How I learned to start worrying and hate the deficit | It’s time for liberals to wake up about the national debt

# The debt debate during the Obama administration

> I graduated college into the maw of the Great Recession and watched in frustration as Washington became prematurely consumed by deficit-reduction mania, despite the depressed state of our economy. (That video of Simpson-Bowles commission member Alice Rivlin doing the Harlem Shake is burned permanently into my brain.)

> Back then, I eagerly argued that Japan’s ability to shoulder a vast national debt suggested that the U.S. wasn’t in any immediate danger (which it wasn’t), that government spending doesn’t really become a problem until it starts generating inflation (which was nowhere to be seen), and that anybody claiming the U.S. was about to face a crisis like Greece was economically illiterate (which they were).

> One of my big fears about Biden in 2020 was that he’d too eagerly return to his old deficit-hawk ways when the economy was still fragile; my main hope in 2021 was that the old guy’s administration would ignore the haters and go big. (I got my wish, for better or worse.)

> But times change and so do Treasury rates. The fact that interest payments on federal debt have doubled as a share of the economy is certainly fueling some of my new concern, as is the effect of watching Donald Trump grow the deficit by making mincemeat of the income tax. The bottom line is that, lately, I’ve been starting to feel anxious that, even if it’s decades from now, conservatives are going to successfully starve the beast, and we’ll find ourselves with a political choice between massive cuts to the welfare state or economic breakdown.

# Why does anyone fret about debt, anyway?

> Mainstream economists point to at least a couple of reasons. First, excessive government borrowing is theoretically supposed to weigh down the economy, a force known as “crowding out.” As Washington tries to sell more bonds, investors will demand ever-higher yields in return for pulling their money from other perfectly good private assets, like stocks or corporate debt. That means everyone from big corporations to home buyers will face higher borrowing costs, leading to less investment and chilling growth. This dynamic is a big factor in forecasts you see from the Congressional Budget Office (CBO) and private think tanks.^1

> In an absolute worst-case scenario, debt could lead to a bona fide fiscal crisis. That’s just math: If the interest rate on government debt starts to outstrip a country’s economic growth rate, debt can start stacking up infinitely, until you owe payments larger than the size of the economy (pull out a spreadsheet and try doing the math yourself; I swear it’s fun). At that point, the only options are to print money and brave the cosmic heat of inflation, massively cut spending and raise taxes, or default. If investors start to suspect such a spiral is underway, they might start dumping government bonds to avoid being left holding the bag.^2

> Aside from the cranks hawking crypto on Twitter, nobody really thinks we’re on the brink of fiscal armageddon. But there is some speculation about whether Trump’s deficits might start leading to higher long-term interest rates and economic crowding out, in part because there’s been some weak investor interest in recent Treasury auctions (that’s made the likes of JPMorgan boss Jamie Dimon and former Trump economic adviser Gary Cohn nervous). If the Fed starts cutting soon, and U.S. government bond yields and mortgage rates stay stubbornly high, we’ll know there’s an issue.

> But mostly, people sweat the debt because of the picture 20 or 30 years down the line. The CBO projects that debt held by the public will rise from around 100% of GDP to 156% by 2055, with interest payments eating up an ever-larger share of the economy. Those changes are driven by the aging of our population, which will simultaneously drive up the costs of programs like Medicare and Social Security and slow the growth of the workforce. Starting in the 2040s, the government’s number crunchers expect that interest rates on our obligations will start to consistently outstrip economic growth, putting us on a path to, well, the bad place.

# The boy who cried wolf

> The problem with these kinds of forecasts is that they rest on many layers of assumptions that may not come true. What’s more, some of the worst predictions about the effects of debt have failed to materialize in the U.S., which tends to give this whole topic a “boy who cried wolf” vibe.

> Take crowding out. The empirical evidence that this was ever a serious problem has always been mixed, at best. Then the Great Recession hit, we borrowed massively to cope, and rather than rise, interest rates hit rock bottom. Instead of worrying that debt was going to crush the private economy, big-name economists like Larry Summers began theorizing that we were entering a period of “secular stagnation” with perpetual low growth and low interest rates. As a result, he argued that governments would need to run permanently higher budget deficits just to give the economy a pulse.

