The deepest markets in the world continue to tell us that paying off the $37 trillion national debt will be the easy part, but budget experts are arguably missing the message. Think the Cato Institute's Adam Michel. He writes for the Civitas Institute that “Deficits matter tremendously. Persistently large annual shortfalls fuel debt accumulation, raise borrowing costs, and risk a sudden fiscal collapse.”
The aim with The Deficit Delusion is to convince Michel and others to reorder their concerns.
The attempted convincing would start with the flashing market signal since 1980 of falling Treasury yields. As the debt has grown, yields on the debt have fallen opposite Michel’s assertion that deficits “raise borrowing costs.” That borrowing costs would decline amid soaring debt is logical. Money is ruthless and the markets are the opposite of stupid.
Only a nation thought exceedingly capable of paying off $37 trillion (and counting) of debt could borrow that much, which helps explain why Treasury paid 11% to borrow when its total debt was $900 billion (1980) versus 4% at $37 trillion today. Michel worries about a “sudden fiscal collapse,” but falling yields on the most owned income streams in the world signal growing market confidence that the odds of fiscal collapse are in decline.
In the soaring nominal debt, we see that existing government revenues are small relative to what they’ll be. Translated, the rich of today are a pale imitation of what they’ll be tomorrow. This is a beautiful thing since rising wealth inequality powerfully signals rapidly declining lifestyle inequality, but it’s also a worrisome signal that the rising debt will yet again be the easy part thanks to soaring tax collections. It's worth repeating that the nominal debt is a loud market signal that revenue collections by Treasury today are small relative to what they will be.
Michel says the debt signals higher future taxes while his colleague Romina Boccia has said on X that the taxes to pay off the debt will eventually fall on the middle and below. Boccia’s prediction suggests that poor and middle earnings that wouldn't rate individual borrowing in size are somehow collectively sufficient to pay back trillions. That’s unlikely. If the poor and middle were thought to be on the future hook for any of the federal debt, there would be a lot less federal debt.
Michel writes that “When the government runs annual deficits of $2 trillion, every dollar of new spending is a future dollar of higher taxation.” This is unlikely, and the right have been explaining why for decades. As tax rates go up, efforts to hide income and wealth increase. A more likely scenario is skyrocketing wealth and income that sadly showers Treasury with humongous revenue no matter the tax rate.
In a recent piece for the New York Post, Boccia wrote of a “debt crisis Congress is refusing to address,” while Michel yet again referenced the possibility of “a sudden fiscal collapse.” Both imply a future crisis.
More realistically, the crisis is now, but it’s unseen. It’s the wealth creation and progress not taking place because Treasury is such a size recipient of precious resources.
Michel laudably calls for government to do less while leaving “more space for families, communities, and markets to work.” Amen to that, but for the reminder that a focus on what Treasury owes distracts from the herculean tax revenue growth implied in what it owes, along with even more remarkable advance that never will happen, and that is similarly implied in extraordinary market confidence in Treasury’s ability to easily pay off the national debt.
