Highlights

• For hundreds of years, governments have issued debt to finance their expenditure as a substitute for raising taxes, especially during challenging times.
• Public debt in the U.S. has been increasing over the past four decades. Political polarization of parties has been offered as a potential explanation.
• We can understand the dynamics of debt by looking at four variables: primary deficit, real interest rate, growth rate, and the stock of debt in the previous period.
• Public debt can be repaid by running a primary surplus, or by promoting economic growth. However, in some circumstances, governments also have an incentive to use inflation to reduce debt.
• State sovereignty limits the extent to which governments can be sued if they default on their debt, especially internationally.
• Default may have negative consequences in terms of reputation and access to debt on favorable terms in the future.
• Statutes and non-partisan institutions known as autonomous fiscal councils have been implemented in many countries to keep the government accountable for its use of debt.

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