Does anybody know what the Republican civil war is actually about? Why, exactly, did House Republicans oust Speaker Kevin McCarthy in early October, then spend three weeks finding a replacement?
The principal explanations for Republican infighting seem to be egomania, personal grievance, and ideological rigidity. The GOP has devolved into a confederation of warring tribes that never forget or forgive an offense and vow retribution forever.
But once upon a time, House Republicans had a purpose, even if it was a cynical one. The purpose was to cut federal spending. That has gotten lost amid the party's internecine combat, but markets are beginning to signal, "Hey, maybe that’s not such a bad idea."
While the House Republicans have been front- and backstabbing each other, the bond market has been signaling that stratospheric levels of federal debt might finally be getting too high. Long-term rates, such as that on the 10-year Treasury bond, have been rising by more than short-term rates, causing turbulence in stocks and pushing borrowing costs for consumers ever higher. The bond market doesn’t always explain itself, but one possible, or probable, cause of rising rates is the massive issuance of US debt into a market that simply can’t digest it all.
When there aren’t enough buyers for debt, rates rise, to make it a more attractive investment. That’s what has been happening for the last few months, with the benchmark 10-year Treasury rate rising by a full percentage point even though the Federal Reserve is probably finished raising short-term rates.
The federal deficit for fiscal 2023, which ended in September, hit $1.7 trillion, up from $1.4 trillion the year before. The “real” deficit in 2023, accounting for student debt relief that was enacted then killed by the Supreme Court, was $2 trillion. Most forecasters think annual deficits will stay in that range or go higher for the foreseeable future.
That’s bad enough. But the sharp rise in rates during the last 18 months poses another problem altogether, because the government’s borrowing costs are heading higher. Much higher. This exposes the daze policymakers got lulled into during the last 25 years, and the peril American taxpayers may face sooner than anybody thought just a year or two ago.
The average interest rate the US government pays on its debt dropped from 8.4% in 1990 to 1.7%, in 2021, according to Brian Riedl of the Manhattan Institute. By the end of September, that had drifted back up to nearly 3%, the highest level since 2011. But in 2011, the national debt was only (!) $15 trillion. It’s $33 trillion now. And that average borrowing rate is certain to rise at least for a while, as lower-rate Treasuries issued during the last 10 years mature and the feds borrow new money at today’s higher rates.
So the government debt situation is rapidly deteriorating for two reasons: the sheer amount of borrowing and rising rates it must pay on what it borrows. In 2019, before COVID, the Treasury paid $577 billion in interest payments. That rose to $879 billion in 2023, which is more than taxpayers spent to fund the entire Defense Department. Before long, the government could be paying the equivalent of two or three Defense Departments every year, just in interest costs.
Republicans are basically always trying to cut spending, sometimes seriously and sometimes not. Earlier this year, they refused to raise the federal borrowing limit until Democrats agreed to modest spending cuts during the next decade. Many conservative Republicans, including the new House Speaker Mike Johnson, were outraged that the temporary spending bill Congress passed at the end of September didn’t include deeper cuts, one reason a handful of Republicans abandoned McCarthy on Oct. 3 and basically maneuvered to fire him.
Nobody should think Republicans are the arbiters of fiscal sanity. The spending cuts they demanded earlier this year were easy pickings that avoided hard choices, like drilling into defense, Social Security, and Medicare, where most of the money is. And they normally call for spending cuts with one fork of the tongue while demanding tax cuts with the other, which doesn’t do anything to shrink the huge and growing federal debt. It just reduces the outflow of government funds in order to reduce the inflow, leaving the core problem unaddressed.
But the market may be now saying, "It’s time to start somewhere." Everybody who follows the federal budget follies knows that getting the debt under control will require a combination of higher taxes, reduced federal benefits, and other measures. A new analysis by the Penn Wharton Budget Model highlights several necessary measures: higher taxes on the wealthy, reforms to Social Security and Medicare, cuts in other programs, and a new value-added tax that would function like a national sales tax. US debt has simply gotten too large to address with spending cuts or tax hikes alone.
Republicans demanding spending cuts normally target tiny, symbolic measures that simply allow them to preen as budget hawks. If they stood for something, they’d go further and force Democrats to muster some kind of response for how to finally get federal borrowing under control. President Biden, for his part, favors higher taxes on businesses and the wealthy, but he wasn’t able to get those through Congress when Democrats controlled both houses, during his first two years in office. Biden also mutters gobbledygook on the federal budget from time to time, claiming things are getting better under his watch when in reality they’re getting worse.
House Republicans finally elected a new speaker on Oct. 25, but all the tensions that led to McCarthy's ouster remain. With the urgent need to pass government spending bills, the infighting could be so intense that they won’t be able to hear the bond market telling them that they may be onto something. Sooner or later, though, it will command the attention of everybody in Washington.