Debt bomb
Republicans have been arguing the reconciliation bill is necessary to avoid a recession. But are they inviting other economic problems by taking on so much additional debt?
Four weeks ago, I predicted here that deficit hawks in the House Republican Conference would ultimately swallow their objections and vote for the reconciliation bill because without the bill’s tax cuts, they’d risk a recession on their watch.
I was only half right. Most of them did indeed cave, but they offered a variety of reasons.
But what if they’ve simply traded one fiscal hazard for another? Assuming the House can work out its differences with the Senate and get something like its bill passed into law, could its effects on the debt and the bond markets wind up being every bit the macroeconomic albatross that a tax hike would be?
Just listen to the fiscal hawks who didn’t vote for the House bill. "This bill is a debt bomb, ticking,” said GOP Rep. Thomas Massie. “Congress can do funny math—fantasy math—if it wants. But bond investors don’t. And this week, they sent us a message. Moody’s downgraded our credit rating, and the investors who finance our debt demanded higher interest rates on the 10-year note, 20-year note, and 30-year note. Instead of taking care of that problem, we’re going to give you a $1,600 tax break.”
Massie’s conservative colleague, Rep. Warren Davidson, added, “Promising someone else will cut spending in the future does not cut spending. Deficits do matter and this bill grows them now.”
How much? Depends whose numbers you believe. But all the numbers are big. The Congressional Budget Office projects $2.3 trillion in additional deficits over the next decade. The Penn Wharton model projects $3.3 trillion in bonus deficits. The Committee for a Responsible Federal Budget puts the figure at $2.5 trillion in primary deficits, which swells to $3.1 trillion once interest is included, or $5.1 trillion if the temporary provisions in the bill are made permanent. (White House press secretary Karoline Leavitt begs to differ, saying the bill saves $1.6 trillion, “the largest savings for any legislation that has ever passed Capitol Hill through our nation’s history.”)
The markets seem to be pricing in the risk of the new debt. Federal Reserve governor Christopher Waller said Treasury bill yields are rising because the markets thought they’d see much more “fiscal restraint” in the bill. Billionaire investor Ray Dalio wrote that “the risks for U.S. government debt are greater than the rating agencies are conveying,” because the government could simply print more money to satisfy its obligations. Carlyle Group founder David Rubenstein added, “If we don’t get [the debt] under control, at some point people will become more nervous about the dollar as a reserve currency and its stability.”
A survey released last Monday by Lending Tree showed that two-thirds of Americans expect a recession, which indicates the politics here could be dangerous, too. Google search trends showed that searches for “national debt” peaked at 9 a.m. on Thursday, just two hours after passage. Morning Consult asked if voters support or oppose the major provisions of the bill. Forty-nine percent said they opposed it, including 59% of self-identified independents.
Of course, they may still be hoping that the Senate will eventually bail them out.