America's Mounting Debt Crisis: CBO Warning Signals Historic Fiscal Challenge

CBO: Federal deficits and debt to worsen over next decade

TL;DR: America's Debt Crisis and National Security Threat

The Fiscal Crisis: The U.S. crossed a historic threshold in 2024: for the first time since WWII, interest payments on the national debt ($882 billion) exceeded defense spending ($874 billion). By 2035, interest alone will reach $1.8 trillion annually—more than double defense spending. With debt at 101% of GDP and climbing to 120% by 2035, the nation now spends more servicing past borrowing than protecting its future.

The Industrial Collapse: Decades of offshoring gutted America's defense manufacturing capacity. China's shipbuilding capacity is 230 times larger than America's. U.S. forces would run out of critical munitions within days—not months—of sustained combat with China. Production timelines for replacement weapons: 2+ years. China controls 70% of rare earth mining and 90% of processing—materials absolutely essential for missiles, jets, submarines, and electronics. Without Chinese exports, U.S. weapons production stops within weeks.

The Supply Chain Trap: Just-in-time globalized supply chains depend on vulnerable shipping chokepoints. The 2023-2025 Red Sea crisis cut Suez Canal traffic by 57% and sent freight costs soaring 160%. A Taiwan conflict would sever both material supplies from China and maritime routes carrying components to U.S. factories and bases worldwide.

The Wartime Financing Death Spiral: Here's the ultimate trap: the conflict that would require $2.5-4.5 trillion in emergency spending over five years is the same event that would collapse foreign willingness to finance U.S. debt. China stops buying Treasuries (and likely dumps holdings). Other nations, fearing sanctions, accelerate de-dollarization. The dollar—already eroding from 70% to 58% of global reserves—faces crisis. The Fed's impossible choice: print money (triggering inflation), raise rates (making debt unsustainable), or impose financial repression (causing capital flight).

The Britain 1945 Parallel: Britain won WWII but emerged financially broken—forced to dismantle its empire, accept U.S. dominance, and ration food until 1954. The difference: Britain was broken by the cost of victory. America risks being broken by debt before the war even starts.

The Bottom Line: The United States cannot afford to fight a major war, cannot produce the weapons at required scale, cannot access the materials to make them, and cannot finance the conflict without triggering a currency collapse. Attempting to address the strategic threat through military action triggers the fiscal crisis. As Admiral Mullen warned: the national debt may be the single greatest threat to American national security—not because of the debt itself, but because it creates strategic insolvency at precisely the moment military power matters most.

The Predicament: This isn't a problem with solutions—it's a predicament with only painful choices, all requiring decades to implement. Current trajectory suggests those choices won't be made until crisis forces them, when costs will be catastrophic and options severely constrained.

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America's Mounting Debt Crisis: CBO Warning Signals Historic Fiscal Challenge

Federal Deficits Accelerate Despite Economic Growth

WASHINGTON—The Congressional Budget Office released its starkest fiscal warning yet this week, projecting that federal debt held by the public will surge from 101% of gross domestic product in 2026 to 120% by 2035, surpassing the historical peak of 106% reached immediately after World War II.

The nonpartisan agency's 10-year outlook, released February 5, 2026, reveals that annual deficits will average $2 trillion throughout the coming decade, with cumulative deficits totaling $22.3 trillion from 2026 to 2035—$1.4 trillion higher than projected just one year ago in the February 2025 report.

"This is an urgent warning to our leaders about America's costly fiscal path," said Michael Peterson, CEO of the Peter G. Peterson Foundation. "Stabilizing our debt is an essential part of improving affordability."

Primary Drivers: Entitlements, Interest, and Tax Policy

The CBO identifies three principal forces accelerating debt accumulation:

Mandatory Spending Growth: Social Security and Medicare expenditures are projected to increase from 8.7% of GDP in 2026 to 10.4% by 2035, driven by demographic shifts as 10,000 baby boomers continue reaching retirement age daily. The Social Security Old-Age and Survivors Insurance Trust Fund faces depletion by 2033—now just seven years away—according to the 2025 Trustees Report, after which incoming payroll taxes would cover only 79% of scheduled benefits without legislative intervention.

Net Interest Payments: Perhaps most alarming, net interest costs are expected to nearly double from $952 billion in 2026 (3.1% of GDP) to $1.8 trillion by 2035 (4.1% of GDP), becoming the second-largest category of federal spending after Social Security. Interest payments already exceed defense spending and will soon surpass Medicare.

"Rising debt and debt service is important because repaying investors for borrowed money crowds out government spending on basic needs such as roads, infrastructure and education," the CBO report states.

Recent Legislative Actions: The Republican-controlled Congress's "One Big Beautiful Bill Act," extended and expanded portions of the 2017 Tax Cuts and Jobs Act while adding new spending initiatives. The Committee for a Responsible Federal Budget estimated the legislation would add approximately $3.8 trillion to deficits over ten years, though tariff revenues provide partial offset.

Tariffs as Revenue Tool: A Double-Edged Sword

The Trump administration's expanded tariff regime represents the most significant shift in trade policy since the Smoot-Hawley Tariff Act of 1930. The CBO projects these measures will generate approximately $3 trillion in additional federal revenue from 2026 to 2035, partially offsetting deficit increases.

However, this revenue comes at substantial economic cost. The CBO forecasts higher inflation persisting from 2026 through 2029, with the Federal Reserve's 2% inflation target not achieved until 2030. The Tax Foundation estimates the tariffs will reduce long-run GDP by 0.2% to 0.4% while raising consumer prices across imported goods.

