Time to freak out about the national debt

The longstanding bill is coming due.

A trader pauses at his desk ahead of the closing bell on the floor of the New York Stock Exchange. (Photo by Drew Angerer)

Last week, interest rates on long-term U.S. government debt reached their highest levels since before the Great Recession of 2008.

How exactly inflation, interest rates, and the budget deficit relate is unfortunately one of those technical economics questions that experts disagree on. Trying to puzzle through the relationships here seems unlikely to persuade anyone or sell newsletter subscriptions.

Specifics aside, however, everyone does agree that they are in some way intertwined. And so far this year, they’re all moving in the wrong direction more or less in tandem.

The increase in government borrowing costs mechanically pushes up spending, which makes the budget deficit worse. A rising budget deficit generates inflationary pressure. And inflation drives up interest rates since investors demand more compensation.

The proximate cause of last week’s bond market action, in which rates rose sharply, was almost certainly the war in Iran delivering an inflationary impulse to the economy rather than anything that happened on the fiscal side. But it clearly does not help that rich countries all around the world not only borrowed extensively during the pandemic, but have done very little to consolidate their balance sheets since then. Britain is probably the clearest example.

Amidst the meltdown of Keir Starmer’s premiership, the rise of Reform on the right and the Greens on the left, and everything else that’s happening in British politics, nobody’s calling for a new program of fiscal austerity. And you see something similar in France and the United States and many other places: There’s a new populist right that is very focused on immigration and relies on the votes of older, less-educated people, and there’s also an insurgent left calling to expand state spending commitments. Nobody wants to spend political capital making the numbers add up!

But the problem is growing severe, to the point that bond market reactions to policy announcements have become a major factor in British policymaking.

We aren’t quite there yet in the United States, but we’re pretty close, and it’s high time that policymakers start taking this seriously.

And a key point is that while ideological progressives hate the idea of fiscal discipline, Democrats have traditionally benefited from debates over the deficit because those debates tend to highlight their most popular ideas and Republicans’ most unpopular priorities.