It Turns Out That the Debt Matters After All

Is it time to start worrying about the debt?

This feels like a weird question to ask, I admit. The bond market is placid. Voters are preoccupied with other issues. The many dire things that fiscal hawks said would happen if we did not shrink the debt a decade ago have not come to pass. And neither party seems to have much interest in the country’s long-term fiscal trajectory; Democrats and Republicans recently walked away from debt-ceiling negotiations without doing much of anything.

Yet the country’s fiscal situation has changed dramatically, if quietly, in the past few years. Medicare and Social Security spending is climbing as the Baby Boomers age. The country’s borrowing costs, measured as a share of GDP, are at their highest level in two decades and rising. Despite strong growth, Washington is running as large a deficit as it was during the worst of the Great Recession. And the debt now stands at $32 trillion.

In those years, Larry Summers, the former Treasury secretary, was one of the most vocal proponents of the idea that a government can and should run deficits in perpetuity. “I am not a congenital deficit worrier,” he told me when we talked last month. “I am not a chronic worrier about this, by any means.” But lately, his views have changed. “Any long-term forecast is going to be way uncertain. But the probability is that we’re on a completely unsustainable path.”

Whether America’s debt becomes unsustainable depends on dozens of factors, among them the rate of productivity growth, the shape of income inequality, the foreign demand for dollars, and the vicissitudes of the global bond market. But there are trillions of reasons to be worried about the country’s financial situation now, and even more reasons to worry about Washington’s capacity to address it in the years to come. Yet nobody cares.

This is a near-perfect inversion of the situation during the Obama administration, when Washington was obsessed with the country’s finances at the wrong time for the wrong reasons. After Congress passed its recession-fighting stimulus bill in 2009, deficit hawks warned about “bond vigilantes” dumping American debt and the United States turning into Greece. Republicans may have believed that the risk was real, but they were also all too happy to dampen Democrats’ electoral prospects by damaging the economy. They forced a catastrophic showdown over the debt limit and ended up implementing austerity across the budget, including cuts to biomedical research, environmental-protection programs, and schools. The result? A miserable recovery and years of “secular stagnation,” as Summers called it, characterized by slow growth, low interest rates, and low inflation.

Under Donald Trump, Republicans stopped caring about red ink. They passed huge tax cuts without commensurate spending cuts, and then a huge, necessary stimulus bill to fight the pandemic. Earlier this year, Republicans threatened to blow up the global economy in order to tackle the debt they had largely created; Speaker Kevin McCarthy at one point proposed $4.5 trillion in cuts over 10 years. But Republicans balked at reducing Social Security and Medicare benefits. And McCarthy’s ultimate deal with President Joe Biden implemented voluntary (read: imaginary) spending caps and made a few other policy changes.

Yet the budget is changing, even if Congress is not the one changing it. The cost of benefits for older Americans has nearly doubled in the past decade. Social Security and Medicare are now spending $500 billion more a year than they are taking in via their dedicated tax funding streams; the two programs are anticipated to exhaust their trust funds in eight to 10 years, give or take. This is no longer “a 30-year problem,” Brian Riedl of the Manhattan Institute told me. It’s a problem now.

The country’s borrowing costs are ballooning, too, by roughly 35 percent a year. The Federal Reserve and other central banks are hiking interest rates to tackle stubbornly high rates of inflation. Short-term borrowing costs have gone from zero to 5 percent over the past three years, and the average interest rate on American government debt has risen from 1.6 percent as of 2021 to 2.1 percent today. “Every time interest rates rise by one point, it costs as much as extending the Trump tax cuts for 10 years,” Riedl noted.

Then, those deficits. Congress keeps spending more than the government receives in taxes, despite the fact that the economy is growing steadily. “At other moments, we’ve had massive deficits in the context of wars that were going to be temporary or recessions that were going to be temporary,” Summers told me. He argued that today’s deficits were not only unnecessary, but harmful: generating inflation and forcing the Fed to jack up interest rates higher than it otherwise would need to. “I don’t think there’s ever been a moment when the trajectory looks nearly as ominous as it does now,” he said, because of the country’s high interest rates.

None of this constitutes a crisis right now. The country is having no problem issuing debt. Borrowing costs are not crowding out other budgetary priorities. And the country’s red ink is not the main reason interest rates are going up.

Some powerful voices in Washington argue that it will never be a crisis. “Yeah, I’m not worried,” Stephanie Kelton, an economist at Stony Brook University and perhaps the country’s most prominent deficit dove, told me. “This thing we call the deficit is not inherently problematic. It is not evidence that the government is mismanaging its finances. It’s not a problem that needs to be solved.” The United States government cannot run out of money, she noted: It issues the currency. Congress should spend what it needs to spend.

But other economists disagree, even if nobody is listening. The debt is “corrosive” to the economy,” Mark Zandi, the chief economist at Moody’s Analytics, told me. The country’s debt is increasing its borrowing costs, he said, even if not in an obvious way. Soon, he added, “I suspect we’re going to be able to connect the dots between our fiscal situation and interest rates and what it means for economic growth.”

What does it mean? According to Summers, a few things. He, too, said that the debt would increase the country’s borrowing costs, thus reducing investment relative to consumption. “We become more of an of-the-moment society; that goes for everything from inadequately funding Head Start to having insufficient investment for venture capital, to having inadequately trained armed forces and inadequately numerous forces, to doing too little investment to maintain leadership in AI and biomedicine.” In addition, he said it would increase the risk of stagflation and of investors dumping American assets.

Of course, deficit hawks claimed that the United States faced those risks 10 years and $19 trillion ago—and none of their worst predictions came to pass. “The fiscal hawks looked like the boy who cried wolf when large deficits 15 years ago didn’t lead to a financial crisis,” Riedl told me, a note of frustration in his voice. “But serious deficit hawks understood that the threat wasn’t a short burst of deficits caused by a recession.” Ongoing, widening, structural deficits were the issue.

The scariest thing is not the debt itself, or the possible changes in interest rates or investments. It’s the government’s inability to do anything effective about it. Republicans keep taking the debt ceiling hostage while running up huge deficits themselves; they insist on gutting the safety net but refuse to reduce defense spending or offer a plan to raise more money for Medicare or Social Security. Democrats are less hypocritical. Still, the Biden White House won’t raise taxes on “middle class” families, meaning the 99 percent of households making less than $400,000 a year.

That might be fine for now. But the aging of the American population—with the falling employment-to-population ratio and greater need for government spending that it entails—is no longer coming. It is here. And at some point, the country will need a budget that accounts for it.