Harvard economist Rogoff: The United States needs a "crisis shock" to solve its debt problem

The U.S. debt problem remains deeply entrenched, and the political sphere has been slow to take action. Harvard economist Kenneth Rogoff warns that the situation may only truly change following a major crisis shock.

In an interview on Friday, Rogoff stated, U.S. public debt surpassed $40 trillion last week, and combined with persistently rising interest rates, the debt situation has dramatically deteriorated. Yet, Washington's policy response has seriously lagged behind. He bluntly said: "Interest rates have reversed, but Washington has not."

Rogoff pointed out that geopolitical conflict, the impact of artificial intelligence, or even cyber warfare could all become triggers for the next crisis. At that time, the policy maneuverability of the Federal Reserve and the U.S. government will be extremely limited.

He also warned that substantial reforms to welfare programs like Social Security require a crisis as a catalyst, as, prior to that, both voters and politicians lack sufficient motivation to take action.

Rogoff attributed the longstanding lack of control over U.S. debt to a near "religious" belief in academia—that interest rates would indefinitely decline. He said it was this assumption that enabled years of unrestrained debt accumulation.

However, when interest rates rebounded from their lows and continued to climb, political leadership failed to adjust their response strategies accordingly.

Currently, the auction rate for 30-year U.S. Treasury bonds has risen to its highest level since 2001. The ever-increasing interest expense is creating a potential "vicious cycle": the larger the debt, the higher yields investors demand, which further pushes up borrowing costs.

Rogoff stated that the recent movements in long-term Treasuries reflect a reality—once a crisis hits, the Federal Reserve and the government will have very limited policy options at their disposal.

Meanwhile, the prevailing consensus in Washington politics is that voters are unwilling to accept tax hikes and do not want to endure substantial spending cuts, making the path to reducing the fiscal deficit ever narrower.

Rogoff listed several scenarios that could trigger a debt crisis over the next five years, including cyber warfare and disruptions brought by artificial intelligence. He noted that if these events occur, they could lead to a sharp spike in interest rates, further worsened by an already fragile fiscal state.

"The crisis arrives because you lack resilience when the shock occurs," Rogoff said. He characterized the conflict with Iran as "just a small shock compared to what may happen in the next five years," implying that current fiscal fragility leaves the U.S. almost defenseless against larger-scale shocks.

Rogoff made these comments while attending the annual economic policy symposium hosted by the Kansas City Federal Reserve in Jackson Hole, Wyoming. He previously served as the chief economist at the International Monetary Fund.

On the issue of Social Security reform, Rogoff also struck a pessimistic tone. He said that significant welfare reform equally requires a crisis to drive it, as voters have not yet recognized the urgency of the issue.

He cited his new book, "Our Dollar, Your Problem," predicting that the current situation "will end in some form of crisis," and only then might reform become politically feasible. Rogoff remarked sarcastically that any candidate campaigning in 2028 on Social Security reform will find that "the voters' gazes instantly become absent."

This assessment paints a picture that investors should heed: before a true catalyst for reform occurs, a fundamental turnaround in the trajectory of U.S. fiscal policy may be a distant prospect. And when that time comes, the price paid may be far higher than the cost of taking proactive measures now.