Writing at Vox in June 2016, liberal commentator Matt Yglesias argued that low-interest rates meant governments were practically obligated to borrow more and run bigger deficits.
“The right course of action is really pretty obvious: If the international financial community wants to lend money this cheaply, governments should borrow money and put it to good use,” he wrote.
“Good use” could mean different things to different political factions, he acknowledged. Yglesias favored more infrastructure spending, but he also suggested that taking on more debt could be used to finance a broad-based tax cut. The specifics might differ from place to place, but as long as there was cheap money to be had on the international bond markets, loading up on debt was a means to a positive end. “While it lasts everyone could be enjoying a better life instead of pointless austerity,” he concluded.
I don’t point this out to pick on Yglesias. He was—as he often has throughout a successful and productive career—serving as a sort of avatar for the liberal political consensus on an important issue. With deficits falling and interest rates at all-time lows, borrowing seemed to make both fiscal and monetary sense on the political left—which was frustrated by the political constraints (that’s what Yglesias meant by “pointless austerity”) Republicans had placed on then-President Barack Obama’s second term. Sure, the economy was doing pretty great in the mid-2010s, but cheap borrowing meant it could be doing even better.
Conservatives didn’t share this rhetorical perspective in 2016, but soon enough they would reveal that they more-or-less agreed. On the campaign trail, Donald Trump promised, unbelievably, to pay off the entire national debt within eight years. Once in office, however, he set about adding to it—with the gleeful agreement of Republicans in Congress, who hiked spending, cut taxes, and let additional borrowing fill the gap. During Trump’s four years in office, the national debt grew by nearly $8 trillion, and you can only blame the COVID-19 pandemic’s emergency spending for about the last $3 trillion of that total.
“One of the reasons I do feel comfortable with us spending all this money is because interest rates are very low,” then-Treasury Secretary Steve Mnuchin said in 2020. “And we’re taking advantage of long-term rates.”
When Yglesias wrote that column for Vox in 2016, the federal government owed about $19 trillion. Today, it owes more than $33 trillion, and we just added another $2 trillion in a fiscal year with no major national emergencies.
In short, the federal government followed Yglesias’ advice. But it might be more accurate to say it went along with what was clearly a bipartisan consensus formed in the mid-2010s: that borrowing was cheap, debt was easy to afford, and deficit spending allowed everyone to enjoy “a better life” with none of the downsides of austerity.
Unfortunately, the downsides have arrived.
The yields on U.S. Treasury bonds are now hitting levels not seen in decades. The 10-year Treasury bond is nearing 5 percent, while the 20-year bond has already crossed that threshold—and some analysts expect higher yields to be coming, CNBC reported Tuesday.
Why does that matter? “We took out a mortgage thinking we’d be paying 2%, but now we’re paying 5%,” Marc Goldwein, director of policy at the Committee for a Responsible Federal Budget (CRFB) wrote on X (formerly known as Twitter) on Tuesday.
Unlike most mortgages, which have fixed interest rates, much of the U.S. government’s debt is tied up in short-term bonds which periodically “roll over” into new bonds with updated interest rates. As a result, higher interest rates mean higher interest payments—and those funds come directly out of the federal budget, leaving less revenue for everything else the government might aspire to do, whether funding welfare programs or buying more fighter jets.
“That debt, borrowed at low rates, is now being rolled over into Treasuries paying interest rates between 4.5 and 5.6 percent,” the CRFB explained last month. “Though borrowing seemed cheap during those periods, policymakers failed to account for rollover risk, and we are now facing the cost.”
Interest payments on the debt will be the fastest-growing part of the federal budget over the next three decades, according to the Congressional Budget Office’s (CBO) projections. In the shorter term, interest payments are set to triple by 2033, when they will cost an estimated $1.4 trillion—a total that will only grow higher if more unplanned borrowing takes place before then, or if interest rates rise higher than the CBO expects.
That’s a huge bill for future taxpayers, and it’s one that won’t get them anything for their money in 2033. It’s simply paying for the things the government did in the past.
Among other things, the CBO warns that paying for all that debt will “slow economic growth” and “elevate the risk of a fiscal crisis.”
In other words, all that borrowing didn’t ensure that people could enjoy “a better life.” It meant that things could be temporarily better, but that the bill would eventually come due. As it always does.
There was available evidence that rampant borrowing would not be costless—and even that growing deficits might push interest rates higher, creating the exact mess in which we now find ourselves. In a 2014 paper, the CBO economist warned that higher debt loads, even when borrowed at low-interest rates, would result in “lower [economic] output and lower national saving lead to a lower standard of living.” Another CBO working paper published in 2019 found that every one-percentage-point increase in debt as a share of gross domestic product (GDP) would add more than 2 points to interest rates.
Those potential consequences were ignored by the political class.
Two months after Ygelsias argued for more borrowing in Vox, Paul Krugman made essentially the same point in The New York Times, writing that “these are the best of times for the world’s most ravenous borrower, the United States of America.”
Yes, the best of times. And now, the worst.
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