Republicans and the Fed are blowing up the deficit — and no one cares

Where did all the deficit scolds go?

Janet Yellen's big move may have been the wrong one.
(Image credit: REUTERS/Jonathan Ernst)

One of the more infuriating falsehoods about the Republican Party is how they are earnestly concerned with cutting the deficit. For years now they have been howling that no new money could possibly be spent on infrastructure or social programs because "we're broke." But when it comes time to make real decisions, their true priorities are revealed.

Two recent developments illustrate this point: modifications to ObamaCare, and the recent rate hike at the Federal Reserve. The former has changed the program so that it will no longer reduce the deficit, while the latter will have an enormous effect on the government's deficit trajectory. Deficit scolds are ignoring them both.

Let's take them in turn. Republicans have been whining for years that ObamaCare increases the deficit, ignoring massive evidence to the contrary. Now it's probably going to be true — ironically, because Republicans will vote to take a bunch of revenue measures out of the law. This is part of the omnibus spending bill, which delays the medical device tax and "Cadillac tax" (on expensive health care plans) for two years. Together, the taxes would bring in something like $110 billion over the next 10 years. But if the taxes aren't going to be implemented now, they probably are never going to be.

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To be clear, many Democrats also supported these rollbacks, because they generally accept Republican logic on raising taxes and are deeply intertwined with the health care industry and unions (which don't like the Cadillac tax). But President Obama supports the taxes, and Republicans control the House and Senate — this is on them.

At any rate, the point is that when there is a choice, the deficit is always Republicans' last priority. That's why all their presidential tax plans would roughly increase the national debt by between $1 and 15 trillion.

The point about central bank policy is more interesting. Deficit scolds typically envision the budget as made up of two things: revenue from taxes, and spending on social programs, government agencies, and the military. Interest payments are typically set aside as an irrelevant distraction, or the mere mechanism by which a debt crisis will take hold, after over-spending has gone on for too long. Hence the typical scold argument that we need to raise taxes and cut social programs (usually tilted heavily towards the latter).

But it turns out that interest payments and monetary policy are at the center of deficit spending. High interest rates mean issuing new debt is more expensive, and so is refinancing old debt that needs to be rolled over. This is mostly what caused the deficit explosion during President Reagan's term — not his combination of tax cuts and spending increases. Conversely, when the economy is weak, the government gains a nearly unlimited ability to finance itself through issuing debt. Indeed, for much of the last seven years, borrowing was literally cheaper than free, after adjusting for inflation. Under President Obama, the overall national debt has increased dramatically, but the cost of financing has been at historic lows.

This means that the behavior of America's central bank — the Federal Reserve — is probably the single most important factor in the future trajectory of U.S. borrowing expenses. And what do you know, yesterday the Fed raised interest rates for the first time since 2006. Markets expect a gradual pace of additional rate hikes throughout the year — thus, the Fed's decision will increase deficit spending, probably by quite a bit (the specific amount will depend on how fast the hikes come, and whether they can be sustained).

Are any Republicans exploring this issue? Nope! None of the right-wing or centrist deficit scolds have even mentioned it, as far as I can tell. Indeed, many of them have been calling for tighter monetary policy and/or the gold standard since the beginning of the Obama era, but they seem either unable or unwilling to grasp the implications.

Setting aside whether an interest hike is actually a good idea (I'd bet a lot of money it will be seen as a disastrous mistake inside of a year or two), the take-home message here is that the politics of deficit paranoia is a fraud, totally disconnected from policy reality. It's a convenient cudgel to bash programs which are disliked for other reasons, nothing more.

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