America Is Writing Checks That Mere Optimism Won’t Cover
Over the past few decades, in a surge of bipartisan national self-confidence, the federal government has borrowed a lot of money, sometimes in response to national emergencies and sometimes to do the things people thought were worth doing. We gave ourselves permission to incur all this debt because interest rates were low and many people assumed that things would stay that way, so the costs of carrying that much debt wouldn’t be too onerous.
Unfortunately, that assumption turned out to be incorrect. Interest rates have risen. According to The Wall Street Journal, America is expected to spend $870 billion, or 3.1 percent of gross domestic product, this year on interest payments on the federal debt. According to the Committee for a Responsible Federal Budget, the government will spend more on interest payments than on the entire defense budget. Within three years, if interest rates remain high, payments on the debt could become the federal government’s second-largest expenditure, behind Social Security.
When money is tight, as it is now, government borrowing competes with private borrowing, driving interest rates up for everybody. A 2019 Congressional Budget Office study found that every 10 percent increase in the debt-to-G.D.P. ratio results in an increase in interest rates of two-tenths to three-tenths of a percentage point. That makes voters miserable, as they are now, because it’s more expensive to, say, get a mortgage or some other kind of loan.
It makes government accountants miserable because the very act of borrowing money to pay off debt can drive interest rates higher and make the prospect of paying off debt even more expensive. You have to worry about the long-term nightmare possibility of a debt spiral, in which you have to borrow and borrow to service the debt while the act of borrowing itself makes paying off the debt more unaffordable.
Pretty soon, you’re staring at Ferguson’s Law. This is the principle enunciated by the historian Niall Ferguson that any nation that spends more on interest payments on the debt than on military spending will slip into decline. It happened to Hapsburg Spain, the Ottoman Empire, the British Empire and prerevolutionary France. Will it happen to us?
You don’t have to get to these nightmare scenarios to see all the problems that can be caused by excessive federal debt. All that fiscal stimulus can cause inflation, as it is doing now. Public sector borrowing can crowd out private sector borrowing, thus slowing the economic growth you need to pay off the debt.