“First, and most obviously, the U.S. government’s fiscal situation is very bad, getting worse, and driven mainly by unsustainable entitlement programs that grow faster than the economy and inflation, regardless of available revenues.” What you’ve just read comes to us from Cato Institute vice president Scott Lincicome. He could perhaps be persuaded that it's an implicit rejection of deep market signals.
While government spending is by far the biggest, most anti-freedom and anti-growth tax on the American people, there’s no evidence supporting Lincicome’s claim that “the U.S. government’s fiscal situation is very bad, getting worse.” Market signals explain why.
That’s because U.S. Treasuries are easily the most owned income streams in the world. From this we can conclude that the market for U.S. Treasuries is easily the deepest, most liquid, most informed market in the world. None of this should be construed as a defense of government spending, but it is a defense of market signals that reject Lincicome’s analysis of the One Big, Beautiful Bill Act (OBBBA).
To be clear, the OBBBA is a no-growth Act by the very description of the Republicans who are cheerleading it. As they, along with the Washington Post acknowledge, most of the tax cuts go to low and middle earners who, because they’re low and middle earners, will more likely spend rather than save the small amounts of money saved from tax cuts. "Size" amounts of investment are what power economic growth, the rich uniquely have size amounts of unspent wealth to put to work, but Republicans generally just talk about growth while writing tax bills that are informed by silly Keynesian notions of “putting money in people’s pockets.”
Unfortunately, Lincicome’s commentary doesn’t spend much time on the no-growth aspects of an Act he doesn’t much like, and it doesn’t owing to his laser focus on deficits and debt. He cites “experts” who claim that “the OBBBA will add trillions to the federal debt over the next ten years.” He adds that “the new law’s massive debt load is predicted to increase U.S. interest rates and, in turn, interest costs on the federal debt by more than the revenue gains coming from the OBBBA’s spending cuts and economic growth.” Treasury market history doesn't support the commentary.
To see how and why, let’s travel back in time to 1980. It was then that total federal debt was $900 billion, and the yield on the 10-year Treasury note was 11 percent. Having read this, along with Lincicome’s expert-informed commentary, does anyone want to speculate what the “experts” in 1980 would have predicted for 10-year yields in 2025 based on $37 trillion worth of debt? It surely goes without saying that their yield predictions would have made 11 percent seem tiny by comparison. Which is the point.
As my upcoming book The Deficit Delusion argues, the experts misunderstood the debt then, and they do now. Of the view that it’s an effect of too little tax revenue from the rich (left), too much spending by Democrats (conservatives), too little entitlement reform combined with not enough tax revenue (libertarians), or excessive tax rates such that tax revenues aren’t high enough (supply side happy talkers), they ignore what falling Treasury yields have been saying for decades: we have too much tax revenue now, and much worse, we will have exponentially more tax revenue in the future.
Without defending the massive tax that is government spending, the surest sign we don’t have a debt problem is all the debt. And the debt rejects Lincicome’s assertion that interest rates are going up over the next ten years alongside the debt. Market signals reveal the flaw in Lincicome's analysis, but for the tendency of experts to ignore markets while analyzing debt markets.
