In the latest Barron’s cover story, Jack Hough warns of the long-term risks of rising U.S. public debt. While noting that there’s little chance of hitting debt-related turbulence anytime soon and that interest rates on U.S. Treasuries remain low, Hough says that complacency is a threat and that politicians have done little to avert a potential market upheaval:
If the party that has long branded itself as fiscally conservative—and showed off a debt clock during the 2012 Republican National Convention, in a call to action—now has little interest in containing deficits during good times, the result could be a costly backlash during the next bust.
Former Treasury Secretary Robert Rubin is among those quoted by Hough warning about the dangers of U.S. fiscal policy: “I don’t think bonds adequately reflect what at some point in the future, with high probability, will be trouble in bond markets and with interest rates, due to our fiscal situation,” he says.
There are no easy fixes, Hough writes, but Rubin highlights the importance of slowing Medicare cost growth: “If you can reduce cost growth in Medicare and Medicaid, even without cutting entitlements, you’re halfway there,” Rubin says.
Boosting federal revenues is the other key, Hough says, noting that back in the late 1990s, when Washington produced budget surpluses, annual tax receipts approached 20 percent of GDP. “Over the next several years, that figure is expected to bottom at 16.4% before beginning to rebound—if certain tax cuts expire,” Hough writes.
Subscribe to Barron’s to read the full story and an accompanying interview with economist Stephanie Kelton, a leading proponent of a school of macroeconomics called modern monetary theory, who has a very different way of thinking about the deficit: “So can the deficit be too big? Of course! But can it be too small? Yes. And that’s something you rarely hear people say. Or complain about it.”