Opinion | America Is Writing Checks That Mere Optimism Won’t Cover

By Equipo
8 Min Read

Over the past few decades, in a surge of bipartisan national self-confidence, the federal government has borrowed a lot of money, sometimes in response to national emergencies and sometimes to do the things people thought were worth doing. We gave ourselves permission to incur all this debt because interest rates were low and many people assumed that things would stay that way, so the costs of carrying that much debt wouldn’t be too onerous.

Unfortunately, that assumption turned out to be incorrect. Interest rates have risen. According to The Wall Street Journal, America is expected to spend $870 billion, or 3.1 percent of gross domestic product, this year on interest payments on the federal debt. According to the Committee for a Responsible Federal Budget, the government will spend more on interest payments than on the entire defense budget. Within three years, if interest rates remain high, payments on the debt could become the federal government’s second-largest expenditure, behind Social Security.

When money is tight, as it is now, government borrowing competes with private borrowing, driving interest rates up for everybody. A 2019 Congressional Budget Office study found that every 10 percent increase in the debt-to-G.D.P. ratio results in an increase in interest rates of two-tenths to three-tenths of a percentage point. That makes voters miserable, as they are now, because it’s more expensive to, say, get a mortgage or some other kind of loan.

It makes government accountants miserable because the very act of borrowing money to pay off debt can drive interest rates higher and make the prospect of paying off debt even more expensive. You have to worry about the long-term nightmare possibility of a debt spiral, in which you have to borrow and borrow to service the debt while the act of borrowing itself makes paying off the debt more unaffordable.

Pretty soon, you’re staring at Ferguson’s Law. This is the principle enunciated by the historian Niall Ferguson that any nation that spends more on interest payments on the debt than on military spending will slip into decline. It happened to Hapsburg Spain, the Ottoman Empire, the British Empire and prerevolutionary France. Will it happen to us?

You don’t have to get to these nightmare scenarios to see all the problems that can be caused by excessive federal debt. All that fiscal stimulus can cause inflation, as it is doing now. Public sector borrowing can crowd out private sector borrowing, thus slowing the economic growth you need to pay off the debt.

The debt burden also constrains future administrations, which have to worry so much about paying off the debt they are less able to invest in programs that might increase growth, reduce child poverty, educate children, house people or respond to emergencies. Today’s high interest rate environment is already hammering, say, the housing construction industry and making housing even more unaffordable.

The United States continues to borrow all this money even though classical Keynesian theory tells us to borrow in times of recession but commit to debt reduction in times like these, when growth is good.

We continue to go deeper into debt even though the storm clouds are gathering around the world. The axis of resentment — China, Russia and Iran — is on the march, making the world a more dangerous place and possibly necessitating a surge in military spending and a rapid need to beef up our military manufacturing infrastructure.

We continue to go further into debt even though the baby boom generation is aging, making programs like Social Security and Medicare more and more costly. The federal government already spends $6 on senior citizens for every $1 on children, which is not exactly investing in the future.

Personally, I’m not bothered that we spent all that borrowed money during Covid. We clearly needed to, and we’ve emerged from the pandemic with a dynamic economy. My concern is that deficit reduction is not high on either party’s agenda right now. Donald Trump has proposed whopping tax cuts. The Biden administration has an ambitious second-term agenda that would involve everything from industrial policy to student debt forgiveness to growth through fiscal stimulus.

Even if a president proposed debt reduction (as Biden has to some degree), a polarized Congress probably couldn’t pass it. As the budget expert Maya MacGuineas has pointed out, these days Congress favors giveaways over budget choices. It is infinitely more difficult to get bipartisan majorities to cut spending or raise taxes on the bulk of Americans than it is to get it to spend with borrowed money.

Ultimately responsibility lies with the voters. In the 1990s, Americans saw how high government debt was raising their interest rates. Voters put tremendous pressure on politicians to get the fiscal house in order. Along came Ross Perot and deficit reduction plans under Presidents George H.W. Bush and Bill Clinton. Voters today have not yet made that connection. When they do, I suspect the political landscape will shift massively.

Maybe none of the problems I’m describing will get worse. Maybe interest rates will fall (though they have remained stubbornly high). Maybe economic growth will outpace interest rate increases, making the debt more affordable. Maybe the government will be able to pour massive stimulus into the economy without leading to continued inflation and high rates.

But this is a gigantic gamble. It’s a gamble that rosy scenarios about future inflation and interest rate declines will come to pass. It’s a gamble that nothing unexpectedly bad will happen in the world. It’s a gamble that our leadership class is so good at what it does that we can continue to walk along the cliff’s edge without any danger of falling over.

At some point all this self-confidence begins to look like hubris or a rationalization for: We want to spend the future’s money on ourselves. Prudence is a boring virtue, but the prudent course is to get the United States on a more sustainable course. As the meme artists on the internet might say (in slightly more colorful language), you mess around with debt, and sooner or later you’ll find out.

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