Immigration Enforcement and Economic Impact

The administration's immigration enforcement initiatives, including plans to deport millions of undocumented immigrants, carry significant fiscal implications. The CBO analysis incorporated estimates that reduced immigration will decrease both tax revenues and economic growth.

The Congressional Budget Office has historically found that immigration increases GDP and tax revenues while having minimal impact on per-capita income for native-born Americans. A 2025 CBO analysis concluded that immigration is "a key driver of potential economic growth" over the next decade.

DOGE's Limited Impact on Structural Deficit

President Trump's Department of Government Efficiency, led by entrepreneur Elon Musk, set an ambitious goal of cutting $2 trillion in federal waste, fraud, and abuse. However, budget analysts estimate actual savings ranging from $1.4 billion to $7 billion, primarily through workforce reductions—less than 0.4% of annual federal spending.

The disparity highlights a fundamental reality: discretionary spending subject to annual appropriations comprises only 28% of the federal budget, while mandatory programs (Social Security, Medicare, Medicaid) and interest payments account for 72% and continue growing on autopilot.

The Greece Comparison: Why America Is Different

Comparisons to Greece's 2010-2015 debt crisis, while superficially compelling given similar debt-to-GDP ratios, overlook critical distinctions that economists emphasize:

Monetary Sovereignty: Unlike Greece, which adopted the euro and surrendered control of monetary policy to the European Central Bank, the United States issues debt in its own currency and operates an independent central bank. This fundamental difference means the U.S. cannot face a Greece-style sudden stop in market financing, according to analysis from the Federal Reserve Bank of St. Louis.

"The United States has the 'exorbitant privilege' of issuing the world's primary reserve currency," explained Barry Eichengreen, economist at the University of California, Berkeley and author of "Exorbitant Privilege: The Rise and Fall of the Dollar." "This provides a larger margin for error than other nations possess."

Market Depth and Liquidity: U.S. Treasury securities remain the world's deepest and most liquid financial market, with daily trading volume exceeding $600 billion. During the 2008 financial crisis and 2020 pandemic, investors fled to U.S. debt as a safe haven rather than away from it—the opposite of Greece's experience.

Global Reserve Status: Approximately 58% of global foreign exchange reserves are held in U.S. dollars, according to IMF data from Q3 2025. This creates sustained structural demand for dollar-denominated assets, including Treasury securities.

Modern Monetary Theory vs. Fiscal Orthodoxy

The debt sustainability debate increasingly divides along theoretical lines:

Proponents of Modern Monetary Theory (MMT) argue that countries issuing debt in their own currency face no inherent solvency constraint, only inflation limits. Stephanie Kelton, professor at Stony Brook University and former Senate Budget Committee advisor, contends that "the question isn't 'how will we pay for it?' but rather 'what are the real resource constraints?'"

Traditional fiscal economists counter that while technical default may be impossible, excessive debt carries serious consequences. Kenneth Rogoff, Harvard economist and former IMF chief economist, warns that high debt levels reduce fiscal space to respond to crises, crowd out productive investment, and risk eventual currency devaluation or financial repression.

Historical Precedents and Future Scenarios

The United States has previously navigated high debt levels, most notably after World War II when debt reached 106% of GDP. However, debt was reduced to 23% by 1974 through:

• Sustained economic growth averaging 3.9% annually from 1947-1973
• Inflation that reduced the real value of outstanding debt
• Primary budget surpluses (excluding interest payments) for much of the period
• "Financial repression" through regulations keeping interest rates below inflation

Today's environment differs markedly: potential GDP growth is projected at 1.8% annually, down from post-war levels; inflation is politically unacceptable after 2021-2023's experience; and primary deficits are projected to continue indefinitely.

Social Security's Actuarial Challenge

The characterization of Social Security as structurally similar to a Ponzi scheme—where current beneficiaries are paid using income from new subscribers, with more subscribers continually needed to support the structure—identifies a genuine architectural parallel, though economists generally distinguish between the program's pay-as-you-go structure and fraudulent pyramid schemes. The critical difference: Congress has legal authority to adjust benefits and revenues, which Ponzi operators lack.

Nevertheless, the program faces genuine actuarial challenges. The 2025 Trustees Report projects:

• Trust fund depletion in 2033 for Old-Age and Survivors Insurance—now just seven years away
• Automatic benefit cuts of 21% under current law if Congress fails to act
• Long-term actuarial deficit of 3.5% of payroll over 75 years

Proposed solutions include:

• Raising payroll tax cap (currently $176,100 in 2026)
• Gradually increasing retirement age beyond 67
• Adjusting cost-of-living formulas
• Means-testing benefits for higher-income recipients
• Increasing payroll tax rates

Each approach faces significant political obstacles, explaining Congressional inaction despite the approaching deadline now less than a decade away.

Market Vigilantes: When Do Bond Markets Revolt?

The critical question remains: at what debt level do financial markets lose confidence, triggering a fiscal crisis?

Economic research provides no clear threshold. Japan maintains debt exceeding 260% of GDP with manageable interest rates, while some emerging markets face crises below 60%. The difference lies in growth prospects, institutional credibility, and currency status.

Recent market signals suggest growing concern: The 10-year Treasury yield rose from 3.8% in September 2024 to approximately 4.5% in early 2026, partially reflecting deficit concerns alongside inflation expectations and Federal Reserve policy.

"The financial markets are watching," Peterson warned. "Voters understand the connection between rising debt and their personal economic condition."

Policy Pathways Forward

The Bipartisan Policy Center's Jonathan Burks emphasized that "large deficits are unprecedented for a growing, peacetime economy," but added: "the good news is there is still time for policymakers to correct course."

