The $30T sprint toward deficit disaster
There is an exception to the federal government’s general inability to accomplish anything briskly. It drove the national debt past $30 trillion this past week, which only two years ago it had not been expected to accomplish until 2026.
Defenders of the government’s fiscal performance say: Who could have predicted the pandemic? But that is the point — prudent people expect the unexpected and plan risk management accordingly. Instead, today’s deficit doves are doubling down on their hubris, asserting (in the skeptical words of the Manhattan Institute’s Brian Riedl) “that this time they can predict interest rates decades in advance.” The average interest rate on government borrowing has fallen from 8.4% to 1.4% since 1990, a decline economists did not forecast but which many now forecast far into the future.
The soaring nominal interest rates of the 1970s were largely unanticipated by economic forecasters and Wall Street, as was the collapse of the housing bubble that triggered the 2008 recession. Nevertheless, such supremely confident experts foresee low yields on 10-year Treasury bonds until 2050. However, a rate of even just 5% — which Washington was paying in 2008 — combined with merely modest new federal spending, would push the debt toward 300% of gross domestic product in three decades.
Riedl’s “How Higher Interest Rates Could Push Washington Toward a Federal Debt Crisis” requires only a one-word edit: replace “could” with “will.” Today’s government debt is more than 100% of GDP (161%, if state and local debt is included), and the Congressional Budget Office sees more than 200%, anticipating $112 trillion in deficits under current law — no new tax cuts, no new spending programs — over the next three decades. Even on these unreasonable assumptions, by 2051 interest on the debt will be the largest federal expenditure, consuming almost half of federal tax revenue.
Demography — the aging and longer-lived U.S. population — is the predictable destiny for Social Security and Medicare, the principal drivers of deficits. Riedl: “Over the next three decades, the costs of these programs will exceed their dedicated revenues (such as payroll taxes and senior premiums) by approximately $20 trillion for Social Security and $47 trillion for Medicare.” This means huge infusions of general revenues, and $45 trillion in increased interest costs.
Unlike homeowners, who can lock in fixed-rate 30-year mortgages, “Washington,” Riedl says, “overwhelmingly relies on short-term borrowing, with an average maturity of 69 months. Consequently, if interest rates rise at any point in the future, nearly the entire national debt will roll over into those higher rates within a decade.”
High rates mean higher borrowing costs, which mean higher annual deficits, which mean more borrowing: a vicious circle. And even an interest rate of just 3% on debt at 250% of GDP would siphon up approximately 40% of tax revenue. Inflation amounts to repudiation, paying debts in devalued dollars, and as debt increases, so does the government’s incentive to choose inflation.
Just one year before the pandemic became progressives’ excuse for spending sums they think justice demands, Republicans ran a nearly $1 trillion deficit with the economy growing and at full employment. Although congressional Democrats are by conviction even more profligate than Republicans are for political convenience, Republicans are more delusional, or pretend to be, about the possibility of restraint.
The Brookings Institution’s Robert P. Beschel Jr., writing in National Affairs, notes that nine months ago the House Republican Study Committee — supposedly the most conservative House members — proposed a budget. It called, Beschel says, for “deficit reductions of nearly $12.5 trillion over the next decade without raising taxes — in fact, the RSC proposes another $1.9 trillion in tax cuts,” reaching a balanced budget by 2026 and reducing the national debt to 75% of GDP. How? By a slew of politically inconceivable deep cuts to discretionary domestic spending, and cutting eligibility for Medicare, Medicaid, Social Security and the Children’s Health Insurance Program, and repealing significant parts of the Affordable Care Act. While the RSC was perpetrating this performative gesture, why didn’t it also propose requiring lobsters to grow on trees?
This past week, as Washington passed the $30 trillion mark, Washington’s National Football League team, formerly the Redskins, renamed itself the Commanders. It disregarded this column’s suggestion that the team should be called the Continuing Resolutions. This would have proudly embraced the durable bipartisanship that — never mind the surface rancor — defines today’s national government: a bipartisan aversion to budgeting and a plucky refusal to be inhibited by any scarcity of revenues relative to political appetites.
George Will’s email address is firstname.lastname@example.org.