Foreign Policy Priorities:
Fiscal Policy and Debt

The health of the U.S. economy is a major factor in the United States’ ability to influence events abroad. The U.S. economy remains perhaps the world’s strongest, and its growth following the disruptions of the COVID-19 pandemic has outpaced that of many of the country’s industrialized peers. American firms lead in many industries viewed as critical to maintaining an economic and geopolitical advantage in the years ahead, such as artificial intelligence (AI). Yet, many economists point to signs of trouble: U.S. firms lag in other high-tech areas, such as the manufacturing of advanced semiconductors, and the economy continues to struggle with inflation, rising inequality, and stagnating wages. Other challenges include crumbling infrastructure, falling life expectancy, and federal government debt levels not seen since World War II. 

Disagreements persist over how much the federal government should spend, and how to finance that spending. Both presidential candidates have said that they will not cut Social Security and Medicare—the so-called entitlement programs that, along with the defense budget, form the bulk of government spending—which are on pace to become insolvent within the next twelve years. At the same time, increasingly competitive foreign economies and the rise of automation are reshaping the U.S. labor market, and Washington collects less tax revenue as a percentage of gross domestic product (GDP) than it did in 2015. Tax reform also continues to be a major topic of debate. Democrats generally favor raising taxes on the highest earners, while Republicans argue that lower taxes will spur greater economic growth, increasing the taxable base.

While those debates continue, the national debt has blown past record levels and is set to continue climbing. Many economists warn that this could have severe consequences for the U.S. economy and American foreign policy. They argue that the increasing cost of interest expenses could soon crowd out critical government spending; ​​for example, with more money dedicated to debt payments, Washington could be forced to trim military spending. Some economists also worry that difficulties in financing a large debt could increase the likelihood of financial crises triggered by disruptions in the government bond market. Washington has repeatedly skirted financial chaos as fights over the “debt ceiling,” or the congressionally mandated limit on government spending, have led to multiple government shutdowns—under both Democratic and Republican administrations—and downgrades of U.S. debt by ratings agencies.

While the financial system has been relatively stable since the 2008 financial crisis, the collapse of Silicon Valley Bank in 2023 demonstrated that even midsize-bank woes can have national consequences. But the future of financial regulation remains contentious: some analysts argue that the last decade’s sweeping financial reform did not go far enough, while others support paring back rules on banking operations, which they say are counterproductive.