Potential stabilization strategies include:

Revenue Enhancement:

• Allowing 2017 tax cuts to expire as scheduled
• Implementing carbon taxation
• Reforming tax expenditures (deductions, credits, exclusions) worth $1.8 trillion annually
• Increasing taxation on capital gains and carried interest

Spending Restraint:

• Gradually raising Medicare eligibility age
• Means-testing Medicare benefits
• Reforming prescription drug pricing
• Reducing defense spending as percentage of GDP
• Limiting growth of discretionary programs

Economic Growth:

• Infrastructure investment to increase productivity
• Education and workforce development
• Immigration reform to expand labor force
• Regulatory efficiency improvements

The Political Economy Challenge

Perhaps the most significant obstacle is political rather than economic. As critics note, no political party could likely stay in office implementing the surpluses necessary to substantially reduce debt.

Public opinion polling from Pew Research Center consistently shows Americans oppose both tax increases and cuts to major programs. This creates what economists call the "fiscal trilemma": voters want generous benefits, low taxes, and fiscal responsibility—an impossible combination.

The most likely outcome, according to academic consensus, is "muddling through": continued high deficits, gradually rising debt, periodic debt ceiling crises, and incremental policy adjustments insufficient to fundamentally alter the trajectory.

The question is whether this path remains sustainable until demographic pressures ease (as the baby boom generation passes), or whether external shocks—financial crisis, geopolitical conflict, loss of reserve currency status—force more dramatic reckoning.

Conclusion: Unique Position, Not Immunity

The United States occupies a unique position in the global financial system that provides substantial insulation from the fate of Greece or other debt-distressed nations. The ability to issue debt in the world's reserve currency, combined with the Federal Reserve's monetary policy independence and deep capital markets, creates what economists call "fiscal space" unavailable to other countries.

However, uniqueness is not immunity. Every advantage the U.S. possesses—reserve currency status, market depth, institutional credibility—depends on sustained confidence that can erode gradually or collapse suddenly. The CBO's February 2026 projections serve as warning that current policies are testing the limits of American exceptionalism in fiscal matters.

Whether policymakers heed this warning before markets force their hand remains the defining fiscal question of the coming decade.

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Verified Sources and Formal Citations

1. Congressional Budget Office. (2026, February 5). The Budget and Economic Outlook: 2026 to 2035. Congressional Budget Office. https://www.cbo.gov/publication/59711

2. Congressional Budget Office. (2025, February). The Budget and Economic Outlook: 2025 to 2034. Congressional Budget Office. https://www.cbo.gov/publication/59710

3. The Board of Trustees, Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. (2025). The 2025 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Social Security Administration. https://www.ssa.gov/OACT/TR/2025/

4. Hussein, F. (2026, February 5). CBO: Federal deficits and debt to worsen over next decade. Associated Press. [Via San Diego Union-Tribune]. https://www.sandiegouniontribune.com/2026/02/05/cbo-federal-deficits-and-debt-to-worsen-over-next-decade/

5. Committee for a Responsible Federal Budget. (2026, January). Fiscal Impact of the One Big Beautiful Bill Act. Committee for a Responsible Federal Budget. https://www.crfb.org/papers/fiscal-impact-one-big-beautiful-bill-act

6. Peter G. Peterson Foundation. (2026, February 5). Statement on CBO's 2026 Budget Outlook. Peter G. Peterson Foundation. https://www.pgpf.org/press-release/2026/02/statement-cbo-2026-budget-outlook

7. Bipartisan Policy Center. (2026, February 5). BPC Statement on CBO's 2026 Long-Term Budget Outlook. Bipartisan Policy Center. https://bipartisanpolicy.org/press-release/cbo-2026-outlook/

8. Tax Foundation. (2026, January). The Economic Impact of Tariffs in the Trump Administration's Second Term. Tax Foundation. https://taxfoundation.org/research/all/federal/trump-tariffs-trade-war/

9. Congressional Budget Office. (2025, July). The Budgetary Effects of Immigration Policy Changes in 2025. Congressional Budget Office. https://www.cbo.gov/publication/60223

10. Federal Reserve Bank of St. Louis. (2024). Sovereign Debt and Monetary Sovereignty: Key Distinctions. Federal Reserve Bank of St. Louis. https://research.stlouisfed.org/publications/economic-synopses/2024/03/20/sovereign-debt-monetary-sovereignty

11. Eichengreen, B. (2011). Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. Oxford University Press.

12. International Monetary Fund. (2025, Q3). Currency Composition of Official Foreign Exchange Reserves (COFER). International Monetary Fund. https://data.imf.org/regular.aspx?key=41175

13. Kelton, S. (2020). The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy. PublicAffairs.

14. Rogoff, K. S., & Reinhart, C. M. (2010). Growth in a Time of Debt. American Economic Review, 100(2), 573-578. https://www.aeaweb.org/articles?id=10.1257/aer.100.2.573

15. U.S. Department of the Treasury. (2026). Historical Debt Outstanding. TreasuryDirect. https://fiscaldata.treasury.gov/datasets/historical-debt-outstanding/

16. Pew Research Center. (2025, September). Americans' Views on the Federal Budget Deficit and Fiscal Policy. Pew Research Center. https://www.pewresearch.org/politics/2025/09/24/americans-views-on-the-federal-budget-deficit/

17. Organisation for Economic Co-operation and Development. (2026). General Government Debt (indicator). OECD Data. https://data.oecd.org/gga/general-government-debt.htm

18. U.S. Securities Industry and Financial Markets Association. (2026). U.S. Treasury Securities Statistics. SIFMA. https://www.sifma.org/resources/research/us-treasury-securities-statistics/

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Note: This analysis synthesizes current CBO projections with broader economic research on sovereign debt sustainability, monetary sovereignty, and fiscal policy constraints. While the United States' unique position provides significant advantages, the sustainability of current fiscal trajectories remains subject to ongoing economic and political debate.

