The Political Class Has Consistently Ignored Warnings of Fiscal Doom. Now Americans Are Paying the Price.
Warnings of inflation and rising interest rates have long been tied to high and rising debt levels.
For well over a decade, the Congressional Budget Office (CBO) has been issuing stark warnings about the nation's current debt levels and the long-term buildup of debt they portend.
The ominous opening paragraph to the CBO's 2010 report on the nation's long-term budget outlook, for example, noted that "large budget deficits have caused debt held by the public to shoot upward; the Congressional Budget Office (CBO) projects that federal debt will reach 62 percent of GDP by the end of this year—the highest percentage since shortly after World War II." Some of that was due to declining tax revenues and increased spending during the Great Recession, and some of the fiscal gap was expected to close as the effects of the crisis receded. But much of the projected long-term buildup of federal debt was a result of "an imbalance between spending and revenues" that predated the economic shocks of the late 2000s. The second paragraph makes the case rather bluntly: "Over the long term, the budget outlook is daunting."
Nearly a decade later, the budget outlook had, if anything, grown worse. The second page of the agency's 2019 budget outlook warns that "large budget deficits over the next 30 years are projected to drive federal debt held by the public to unprecedented levels—from 78 percent of gross domestic product (GDP) in 2019 to 144 percent by 2049."
Did you catch the jump there? In 2010, debt levels at 62 percent of gross domestic product (GDP) were the starting point for a long-term forecast that was "daunting." What would a starting point of 78 percent represent? Presumably something even worse than daunting.
The following year, debt levels skyrocketed even further, to around 98 percent of GDP. Admittedly, 2020 was an unusual year, due to COVID-19 and associated shutdowns and fiscal relief packages. But trillions of dollars in deficit-financed spending drove the annual budget gap through the roof and helped pile on debt. Yet even after the fiscal effects of pandemic policy wore off, the CBO projected "deficits in coming decades are projected to be large by historical standards."
Included in the upfront summary of findings for 2020 was another warning: "High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation."
This was not a fundamentally new concern. The budget office had long warning, with varying degrees of alarm, that high debt levels could produce worrisome interactions with rising inflation and interest rates.
Back in 2010, the CBO noted that its already-alarming projections were probably not alarmist enough because they did not account for the possibility of increased interest rates, and that federal interest costs, already one of the nation's larger spending categories, would be "likely to grow substantially" when interest rates rose. Relatedly, the 2019 report warned "the projected increase in federal borrowing would lead to significantly higher interest costs. In CBO's extended baseline projections, net outlays for interest more than triple in relation to the size of the economy over the next three decades, exceeding all discretionary spending by 2046."
These sorts of warnings about debt, interest rates, and inflation were being delivered before the pandemic, and before the most rapid rise in inflation in 40 years prompted the Federal Reserve to begin rapidly raising interest rates.
The point of all those warnings over all those years was fairly clear: High debt levels represent a likely problem, period, since over time they will raise carrying costs, increasing the share of the federal budget that is devoted to debt service. Even in economic good times, that puts pressure on the rest of the budget. And in a crisis, it gives policymakers far less room to maneuver and threatens to strain the public fisc if they do.
The takeaway from all of this—the obvious action item—was that debt levels should be put on a downward trajectory to something more manageable and less risky. Inevitably, that work would be politically difficult, since it would involve some combination of higher tax rates and, limiting the scope of federal spending. Budget management would best be done earlier rather than later, in good times rather than in bad.
Yet as recently as 2021, well into the pandemic spending and borrowing spree, President Joe Biden was still insisting on more borrowing, on going big with spending plans essentially for the sake of going big, because the only real economic risk was in doing too little.
All of this was justified, Biden's economics team insisted, by the persistence of low interest rates that simply made borrowing a lot more money the right thing to do. As Treasury Secretary Janet Yellen said at her confirmation hearing: "Neither the president-elect, nor I, propose this relief package without an appreciation for the country's debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big."
The smartest thing we can do is act big.
Interest rates, you may have noticed, are no longer at historic lows, and they are likely to continue rising. And inflation has returned as both a problem for the political fortunes of Biden and his fellow Democrats and, more importantly, for American households. They did the "smart" thing and acted big, and this is what happened.
This week, total national debt reached $31 trillion. Federal debt is still rising, and Biden's policies are responsible for about $5 trillion of the increase, according to the Committee for a Responsible Federal Budget. The ominous fiscal trajectory the CBO warned about has continued, and the fiscal crunch that budget watchers have warned about is, to some degree, already here.
Yet the administration is still defending its approach. In a recent interview with The New York Times, White House economic policy adviser Jared Bernstein said: "Our budgets have been heavily fiscally responsible, and they build a very compelling architecture toward critical investments and fiscal responsibility. So it would be a mistake to overtorque in reaction to current events."
Critical investments, in this case, means "spending." Fiscal responsibility, meanwhile, is probably a reference to the administration's eyebrow-raising claims that Biden's policies have reduced the federal budget deficit.
These claims are laughable: This year's drop is largely a result of the end of one-time pandemic policies that were intended to sunset. The on-paper deficit reduction in the Inflation Reduction Act is totally wiped out by the administration's decision to cancel vast swaths of student loan debt. On the contrary, the Biden administration's policies have put the federal budget on a trajectory toward a long-term increase in deficits. Biden's claims of fiscal responsibility rest entirely on easily discerned sleight of hand. Yet his administration clings to this illusion because that's all it has.
A few months ago, the CBO once again issued a report looking into America's fiscal future. The present, it admitted, was worse than it had expected. Prices were rising faster than it had anticipated even the previous year, and it expected interest rates to be higher. Debt loads, meanwhile, are expected to increase, reaching $40 trillion, or the equivalent of 110 percent of the nation's total economy, in a decade—double the average of the last 50 years, and the highest in recorded history.
If so, the report warned, that will have consequences. Among the possible outcomes: "The likelihood of a fiscal crisis in the United States would increase. Specifically, the risk would rise of investors' losing confidence in the U.S. government's ability to service and repay its debt, causing interest rates to increase abruptly and inflation to spiral upward, or other disruptions." The fiscal warnings are still coming. But it sure doesn't seem as if anyone in power is actually listening.
