K-12 Tax & Spending Climate: Debt commentary

Brian Riedl:

These debt spirals become nearly impossible to escape, as rising interest costs necessitate more borrowing, which in turn brings higher interest costs, as nervous lenders demand higher interest rates. The government would face grim choices: drastically raise taxes to make these interest payments, gut federal programs or risk hyperinflation by financing the debt with new money (via the Federal Reserve).

Yet many critics shrug off such concerns, overconfidently projecting current interest rates and spending levels well into the future. To their credit, Summers and Furman concede that “current projections do raise concerns over the fiscal situation beyond 2030,” but they stress the “uncertainty” of long-term projections. They also mention, almost in passing, that remedying long-term debt problems hinges on reforming Social Security and Medicare (and they offer budget projections that assume an unspecified Social Security fix), although their general downplaying of debt is likely to make lawmakers less motivated to address the problems with these programs.

One way to make borrowing less risky would be for Washington to lock in today’s low rates by issuing more 30-year bonds. Instead, Washington is behaving like a subprime homeowner and making long-term debt commitments based on short-term interest rates. The average maturity of the U.S. debt is five years and sharply declining, which means most of the national debt would quickly roll over into any future interest rate increase.