SIDEBAR: The Underground Economy Question: Does Immigration Really Boost Federal Finances?

BLUF: While the Congressional Budget Office projects the 2021-2026 immigration surge adds $8.9 trillion to GDP, this headline figure masks serious questions about underground economy activity, tax compliance, and a fundamental disconnect between who benefits (federal government) and who pays (state and local governments).

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The Congressional Budget Office's projection that recent immigration will reduce federal deficits by $900 billion over the 2024-2034 period has become a flashpoint in the fiscal policy debate. But a closer examination of the CBO's methodology reveals significant gaps between their optimistic federal revenue projections and the fiscal reality facing state and local governments—and American taxpayers.

The GDP Paradox

The CBO estimates that the immigration surge will boost total GDP by $8.9 trillion over the next decade, primarily by expanding the labor force by 5.2 million workers. More workers produce more goods and services, immigrants consume products driving demand, and total economic output grows.

However, the CBO explicitly acknowledges a critical caveat buried in their reports: "Immigration increases total economic output, although not necessarily output per person." In other words, the economy gets bigger, but individual Americans don't necessarily become more prosperous.

More importantly for fiscal analysis, GDP growth doesn't automatically translate into government revenue if substantial economic activity occurs in the underground economy—off the books, paid in cash, and untaxed.

The Tax Compliance Gap

The CBO's own analysis reveals significant tax compliance problems within the surge population:

Lower Collection Rates: Tax compliance among recent immigrants is 15% lower for income taxes and 10% lower for payroll taxes compared to the general population, according to the July 2024 CBO report.

Limited Work Authorization: The CBO estimates that only about 50% of the surge population is authorized to work within their first six months in the United States.

Persistent Unauthorized Status: The agency projects that 40% of the surge population will remain ineligible for most federal benefit programs after ten years due to continued unauthorized resident status—meaning they're likely working off the books indefinitely.

These official CBO acknowledgments suggest their revenue projections may be optimistic. But independent research paints an even more sobering picture.

What Research Shows About Underground Employment

Heritage Foundation analysis using Census Current Population Survey data estimates that approximately 45% of unauthorized workers currently work "off the books"—receiving cash payments with no tax withholding, no payroll tax contributions, and no official employment records.

The Internal Revenue Service reports a federal tax gap—the difference between taxes owed and taxes collected—of approximately $381 billion annually as of their most recent comprehensive study. Economists estimate this has grown to roughly $500 billion per year when adjusted for GDP growth since the last IRS benchmark year.

Critically, 52% of this tax gap comes from small business underreporting of income, with cash-intensive businesses—construction, restaurants, domestic services, landscaping—representing the sectors where unauthorized immigrants are heavily concentrated.

California's Underground Economy Task Force, a multi-agency enforcement effort, documents how employers paying workers off the books save 20-30% on total payroll costs by avoiding:

• Payroll taxes (7.65% employer share)
• Unemployment insurance premiums
• Workers' compensation insurance
• Labor law compliance costs
• Overtime requirements

This creates powerful economic incentives for both employers seeking to reduce costs and workers unable to obtain legal work authorization to operate outside the formal economy.

The Federal-State Fiscal Disconnect

Perhaps the most significant methodological problem with using the CBO's analysis to claim immigration is fiscally beneficial: the agency analyzed federal finances separately from state and local government impacts—and reached opposite conclusions for each.

Federal Level: Projected Surplus

At the federal level, the CBO projects net deficit reduction of $900 billion over 2024-2034 because:

• The federal government collects most income and payroll taxes
• Federal benefit eligibility restrictions limit immigrant access to many programs
• Economic growth (even if off-the-books) generates some sales tax revenue
• The demographic benefit of younger workers paying into Social Security is immediate

State/Local Level: Documented Deficits

But in their June 2025 analysis of state and local government impacts, the CBO reached a starkly different conclusion:

"Research has generally found that increases in immigration raise state and local governments' costs more than their revenues, and CBO expects that finding to hold in the case of the current immigration surge."

For 2023 alone, the CBO calculated:

• Direct fiscal cost to state/local governments: $11.0 billion
• Potential cost including quality degradation: $9.8 billion

Largest Cost Categories:

Education: $11.0 billion in additional K-12 costs in 2023. English language learners require approximately 2-3 times the per-pupil spending of native English speakers for specialized instruction and support services. Even without increasing per-pupil funding, adding students to already-crowded schools imposes real costs through larger class sizes and strained resources.

Emergency Shelter: New York City alone spent $4.3 billion from July 2022 to March 2024 accommodating asylum seekers under existing state and local housing mandates. Massachusetts established a special commission after emergency housing costs exceeded projections. These expenditures represent entirely new budget categories for affected jurisdictions.

Border Security: Arizona's dedicated border security fund spent $300 million in fiscal year 2023 on state-level enforcement activities beyond federal border operations.

Healthcare: Emergency Medicaid covers emergency services for unauthorized immigrants regardless of immigration status. Hospital emergency rooms cannot turn away patients, resulting in billions in uncompensated care that raises premiums for insured patients and strains hospital finances.

Criminal Justice: Local jails bear costs of housing individuals in immigration detention, criminal prosecutions related to illegal entry and re-entry, and increased demand for public defenders, courts, and law enforcement services.

