The Politics of Limits

The federal debt is already $35 trillion and currently rising by roughly $2 trillion every year – with no end in sight. As a result, some investors are worried that the US could become a 21st Century version of Argentina: completely bankrupt and unable to pay the bills.

We don’t think that’s going to happen. It’s not that the national debt doesn’t matter, it does matter. Instead, it’s because the recent surge in the interest on the national debt is going to have big effects on government policy.

The best way to measure the manageability of the national debt is not the top-line debt number, $35 trillion in the case of the US. Instead, it’s the net interest cost of that debt relative to GDP. Think about it like a national mortgage payment relative to national income.

Back in the 1980s and 1990s the US was regularly paying Treasury bondholders roughly 3.0% of GDP. From Fiscal Year 1982 through 1998, the interest cost on the debt relative to GDP hovered between 2.5% and 3.2%. At this level, even politicians felt the pain. Both parties enacted policies that led to budget surpluses and interest costs relative to GDP plummeted. Between FY 2002 and 2022 the interest burden averaged roughly 1.5% of GDP and stayed between 1.2% and 1.9% of GDP.

We call this period the “Age of Candy.” What happened during the Age of Candy? We cut taxes in 2001, 2003, and 2017. In 2004 the US added a prescription drug benefit to Medicare. In 2010, with Obamacare, we enacted the first major expansion of entitlements since the 1960s – not by coincidence, another period when the interest burden on the debt was low.

Why did all this happen? We are sure others can come up with plenty of ideas, too. But we think a large factor is that when the interest burden of the debt was low (which meant they didn’t have to pay bondholders as much) politicians realized they had a lot of extra money sitting around to buy our votes. And that’s exactly what they did.