> It hasn’t helped that deficit hawks often wildly overstated the strength and certainty of their case. The most notorious example remains the way deficit scolds wielded the work of Kenneth Rogoff and Carmen Reinhart during the Obama era. In a high-profile paper, the two star economists found that countries with debt-to-GDP ratios of 90% or more tended to experience slower growth, which led some pundits and politicians to claim we were speeding toward some sort of economic cliff.

> That kind of talk quieted down thanks to an embarrassing controversy when a group of researchers looked at the underlying data and discovered that these findings were driven by a spreadsheet error. But the reality was that the paper had never shown a causal relationship between debt and growth; it was always pure correlation. And there was plenty of reason to think that many countries were borrowing more because their economies were weak, not vice versa. Rogoff and Reinhart had been fairly explicit about this, but the nuance tended to get lost in the public discourse.

# What we do know

> The reality is that the future of the debt, and its impact on the economy, involves a lot of educated guesswork about distant probabilities. In that sense, it’s a little bit like climate change, except without the obvious near-term signs of crisis like intensifying wildfires or deadly summer heat waves. The worst we get is a slightly undersubscribed Treasury auction.

> A recent paper presented at the Federal Reserve’s Jackson Hole conference suggested that, depending on your assumptions, it could plausibly be 50 years before the ill effects of government borrowing really begin to kick in. But once the bill comes due, it could be steep.

> The study probes two questions: Why haven’t America’s rising debt loads caused interest rates to rise much higher already? And how much more debt can we add before they do start to rise?

> The first answer is fairly straightforward: Interest rates have stayed manageable despite our prodigious borrowing because demand for U.S. government debt has grown faster than supply. The most important reason why has been our aging population; on average, senior citizens tend to hold much larger savings than the young, so as society grays, the market for assets like Treasury bonds grows. (This also helps explain why Japan has been able to keep trucking despite its 250% debt-to-GDP ratio.)

> That state of affairs will last for a very long while, but not forever. By 2075, the authors project that the population will be old enough, and the deficits driven by Medicare and Social Security will be large enough, that the government’s need to borrow will outstrip the growth of demand for Treasury bonds. As a result, interest rates will begin to jump, and by 2100 we could be looking at catastrophic debt levels.

> The U.S. could stabilize its debt after that demographic tipping point. But doing so would require tax hikes and spending cuts equal to 12% of GDP. For context, we currently collect under 17% of GDP in taxes — roughly $4.9 trillion. (If we’re willing to make that kind of a sacrifice, we could carry debt equal to 250% of GDP without higher interest rates all the way through 2100).

> This is, of course, just one study. It’s not gospel — some fiscal policy experts I know have already raised eyebrows at the paper’s more dramatic numbers. Lots of regular readers would look at results like this and decide to let their grandkids worry about the fallout, since we’ve got bigger fish to fry right now. To me, it’s a reminder of Ernest Hemingway’s line in The Sun Also Rises when one character asks the other “How did you go bankrupt?” “Two ways,” his interlocutor responds. “Gradually, and then suddenly.”

> Making matters worse, President Trump’s agenda is almost certainly moving up the date of any potential debt reckoning. Even if Trump’s tariffs ultimately survive in court, the administration’s tax and spending policies are expected to increase the deficit. Meanwhile, its seemingly successful efforts to crush immigration will make our demographic crisis worse, leaving us with fewer young workers to support our rapidly growing number of retirees.

> The future is always hard to predict. But insofar as we can take steps to lower the risk of a crisis without causing serious harm now, we should.

# What is to be done?

> First, liberals need to fight for immigration, not just as a matter of national values, but as a matter of fiscal sanity. As that recent Jackson Hole paper shows, **our future budget challenges are to a large extent demographic challenges**, and the more young workers we can bring in, the further off we can push a breakdown.^3

ran out of characters but I just care about immigration anyways so whatever 😎