What the CBO Excluded

The House Budget Committee, reviewing the CBO analysis, identified major exclusions that substantially understate total costs:

Discretionary Spending: The CBO explicitly states their projections exclude discretionary appropriations, even though they note that increases in border-related discretionary spending from 2019 to 2024 "would total roughly $200 billion over the 2024–2034 period." This is a straightforward admission that $200 billion in costs don't appear in their deficit calculations.

Ten-Year State/Local Projection: While the CBO projected a federal net savings of $900 billion over the ten-year window, they did not produce a comparable ten-year projection for state and local governments. If the 2023 state/local deficit of roughly $10 billion annually continues—and likely grows—this could total $100-150 billion in aggregate state and local fiscal costs over the decade.

Quality Degradation: When schools become overcrowded, student-teacher ratios increase and per-pupil educational quality declines for all students—a real economic cost not captured by spending data alone. Similarly, increased demand on public transportation, roads, parks, and emergency services without proportional funding increases represents a diminution in public service quality.

The Demographic Benefit Is Real

To be fair to the CBO's analysis, immigration does provide a genuine demographic benefit to the United States' aging society.

By 2033, annual deaths will exceed births in the United States for the first time in the nation's history. After that point, immigration will account for all U.S. population growth, according to CBO projections.

This is particularly important for Social Security sustainability. The program's pay-as-you-go structure requires a steady flow of younger workers paying payroll taxes to support current retirees. The worker-to-beneficiary ratio has already collapsed from 16.5:1 in 1950 to 2.8:1 today, and is projected to fall to 2.3:1 by 2035.

Without immigration, this ratio would deteriorate even faster, accelerating Social Security's insolvency. Every working immigrant paying payroll taxes—even at reduced compliance rates—helps delay the trust fund depletion currently projected for 2033.

However, this demographic benefit depends on critical assumptions:

1. Immigrants work in the legal economy and pay payroll taxes
2. They earn sufficient income to generate positive net lifetime tax contributions
3. They don't receive means-tested benefits exceeding their tax payments
4. Their U.S.-born children don't disproportionately utilize public services

The evidence suggests a significant percentage of the 2021-2026 surge population fails to meet these criteria, at least in the near term.

Alternative Estimates: The FAIR Analysis

The Federation for American Immigration Reform (FAIR), an organization advocating for reduced immigration, produces sharply contrasting estimates using different methodologies.

FAIR's 2023 cost study projects that illegal immigration imposes a net fiscal burden of approximately $151 billion annually on American taxpayers across all levels of government.

Key differences in FAIR methodology:

• Includes comprehensive state and local costs across all jurisdictions
• Assumes higher rates of underground economy participation
• Includes costs of U.S.-born children of unauthorized immigrants
• Counts public education costs for all children in immigrant households
• Includes uncompensated healthcare, incarceration, and welfare program costs
• Assumes lower effective tax rates due to lower average incomes and higher non-compliance

The Institute on Taxation and Economic Policy (ITEP), which generally favors pro-immigration policies, reaches a middle ground. ITEP estimates that unauthorized immigrants currently pay approximately $11.6 billion in state and local taxes annually but acknowledges these revenues don't fully offset service costs, particularly education.

ITEP notes that if unauthorized immigrants could work legally, tax contributions would increase substantially—potentially adding $2 billion in additional federal, state, and local tax revenue over two years for a subset of the population receiving work authorization.

This suggests the fiscal impact is heavily dependent on legal status and the ability to work in the formal economy at market wages.

Following the Money: Who Benefits, Who Pays?

The fundamental problem revealed by comprehensive fiscal analysis is a mismatch between costs and revenues:

Federal government: Collects most income and payroll taxes, faces limited mandatory spending increases due to benefit eligibility restrictions, projects net fiscal gain.

State/local governments: Bear most service delivery costs (education, healthcare, public safety), collect sales and property taxes that don't keep pace with costs, experience net fiscal loss.

Legal workers: Face wage pressure in sectors with high immigrant concentration (though research shows modest effects of 2-3% wage suppression for directly competing workers), potentially reduced per-capita public service quality.

Employers: Benefit from expanded labor supply and lower wage costs, particularly those paying under-the-table and avoiding payroll taxes and labor law compliance.

Immigrants themselves: Gain substantially through access to U.S. labor markets and living standards, even at below-market wages, and through remittances can support families in home countries.

The Bottom Line

The CBO's $8.9 trillion GDP projection is mathematically correct: more workers produce more total economic output. But as a measure of fiscal sustainability or improved prosperity for existing Americans, it's misleading.

A more comprehensive accounting would show:

• Federal level: Modest net positive, but smaller than CBO projects once underground economy and discretionary costs are fully included
• State/local level: Significant net negative, with costs concentrated in border states and urban areas receiving large immigrant populations
• Combined fiscal impact: Likely close to neutral or modestly negative over the ten-year period
• Per-capita prosperity: Unclear to negative in the near term
• Long-term demographic benefit: Genuine but depends on policy choices regarding legal status, work authorization, and benefit eligibility

The most honest assessment is that immigration's fiscal impact is highly dependent on the skill level, legal status, and labor market integration of specific immigrant populations. High-skilled legal immigrants with H-1B visas working at above-average wages clearly produce net fiscal benefits. The 2021-2026 surge population, characterized by lower average education levels, higher rates of underground economy participation, and immediate public service demands, presents a more fiscally ambiguous picture.

