In the early 1990s, the Japanese economy seemed invincible. Dubbed the “Japanese miracle,” growth exploded as housing and stock markets reached historic highs. Businesses grew aggressively and credit flowed freely, creating the illusion of unlimited prosperity. However, this boom was due to speculative bubbles and unsustainable debt levels. When the bubble burst in 1991, Japan entered a period of stagnation now known as the “lost decade,” marked by deflation, mounting debt and sluggish growth that took years to overcome. The recent American economic boom also has some similarities. America voted for a new president. However, the president will face a significant economic challenge.

Upon closer analysis, the so-called US economic boom is a classic case of distorted, debt-fueled growth that may prove unsustainable. Although GDP growth has averaged nearly 3% for nine quarters, this expansion is fundamentally unbalanced and has the characteristics of a “Kaldorian” imbalance, in which increased demand driven by affluent consumers and the concentration of profits companies distort growth. The poorest 40 percent of earners account for just 20 percent of total consumption, while the richest 20 percent account for 40 percent – ​​a record gap according to Oxford Economics. This concentration of purchasing power aligns with the Keynesian theory of income disparity, dampening aggregate demand because a large portion of the population lacks discretionary purchasing power, thereby weakening the multiplier effect of consumption.

These structural weaknesses are further compounded by the unprecedented increase in public debt, which has jumped by $17 trillion over the past decade, reflecting the “Kalecki-Levy equation” that links rising deficits to increasing corporate profits. In this framework, public borrowing supports corporate profits by replacing weak private demand, thus promoting an artificial balance in the short term. The federal deficit has increased to more than 6 percent of GDP, with government spending the main driver of economic activity. This dynamic aligns with Minsky’s financial instability hypothesis, which states that reliance on debt-financed growth amplifies financial fragility.

Additionally, the U.S. stock market reflects an unsustainable concentration of capital, with the 10 largest companies accounting for 36 percent of total market capitalization, representing a peak in concentration since data began in 1980. This centralization of corporate power hinders the competitive dynamics of the market. reinforcing economic bifurcation and decreasing innovation – a problem well documented in the theory of monopolies and oligopolies. Meanwhile, foreign capital inflows, expected to reach $350 billion this year, are further inflating valuations, creating a situation reminiscent of the “safe asset paradox,” in which demand for U.S. assets keeps the dollar strong but promotes complacency in the management of structural risks in fiscal policy.

On the current trajectory, the United States risks what economic historian Charles Kindleberger has called “imperial overexploitation,” where rising debts would eventually strain the fiscal capacity to maintain dominance. As bond markets began to punish fiscal profligacy globally, including in the UK and France, strong demand for dollar-denominated assets protected the US – temporarily. However, rising interest rates reflect growing market skepticism, suggesting that this artificial growth, supported by growing deficits, may soon run into the limits of sustainability. This trajectory suggests that the next administration could face the destabilizing effects of a heavily indebted economy on the verge of exceeding its fiscal limits, illustrating the inherent risk of relying on debt as a substitute for organic, broad-based economic expansion.

For the new administration, a conservative fiscal approach should emphasize restoring fiscal discipline and reducing the federal deficit to support long-term economic stability. This could start with a legal cap on discretionary spending, aligning it more closely with GDP growth to avoid uncontrolled expansion. Additionally, gradual reductions in non-essential spending – particularly in areas with diminishing returns – would help stabilize public finances. A conservative approach to entitlement reform could involve adjusting benefits based on demographic trends without compromising essential services, ensuring that programs like Social Security and Medicare remain viable without imposing excessive burdens on taxpayers .

It is also essential to promote economic growth through targeted tax incentives. The administration could prioritize tax cuts or credits for capital investments that boost productivity in critical manufacturing, technology and infrastructure sectors. Simplifying the tax code and reducing corporate tax rates could attract more domestic and foreign investment, thereby boosting job creation and strengthening the country’s economic base. At the same time, expanding tax-advantaged accounts or deductions for private-sector R&D and job training would encourage businesses to invest in workforce development, thereby addressing productivity concerns without government spending direct.

The administration could focus on regulatory reforms to foster a business-friendly environment while maintaining necessary oversight. Streamlining regulations, particularly in sectors like energy and transportation, could reduce compliance costs and promote private sector growth. Additionally, revising certain environmental and financial regulations to reduce red tape would encourage domestic energy production and enhance the stability of financial markets. A renewed focus on pro-growth policies, with limited but effective regulation, would help stimulate private investment, support job creation and lay the foundations for sustainable economic expansion while limiting the role of the state.

Finally, emphasis should also be placed on institutional reforms. Institutional reforms can improve U.S. economic efficiency by modernizing government operations, as research consistently shows that streamlined and transparent institutions promote financial stability and growth. Studies by Alesina and Perotti (1996) emphasize that effective institutions reduce budgetary waste and enhance credibility, thereby promoting a stable investment climate. The government could reduce administrative costs and improve the speed of service delivery by digitizing federal agencies and implementing process re-engineering. Furthermore, addressing bureaucratic fragmentation through stronger interagency coordination – addressing what Olson (1982) calls institutional sclerosis – could reduce duplicative efforts and improve policy cohesion.

Additionally, implementing accountability measures such as real-time monitoring of public spending and performance indicators, as noted by Mauro (1995) and World Bank findings, would enhance transparency and public trust . These evidence-based reforms create a leaner, more agile government that can support economic dynamism without excessive bureaucratic burdens.

Aditya Sinha (X: @adityasinha004) is Officer on Special Duty, Research, Economic Advisory Council to the Prime Minister. The opinions expressed in the article above are personal and solely those of the author. They do not necessarily reflect the opinions of Firstpost.

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