This is from the Committee for Responsible Budget:
These additional interest payments aren’t paid for with lower spending elsewhere. If anything, everyone on the right and the left has programs they would like to expand or create. It means we are borrowing more money for these interest payments and sending the message to investors that no one is serious about fiscal management. Who truly believes that this can go on without consequences?
The CBO projections could give this impression:
Figure 1: Actual and projected economic variables (left scale) and privately held federal debt as a percentage of GDP (right scale)
Source: Congressional Budget Office, The 2023 Long-Term Budget Outlook, June 2023.
While the debt is going up dramatically and interest rates tilt up a little, inflation is flat and so is unemployment. Real growth is slightly slowing, but not much. That’s because CBO’s projections are largely accounting exercises. These projections include no feedback from fiscal policy or the real-world actors. As UVA’s Eric Leeper explained in a post for the Budget Process at 50 Substack:
The trouble with relying entirely on accounting is that there’s no check on whether the outcomes that the accounting exercise delivers could actually occur in the economy. That check comes from addressing an economic question instead of a purely accounting question. The economic question would be, “What set of policies for outlays and receipts would yield a stable debt-GDP ratio?” An alternative question might be, “What fiscal policies stabilize debt and maximize social welfare?”
Economic analysis imposes discipline on the accounting exercise by making explicit the private sector’s willingness to hold government debt and the terms on which it’s willing to hold that debt. Those terms have important implications for interest rates, inflation, and real economic activity. Clearly, social welfare depends on economic behavior.
That’s one way of saying that I wouldn’t count on this to happen. There will be fiscal-policy feedback and real-world consequences. Inflation, interest rates, unemployment, and growth will all look different than they do here.