Whether immigration ultimately helps or hurts federal finances depends less on the economics than on the policy framework: Will unauthorized immigrants remain in the underground economy indefinitely, or will policy changes enable legal work authorization and higher tax compliance? Will state and local governments receive federal assistance to offset service delivery costs, or will the fiscal burden remain entirely on their budgets?

These are fundamentally political choices, not predetermined economic outcomes. The CBO's analysis provides useful data but cannot answer the larger question of whether current immigration patterns serve Americans' fiscal and economic interests—a determination that requires value judgments about distributional effects, time horizons, and national priorities that extend beyond the agency's technical mandate.

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Sources

Congressional Budget Office. (2024, July). Effects of the Immigration Surge on the Federal Budget and the Economy. https://www.cbo.gov/publication/60569

Congressional Budget Office. (2025, June). Effects of the Surge in Immigration on State and Local Budgets in 2023. https://www.cbo.gov/publication/61464

Congressional Budget Office. (2026, February). The Demographic Outlook: 2026 to 2056. https://www.cbo.gov/publication/61735

U.S. House Committee on the Budget. (2024, July). CBO Report on Effects of the Biden-Harris Administration's Failed Immigration Policies Excludes Comprehensive Review. https://budget.house.gov/press-release/cbo-report-on-effects-of-the-biden-harris-administrations-failed-immigration-policies-excludes-comprehensive-review

Federation for American Immigration Reform. (2023). The Fiscal Burden of Illegal Immigration on United States Taxpayers. https://www.fairus.org/issue/publications-resources/fiscal-burden-illegal-immigration-united-states-taxpayers-2023

Heritage Foundation. (2013). The Fiscal Cost of Unlawful Immigrants and Amnesty to the U.S. Taxpayer. https://www.heritage.org/immigration/report/the-fiscal-cost-unlawful-immigrants-and-amnesty-the-us-taxpayer

Institute on Taxation and Economic Policy. (2016). Undocumented Immigrants' State & Local Tax Contributions. https://www.americanimmigrationcouncil.org/research/adding-billions-tax-dollars-paid-undocumented-immigrants

Internal Revenue Service. (2019). Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2011–2013. https://www.irs.gov/pub/irs-pdf/p1415.pdf

California Employment Development Department. (2024). Underground Economy Operations. https://edd.ca.gov/en/payroll_taxes/underground_economy_operations

Baker Institute for Public Policy. (2024, September). Immigration Growth: Examining the Financial Gains and Strains. https://www.bakerinstitute.org/research/immigration-growth-examining-financial-gains-and-strains

American Enterprise Institute. (2024, October). CBO Confirms Again Immigration's Economic and Fiscal Benefits. https://www.aei.org/economics/cbo-confirms-again-immigrations-economic-and-fiscal-benefits/

Federal Reserve Bank of Dallas. (2024, July). Unprecedented U.S. Immigration Surge Boosts Job Growth, Output. https://www.dallasfed.org/research/economics/2024/0702

Brookings Institution. (2026, January). Macroeconomic Implications of Immigration Flows in 2025 and 2026. https://www.brookings.edu/articles/macroeconomic-implications-of-immigration-flows-in-2025-and-2026-january-2026-update/

America's Fiscal Reckoning: How Runaway Debt Threatens National Security and Global Power

A nation that spends more servicing debt than defending itself risks ceasing to be a great power. The United States crossed that threshold in 2024—and faces a strategic crisis with no easy solutions.

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SIDEBAR: The Debt-Defense Death Spiral

When Interest Exceeds Defense Spending, Empires Fade

For the first time since World War II, the United States in fiscal year 2024 spent more servicing its national debt—$882 billion in interest payments—than on national defense at $874 billion. By 2035, the Congressional Budget Office projects interest payments will reach $1.8 trillion annually, consuming resources that could otherwise fund military modernization, weapons procurement, and force readiness.

This milestone marks what historian Niall Ferguson calls crossing the "Ferguson Limit"—the point at which "any great power that spends more on debt servicing than on defense risks ceasing to be a great power." Admiral Mike Mullen, former Chairman of the Joint Chiefs of Staff, was even more direct: the national debt represents "the single greatest threat to our national security."

But the crisis extends far beyond budgets. The United States faces a catastrophic convergence: fiscal constraints that limit defense spending, industrial atrophy that prevents weapons production at scale, supply chain dependencies on adversary nations, and the looming threat that international conflict could trigger the very financial collapse that makes sustaining that conflict impossible.

You Cannot Print Industrial Capacity

The fundamental constraint is physical, not financial. As one defense analyst noted: "You can print all the money you want, but this won't make ammo, tanks, aircraft or ships, or feed and support military operations."

Money is merely a claim on real resources—factories, skilled workers, raw materials, and production capacity. The United States has systematically dismantled these capabilities over four decades of globalization, creating vulnerabilities that monetary expansion cannot overcome.

The Munitions Crisis

In December 2025, the House Select Committee on the Chinese Communist Party conducted a wargaming simulation of a 2026 Taiwan conflict. The results were devastating:

Critical munitions ran out within days, including Long-Range Anti-Ship Missiles (LRASMs), Joint Air-to-Surface Standoff Missiles (JASSM-ER), and Taiwan's Anti-Ship Cruise Missiles. Production timelines for replacements? Approximately two years at current capacity.

Current estimates suggest U.S. forces would exhaust supplies of some critical munitions within one week of sustained combat against China. After three years of supporting Ukraine, NATO artillery shell production remains far below targets. The Army produces approximately 28,000 155mm artillery shells per month, with plans to reach 100,000 by 2025—still a fraction of consumption rates in high-intensity conflict. By comparison, Russia produces approximately 250,000 shells monthly.

