Is the federal government's history of enormous deficits proof that it can keep up the borrowing?
asserted
it → keep → borrowing
Some people think so, and legislators sure act that way.
asserted
legislators → think → ?
Federal debt held by the public now equals the size of the annual economy—and is growing.
asserted
debt → hold → economy
Yet investors continue buying Treasury securities.
asserted
investors → buy → securities
No government bond sale has really failed, no one has suddenly refused to finance Washington's spending, and no unmistakable moment has forced Congress to change course.
asserted
moment → fail → course
That leads some people I cross paths with in academic life to conclude that despite decades of dire warnings, we've managed to go from a 35 percent debt-to-GDP ratio in 2007 to 100 percent today with no devastating consequences.
asserted
we → lead → consequences
Their implication is that we can keep going right up to 175 percent in 2056, which is the trajectory if Congress fails to reform Social Security and Medicare and if interest rates rise only modestly.
asserted
rates → keep → Security
The idea that all this debt won't bring a reckoning may sound tempting, but it's questionable at best.
uncertain
it → bring → reckoning
First, markets have already reacted.
asserted
markets → react → ?
The 2021-2022 inflation spike, the worst in four decades, was the price level adjusting to a $5 trillion flood of deficit spending that investors did not believe future fiscal surpluses would cover.
asserted
surpluses → adjust → spending
That fear led to inflation.
asserted
fear → lead → inflation
It's hard to believe we won't get another market response when Congress commits to borrowing nearly 16 times what it did during COVID-19, plus interest payments, without any repayment plan.
asserted
it → believe → plan
Incidentally, interest rates are well above what we saw from 2009 to 2021 (back when fiscal doves thought rates would always stay low).
asserted
rates → see → 2021
Some of the recent increases come from AI investment raising the demand for capital.
asserted
investment → come → capital
With inflation still an issue and no fiscal austerity on the horizon, investors—still worried that future debt will be devalued rather than truly repaid—want more compensation for holding long-term treasuries.
asserted
debt → worry → treasuries
But let's just suppose Washington can stay the course without provoking a bond-market response.
asserted
Washington → let → response
Assume that Uncle Sam can borrow an additional $138 trillion, including interest payments over the next 30 years—the amount projected by the Congressional Budget Office (CBO)—and that there won't be a market reaction that raises interest rates or inflation.
asserted
that → assume → rates
First, it could be that investors expect Congress to eventually reform entitlements by raising taxes, reducing benefits, or both, so it won't need to increase borrowing.
uncertain
it → expect → borrowing
But if future Congresses don't deliver, the reckoning will come.
asserted
reckoning → deliver → ?
Second, it could be that despite all the risks in this scenario, investors would still value treasuries as the safest and easiest assets to trade.
uncertain
investors → value → assets
The world still needs dollars.
asserted
world → need → dollars
Given the messes Europe, the U.K., and other governments find themselves in, some of this could be true.
uncertain
some → give → this
Third, there's AI, which could supercharge economic growth.
uncertain
which → be → growth
Faster productivity growth will mean higher incomes and a larger tax base, making debt easier to carry.
asserted
debt → mean → incomes
AI investment may already be pushing up interest rates; a boom capable of substantially easing deficits would be even more likely to do so.
uncertain
boom → push → deficits
So, as existing Treasury debt matures, it would be refinanced at higher prevailing rates.
asserted
it → mature → rates
Thus, faster growth improves the fiscal arithmetic, but whether it is enough depends on how fast the economy grows, how high borrowing costs rise, and, ultimately, whether Washington continues running larger primary deficits.
asserted
Washington → improve → deficits
Even if we assume the best-case scenario, this debt accumulation isn't costless.
asserted
accumulation → assume → scenario
Government borrowing competes with private borrowers for the economy's available savings, which is another way to end up with higher interest rates.
asserted
which → compete → rates
It also means less private investment than we would otherwise have—in factories, software, housing, and, yes, the very AI investments we are counting on to raise future growth.
asserted
we → mean → growth
Financing government spending through high and distortionary taxes carries its own economic costs.
asserted
Financing → finance → costs
And, as my colleague Jack Salmon has documented, higher government debt is associated with slower growth.
asserted
debt → document → growth
That matters even in a world where AI makes us richer.
asserted
us → matter → world
Finally, government debt displaces other spending.
asserted
debt → displace → spending
Annual net interest payments now cost us more than national defense, and older, cheaper debt is being refinanced at today's higher rates.
asserted
debt → cost → rates
Those are dollars that can't shore up entitlements or help during the next emergency, when the ability to borrow matters most.
asserted
ability → shore → emergency
CBO projects interest payments becoming the largest federal expenditure by 2040, consuming roughly 40 percent of the government's revenue by 2056.
asserted
payments → project → 2056
I wouldn't count on markets to stay calm.
asserted
I → count → markets
But even the calm scenario means less investment, slower wage growth, and a budget increasingly spent on past obligations.
asserted
scenario → mean → obligations
Without action and perhaps a more obvious cue to complacent congresses, the damage will continue, sometimes quietly, and the danger will grow.
asserted
danger → continue → congresses
The Aporia
