, which means spending more. Growth creates upward pressure on costs in the exact programs that dominate the budget.

The administration has floated other ideas before settling on the growth narrative. Trump originally suggested tariffs would pay down the debt, but that plan got shut down by a Supreme Court ruling that ordered the government to repay roughly $100 billion in tariff revenues the justices deemed illegal. Then came the "golden visa" proposal—selling $5 million visas to wealthy immigrants—which also didn't move the needle.

Now the question is whether bond markets will buy the growth story. The 30-year Treasury yield pushed above 5.3% recently, which prompted Bessent to deploy $4 billion in unscheduled buybacks to stabilize demand. That's a warning sign. If investors lose confidence in the U.S.'s ability to service its debt, borrowing costs go up, which makes the debt problem worse. The worst-case scenario is a default crisis, which would be catastrophic for global markets.

Smetters pointed out that credibility is everything here. "If you tell the debt markets, 'Hey, we think we're gonna be able to grow our way out of this,' and then a year later they're not seeing any improvements from that, then it's a credibility issue." Bond markets will tolerate uncertainty for a while, but only if they believe policymakers have a realistic plan. If the growth thesis doesn't materialize within a few years, the risk premium on U.S. debt could spike, and that creates a feedback loop where higher borrowing costs accelerate the problem.

The growth optimism is based mostly on AI capital expenditures, which have already become the chief driver of economic expansion. Tech companies are pouring billions into infrastructure, data centers, and compute capacity, and that's creating a real investment boom. Smetters acknowledged this is happening but said the timeline is the issue.

"We are going through a big investment boom right now, it's transitory, it probably lasts three to five-ish years," he said. "You could still get lots of enhancements throughout the rest of the economy, but nothing that comes close, even remotely close to, dealing with the debt issue."

Even Elon Musk pointed this out on X last week—the timing of AI efficiencies hitting the real economy and the debt reckoning coming due is uncomfortably tight. If the productivity gains don't show up fast enough, or if they're offset by rising costs in entitlement programs, the debt-to-GDP ratio won't improve much.

Bessent hasn't said growth is the only tool the administration is considering, which is probably smart. Some fiscal hawks are pushing to cut federal deficits to 3% of GDP, which would be roughly half their current levels. Others want to form a budget commission similar to Obama's Bowles-Simpson group to examine options across spending cuts, revenue increases, and entitlement reforms. None of these are politically easy, but they're more mechanically sound than betting on growth alone.

The political pressure is real, though. New research from the Peterson Foundation found that only 10% of voters said the debt issue won't impact their ballot decision in the midterms. That means both parties need some kind of credible answer, even if it's just the outline of a plan.

Smetters made the point that we actually have time for rational discussions about this. "There's lots of clickbait trying to create panic, and panic creates panic. It's a bank run issue, and we don't want that. What we do want, though, is a serious discussion about forward-lookingness; we actually do have time to have rational discussions about this."

The debt was accumulated across both Republican and Democratic administrations, so the ultimate outcome depends on whether policymakers on both sides can agree on a framework that bond markets believe. If they can't, the market will force the issue through higher borrowing costs, and that's a much worse way to deal with it.