Interest Rates Push Washington Toward Another Fiscal Crisis
The article discusses Herbert Stein’s Law, which states that “if something cannot go on forever, it will stop,” observing that rising interest rates exemplify this principle. the recent increase in long-term interest rates is driven by concerns over persistent inflation, high spending on data centers and AI, and fears about the federal government’s growing debt and its ability to service it. Higher interest rates lead to increased debt service costs, making mortgages more expensive and straining the federal budget, with projections indicating that interest payments could surpass spending on programs like Medicare and Social Security within a decade if rates stay elevated.
The piece highlights the looming risk of a fiscal crisis, especially when interest rates exceed economic growth, reducing the nation’s ability to grow out of its debt problems. Experts warn that continued borrowing and rising rates could trigger a crisis, with some policymakers, like Jared Bernstein, expressing concern over the unsustainable trajectory of deficits and debt, despite traditionally being opposed to budget cuts.
The author emphasizes that addressing the nation’s fiscal issues depends on political will,which currently seems lacking,and suggests that a financial crisis might be the only catalyst for meaningful reform. Until then, the inevitable consequence of Stein’s Law is that unchecked fiscal policies will eventually lead to significant economic repercussions, likely causing discomfort for the American people in the future.
Stein’s Law, named for noted economist Herbert Stein (the father of policy adviser and actor Ben Stein), holds that “if something cannot go on forever, it will stop,” sooner or later. As interest rates slowly creep up, Americans may be witnessing the principles of Stein’s Law in action.
The recent rise in long-term interest rates has many causes, including concern over persistent inflation and the explosion in spending on data centers and artificial intelligence, which has sucked up so much money within the economy as to raise the cost of borrowing across-the-board. But rising interest rates also reflect concern that the federal government will not be able to pay its rapidly rising debt, even as it makes that debt more costly to service.
Greater Debt Service Costs
Increases in long-term interest rates make mortgages more costly, exacerbating the price pressures many families currently face. But with respect to the federal budget, rising interest rates present short-term and long-term concerns.
In the short term, as one article noted, the recent rise in rates on the 10-year Treasury note to 5 percent already exceed the Congressional Budget Office’s projections for the entire decade. In February, CBO’s most recent forecast for the Budget and Economic Outlook assumed that 10-year interest rates would average 4.1 percent in Fiscal Year 2026 (which ends September 30), 4.2 percent in 2027, 4.3 percent from 2028 through 2031, and 4.4 percent from 2032 through the end of its projection period in 2036.
Interest rates above projections could add trillions of dollars in additional debt to a budget forecast that already looks bleak. The Center for a Responsible Federal Budget notes that, if interest rates remain elevated as at present, within a decade Washington will “be spending more on interest [to finance the debt] than Medicare or Social Security retirement benefits.”
Debt Bomb Looming?
As CRFB also notes, the bigger long-term concern lies in the chance of a fiscal crisis. When interest rates exceed America’s economic growth, the nation’s ability to grow its way out of our self-imposed fiscal hole dramatically declines. And the rise in interest rates, coupled with Washington’s continued efforts to add to the nation’s debt pile, accelerates the day when that crisis will hit.
Recently, Jared Bernstein wrote an op-ed in the New York Times highlighting the potential for a fiscal crisis. The article’s title notes that Bernstein, who chaired the Council of Economic Advisers under President Biden, has “never been a budget hawk” — a true enough statement.
Yet Washington’s irresponsible behavior has given Bernstein concern over the nation’s financial trajectory. He notes that “our annual deficits, currently about 6 percent of GDP, are way above where history says they should be. We’re not in a recession, but we’re borrowing as though we were,” and that “politically, neither party shows any interest in addressing the problem.”
Put aside for a moment the fact that the Administration Bernstein most recently worked for helped create the debt and deficit problems that Bernstein now criticizes, and would have exacerbated the problem further had Biden’s Build Back Bankrupt bill become law. His flawed history doesn’t make him wrong about the need to get our fiscal house in order now.
Stop Overspending
Of course, taking action to address our fiscal deficits assumes that anyone in Washington has the political will to do so. But to the extent that our politicians lack any sense of spine to make tough choices — in part, it must be said, because the American people themselves want to have their fiscal cake and eat it too — a cynic might argue that the recent groanings in the bond market actually represent “good bad news.”
After all, if only a financial crisis will force our nation — both its politicians and the public at large — to get serious about its fiscal future, better to have it when federal debt stands at $40 trillion than at some even higher number. Either way, Stein’s Law will eventually take effect — and the American people likely will not like the consequences when it does.
Chris Jacobs is founder and CEO of Juniper Research Group and author of the book “The Case Against Single Payer.” He is on Twitter: @chrisjacobsHC.
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