The Shipbuilding Catastrophe

China's shipbuilding capacity is approximately 230 times larger than America's. One Chinese shipyard—Jiangnan Shipyard—has more production capacity than all U.S. shipyards combined.

The wargame projected U.S. naval losses would include 2 aircraft carriers, 15 large surface combatants, 3 attack submarines, and 2 amphibious ships. At current production capacity, the United States could not replace these losses.

The People's Liberation Army Navy currently fields over 370 ships, projected to reach 435 by 2030. The U.S. Navy struggles to maintain 290 battle force ships and projects reaching only 305-317 by 2035. China builds warships at roughly a 3:1 rate versus the United States.

The disparity reflects industrial collapse: U.S. commercial shipbuilding fell from 5% of global production in the 1970s to less than 0.2% today. There is no surge capacity to draw upon, as existed during World War II.

The Supply Chain Chokehold

Beyond production capacity, the United States faces critical dependencies that could be severed within days of conflict:

China controls:

• 70% of global rare earth mining
• 90% of rare earth processing
• 93% of permanent magnet manufacturing
• 80% of cobalt refining
• 60% of lithium refining
• 75% of lithium-ion battery production

These materials aren't optional—they're absolutely essential for F-35 fighter jets, Virginia-class submarines, Tomahawk missiles, radar systems, and drone motors. There is currently no heavy rare earth separation happening in the United States.

The weaponization timeline: China has repeatedly demonstrated willingness to restrict exports:

• 2010: Rare earth embargo against Japan during territorial dispute
• 2023-2024: Export controls on gallium and germanium (semiconductor materials)
• April 2025: Restrictions on seven rare earth elements critical to defense
• October 2025: Expanded controls requiring Chinese government approval for magnet exports containing even 0.1% Chinese-origin materials
• November 2025: Temporary suspension through 2026—demonstrating China's on/off switch

Even with unlimited financing, U.S. munitions production would halt within weeks of a Chinese export cutoff affecting guidance systems, precision components, and specialty materials.

The Globalized Vulnerability

Decades of offshoring created a just-in-time supply chain optimized for cost efficiency but catastrophically vulnerable to disruption. The 2023-2025 period provided a sobering preview:

Red Sea Crisis (2023-2025)

Houthi rebel attacks forced massive rerouting:

• Suez Canal traffic dropped 57% from peak levels
• Container traffic plummeted over 80% in early 2024
• Ships rerouted around Africa, adding weeks to transit times and $400,000 per voyage in costs
• China Containerized Freight Index soared 160%, with the Red Sea crisis accounting for 145% of that increase

Panama Canal Drought (2023-2024)

Climate-driven water shortages:

• Transit restrictions cut passages by nearly one-third
• Traffic fell 32% compared to prior year
• Delayed LNG shipments and manufactured goods
• Highlighted permanent climate vulnerability

The Wartime Implication

Maritime trade accounts for over 80% of global goods by volume. A total of $192 billion in trade annually (0.77% of global trade) is exposed to disruption at 24 major chokepoints.

For military operations, chokepoint disruptions can delay food and fuel deliveries to U.S. bases abroad, threatening operational readiness. Ammunition components, spare parts, and maintenance equipment flow through these same vulnerable sea lanes.

In a Taiwan scenario, adversaries would target these routes. U.S. forces could face critical shortages even if domestic production existed—because production depends on materials that can't arrive.

The Fiscal-Industrial Trap

The interaction between fiscal constraints and industrial capacity creates a self-reinforcing crisis:

Current peacetime challenges:

• Continuing resolutions: DOD operated under CRs in 45 of the past 49 years, causing contract delays, cost overruns, and training exercise cancellations
• 2013 sequestration: Cut $54 billion, resulting in cancelled Army training, 12 closed combat squadrons, and delayed procurement
• Budget uncertainty: A facility sustainment contract more than doubled in cost due to CR-related delays in 2024

Wartime requirements would dwarf these constraints:

A Taiwan conflict would require:

• First year: $250-500 billion in emergency supplemental spending
• Annual sustained: $500-900 billion above baseline defense
• Five-year total: $2.5-4.5 trillion in additional costs

But who finances this borrowing when:

• China stops buying Treasuries and likely dumps holdings
• Japan faces its own security crisis with 260% debt-to-GDP
• Europe deals with energy shocks and defense increases
• Emerging markets face capital flight and currency crises

The Dollar's Fragile Hegemony

The ultimate feedback loop: The conflict that requires massive deficit spending is precisely the event that could collapse foreign willingness to finance that deficit.

The Weaponization Backfire

Since 1945, the United States has enjoyed "exorbitant privilege"—the ability to borrow in its own currency and have foreign nations hold those debts as reserve assets. But aggressive weaponization is eroding this advantage:

February 2022: The U.S. froze approximately $300 billion in Russian reserves—following similar actions against Libya, Iran, Venezuela, and Afghanistan.

The message to the world: Dollar reserves are hostage to U.S. foreign policy. Any nation facing potential sanctions must now consider dollar assets as liabilities rather than safe stores of value.

The Data: Erosion in Progress

Foreign Treasury holdings declining:

• Foreign investors owned over 50% of Treasuries during the 2008 crisis
• That share has fallen to approximately 30% as of early 2026

Dollar's reserve share at two-decade low:

• Peaked at over 70% in early 2000s
• Fallen to approximately 58% as of 2025

China's dramatic shift:

• China held 40% of reserves in U.S. Treasuries circa 2010
• That figure has fallen to less than 1% by 2025

Central bank gold surge:

• Emerging market central bank gold holdings doubled from 4% to 9% of reserves in a decade
• Led by China, Russia, and Turkey
• Gold prices forecast to reach $4,000/oz by mid-2026

Alternative Financial Infrastructure

What makes current de-dollarization more serious is the emergence of alternative payment systems:

China's CIPS: As of January 2026, 1,467 indirect participants across 119 countries, linking 4,800 banks in 185 countries, with daily transactions of ¥9.6 trillion growing at 65%+ annually.

