The Congressional Budget Office has officially weighed in on the cost of the Trump Administration’s fiscal policies, estimating that the recent spending increases and corporate tax cuts signed into law by the president will add a cool $2.7 trillion to the deficit over the next ten years.
Investors treated the news as it has other evidence of Washington’s growing fiscal irresponsibility in recent year: with near total indifference. Indeed, the 10-year treasury yield has actually fallen since the president signed his most recent deficit-ballooning measure, a 2-year budget deal which increased government spending by $300 billion with no offsets.
This reaction is just the latest in a growing body of evidence that if there is a limit to how much bond investors are willing to lend wealthy and stable like the United States, we are nowhere near that limit. Indeed, even as it predicts the U.S. to add more than $12 trillion in new debt over the next decade, the CBO expects interest rates to not rise above 4% during that time.
In other words, the conventional wisdom is that United States is headed for a future that looks a lot like Japan’s: one in which social spending on retirees drives budget deficits higher, but also one in which low interest rates make the resulting debt loads manageable. And there’s a strong argument Japan’s economic present would be a good future for American policy makers to hope for. Despite rising debt loads and slow GDP growth, Japan’s economic performance over the past quarter century has been strong, if you adjust for the effects of its aging population. GDP growth per working age person, for instance, has grown nearly as quickly in Japan as in the U.S., since the early 1990s, and it has grown faster than in Europe.
Japan appears to be managing many problems that will soon grow more acute in the U.S. and Europe, like the slow growth or contraction of the working age population and the loss of manufacturing jobs to low-wage competition abroad. But just because Japan has managed to navigate the economic minefield that is a post-industrial, aging society doesn’t mean that the United States will be able to easily.
According to political scientists Frances McCall Rosenbluth & Michael F. Thies, Japan has undergone a political transformation over the past thirty years that began with electoral reform in 1994, and continued with deep reforms to the country’s pension system in 2004. That change to the law, which guaranteed that the value of pension payments would fall relative to private-sector wages, has helped Japanese government debt to grow much less quickly than it otherwise would have. It has also led to growing poverty among Japan’s pensioners, whose struggles were illustrated poigintely by the self-immolation of an impoverished pensioner in the summer of 2015.
The American political system has shown that it is nowhere near ready to impose these sorts of sacrifices on workers who have spent decades paying in to Social Security and Medicare. The Republican Party, which holds all the power in Washington, refuses to accept that as the population ages, government spending as a share of the economy must rise if retirees aren’t forced to accept a lower quality of life. Indeed, it can’t even bring itself to raise the debt ceiling proportionately to allow debt to be issued to pay for spending the GOP itself agreed to in its latest budget. Instead of raising the debt ceiling, it will be “suspended” until March of 2019.
There has long been a healthy constituency for anti-debt and spending politics in the United States. And though the constituency for spending on Social Security and Medicare is greater, the fact that the U.S. Congress must vote every couple of years to authorize the issuance of new debt to pay for programs authorized by past Congresses means that the Japanization of the U.S. economy will be fraught with default risk.
Indeed, when S&P downgraded U.S. debt in 2011, it was do to the nature of the U.S. political system, which proved too willing to consider defaulting on U.S. government obligations for the ratings agency’s taste. The standoff showed that “America's governance and policymaking becoming less stable, less effective, and less predictable,” than previously thought, and this trend has only continued in the intervening seven years.
Japan��s economic present proves that an economy like the United States could continue to provide a growing standard of living for most of its citizens even with government debt levels much higher than it does today. But the Japanese experience also shows that getting there requires learning hard truths about the role of government in an aging society, and undergoing difficult reforms that will be hard on retirees. There is no evidence that the U.S. political system is prepared to learn these truths or ask for these sacrifices. In the meantime, there will be ample opportunities every year or two for anti-debt fanatics in Congress to roil Treasury markets with threats of default, increasing the chances of an unnecessary debt crisis right here in the U.S.
Christopher Matthews is a writer who splits his time between New York City and Accra, Ghana, with an interest in the intersection of markets, the economy, and public policy. He previously held staff positions at Axios, Fortune Magazine, and Time Magazine, and has been published in Forbes and Debtwire.