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George Will

Look for the day when the national debt is driven by ... the national debt

| Saturday, May 5, 2018, 4:14 p.m.

WASHINGTON

Think about this: The interest rate on 10-year Treasury bonds recently rose briefly to 3 percent and could move higher. It's more than evidence of the economy's strength. It's also a harbinger of a coming day when the great driver of the national debt will be ... the national debt. Read on.

The economy's growth, which slowed in the first quarter, is not brisk; it's still not the 3 percent that's the low end of presidential boasting. At the end of this month, the economy will amble into the 10th year of an expansion that began in June 2009. This month is its 108th, making it almost twice as long as the average expansion (58 months) since 1945. Unless Mr. I Alone Can Fix It has banished the business cycle forever, a contraction will come sometime.

It might begin in fiscal conditions resembling today's because this is now normal: trillion-dollar annual budget deficits while the economy is at full employment. (The 3.9 percent unemployment rate is impressive, even given the decades-long decline in the workforce participation rate, which today is 62.8 percent.)

This is a result achieved when both ends of Pennsylvania Avenue are controlled by what still fancies itself a conservative party. What are the chances of fiscal improvements arriving after voters return many congressional Republicans to the private sector of which they speak so fondly?

The Manhattan Institute's Nicole Gelinas notes that “from the 1960s through the beginning of the financial crisis, Treasury rates never fell below 3 percent, and they were often several percentage points above that.” In 2007, the Great Recession arrived when the national debt was $7.5 trillion and the average interest on it was 4.5 percent. Imagine paying 4.5 percent on today's $16.5 trillion debt.

The Congressional Budget Office projects that new federal borrowing over the next 10 years will total $12.4 trillion. At the end of 2028, the debt will be $28.7 trillion — 96 percent of GDP, up from 39 percent in 2008.

But the CBO is required to pretend Congress won't make matters worse. Its projections must assume the continuation of current law. So, the CBO must assume that the caps on defense and nondefense appropriations imposed in 2011 will be enforced in 2020 and 2021. But those for 2018 and 2019 have just been discarded. How likely is a reversion to disagreeable discipline?

The CBO must also assume that Congress meant what it said about cuts contained in the new tax law expiring after 2025. Some legislators want to make those cuts permanent now. The American Enterprise Institute's James Capretta believes that federal debt will reach 150 percent of GDP much sooner than last year's CBO projection of 2047.

Gelinas says that by the end of 2017, Americans' household borrowing stood at $15.3 trillion, “just shy, in inflation-adjusted dollars, of what it was in 2005, the year before the housing bubble peaked.” And although “Americans are now spending less of their income on debt — about 10.3 percent, down from roughly 13 percent between 2005 and 2008 — they didn't use the period of super-low rates to reduce their debt, which means they're vulnerable to higher rates.”

When such rates arrive, and debt service swells the debt, what can government do? When the Korean War erupted in June 1950, Congress slashed discretionary nondefense spending by 25 percent. Back then, however, such spending was 29 percent of the budget. Today, sacrosanct transfer payments are 70 percent of the budget, paying debt service (7 percent) is mandatory, and discretionary nondefense spending is 15 percent. So, government can't act as nimbly as it did 68 years ago.

Hillsdale College's Gary Wolfram notes that total discretionary spending for fiscal 2019 is projected to be $1.36 trillion. That's just $381 billion more than the projected deficit. All this means trouble, unless Mr. Art of the Deal can negotiate with arithmetic, persuading it to amend its rules so that trillion-dollar deficits will not mean trillion-dollar increases in the debt.

George F. Will is a columnist for Newsweek and The Washington Post.

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