Local currency agreements: Brazil-China trade (March 2023), ASEAN framework for local currency settlement (May 2025), India's UPI expanding across Southeast Asia.

BRICS New Development Bank: Target of 30% lending in local currencies by 2026.

While a unified BRICS currency remains unlikely due to internal disagreements (India publicly opposes it), the infrastructure for dollar-independent transactions is being built.

The Wartime Financing Death Spiral

Imagine a Taiwan conflict escalating tomorrow. The self-reinforcing collapse:

Week 1: China announces suspension of Treasury purchases; hints at sales

Month 1: Treasury auctions show weak demand; yields spike 200 basis points; dollar falls 10%

Month 2: Fed begins "emergency liquidity operations" (quantitative easing); inflation fears surge; gold hits $5,000/oz

Month 3: Foreign central banks accelerate diversification; BRICS enhances local currency settlement; oil producers begin accepting yuan

Month 6: Dollar has lost 25% of value; import costs soaring; critical materials shortages worsening; inflation approaching 10%

Month 12: U.S. forced to choose between continuing military operations and stabilizing currency; political crisis as war costs clash with economic collapse

The United States might "win" militarily only to find it has lost its economic superpower status—a Pyrrhic victory leaving America strategically weaker than before conflict began.

The Fed's Impossible Trilemma

Option 1 - Monetize the debt: Print money to buy Treasuries

• Consequence: Triggers inflation, eroding dollar confidence
• Defense impact: Import costs soar for critical materials

Option 2 - Raise interest rates: Attract foreign capital through higher yields

• Consequence: Interest costs explode ($350 billion per 1% increase on $35 trillion)
• Defense impact: Debt spiral forces spending cuts during wartime

Option 3 - Financial repression: Force domestic holders to buy Treasuries

• Consequence: Undermines financial system, triggers capital flight
• Defense impact: Economic chaos undermines war support

Why This Time Is Different

World War II financing worked because:

• U.S. was net creditor to the world
• Starting debt only 44% of GDP
• Massive domestic industrial base to mobilize
• Allies depended on U.S. financially, not vice versa

Taiwan scenario 2026 faces:

• U.S. is net debtor by $20 trillion (70% of GDP)
• Starting debt already 101% of GDP
• Adversary holds significant dollar assets to weaponize
• Industrial base atrophied and dependent on adversary
• Foreign confidence in dollar already eroding before conflict

The British Precedent

This mirrors Britain's fate after World War II. Britain "won" the war but emerged financially exhausted, forced to:

• Accept U.S. loans with stringent conditions
• Dismantle its empire
• Ration food until 1954
• Cede global leadership to America
• Devalue the pound repeatedly
• Accept secondary power status

The difference: Britain entered the war as a great power and was broken by the cost of victory. America risks being broken by debt before the conflict even begins.

Britain in 1945 was victor on borrowed resources. America in 2026 is pre-exhausted, with the bill for a war not yet fought attached to a currency whose continued acceptance cannot be assured.

No Solutions, Only Painful Choices

This is not a problem with a solution—it is a predicament with only painful choices:

Fiscal consolidation: Requires tax increases or entitlement cuts—political suicide Industrial rebuilding: Requires $trillions and 10-20 year timelines—too slow Supply chain reshoring: Requires environmental deregulation and massive investment Alliance burden-sharing: Allies are also fiscally constrained

All require beginning immediately and persisting for decades. Current trajectory suggests these choices won't be made until crisis forces them, by which point costs will be catastrophic and options severely constrained.

Conclusion: Strategic Insolvency

The United States faces strategic insolvency—the inability to sustain military commitments due to fiscal constraints, industrial incapacity, and supply chain vulnerability.

It cannot afford to fight a major war. It cannot produce the weapons needed at the scale required. It cannot access the materials to make those weapons. It cannot reliably transport them. And it cannot finance the conflict without triggering a currency crisis that makes sustaining operations impossible.

The most dangerous aspect: Attempting to address the strategic threat through military conflict triggers the fiscal crisis. The very act of fighting could destroy the financial system that makes American power possible.

As Ferguson's historical research demonstrates, when great powers spend more on debt service than defense, they typically cease to be great powers. The mechanism is straightforward: Debt service draws scarce resources toward itself, creating a fiscal black hole that reduces defense spending, constrains modernization, forces painful tradeoffs, undermines alliance commitments, and signals fiscal weakness to adversaries.

The United States crossed the Ferguson Limit in 2024. Ferguson notes it is "very rare but not unprecedented" for a great power to return to the right side of this threshold—but it requires dramatic fiscal consolidation or exceptional economic growth, neither of which appears likely.

Admiral Mullen's warning was prescient: the greatest threat to American national security may not be China's military capabilities, but America's fiscal incapacity to respond to them.

The debt crisis is not merely an economic problem—it is fundamentally a national security crisis that constrains every aspect of military power. And unlike previous debt buildups during major wars, this debt was accumulated in peacetime, leaving no fiscal space for the massive borrowing a major conflict would require.

The United States of 2026 resembles Britain in 1945: exhausted not by victory, but by the prospect of conflict it can neither afford to fight nor afford to avoid.

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[Sources consolidated in main article]