Higher rates spell an end to the case for putting huge programs on Uncle Sam’s credit card

Just a few years ago, Washington felt more comfortable pushing for massive spending programs financed by the government and fueled by cheap borrowing costs. But that era is now over.Low interest rates at the start of the 2020s encouraged liberal lawmakers to push for sweeping spending programs such as the Green New Deal, Medicare for All, and then-President Joe Biden’s Build Back Better agenda. Low interest rates made some see the government as simply able to finance these spending plans, but now, as rates rise, the government is spending more just to service its existing debt, making the case for more borrowing far more challenging.“I think there is at least some growing recognition among more of the middle of the Democratic caucus that there isn’t endless amounts of fiscal space to just throw money at things,” David Ditch, a policy analyst at the Cato Institute, told the Washington Examiner. GRIM $40 TRILLION DEBT MILESTONE RAISES QUESTIONS ABOUT FISCAL COMMISSIONAs the United States emerged from the COVID-19 pandemic, interest rates were ultra-low, making borrowing ultra-cheap and sort of removing one concern as lawmakers pushed for massive fiscal stimulus packages.Many on the Left — such as Rep. Alexandria Ocasio-Cortez (D-NY) and Sen. Bernie Sanders (I-VT) — advocated the Green New Deal, which would have leveraged federal spending to curb climate change and create a federal jobs guarantee, to the tune of trillions of dollars.That, and programs such as Medicare for All, were big talking points for Democrats running in the 2020 presidential election. Some, such as Sen. Cory Booker (D-NJ), cosponsored Green New Deal legislation, and others, like former Vice President Kamala Harris, explicitly called for such a plan.Likewise, 2020 contenders, including Sanders, Sen. Elizabeth Warren (D-MA), and former New York City Mayor Bill de Blasio, all fully endorsed Medicare for All, while several other candidates, including Booker and Sen. Kirsten Gillibrand (D-NY), also supported it.But since then, the political calculus for Congress spending trillions of dollars on these massively ambitious policy proposals has lost steam. In part, because borrowing costs would cause any such plans, without pay-fors, to spike the national debt even further after it just crossed $40 trillion.The yield on the benchmark 10-year Treasury security, for instance, has risen from around 1.5% at the end of 2021 to 4.75%.Ryan Young, a senior economist at the Competitive Enterprise Institute, said that a lot of those proposals, once considered politically viable for Democrats, would have a difficult time getting enough votes — even if Democrats had the trifecta of the White House, Senate, and House of Representatives.“The spendiest of the spendy policies, like the Green New Deal, a Medicare for All proposal, a lot of things that maybe DSA types are proposing, they fall flat with the rest of the party,” Young told the Washington Examiner. “And frankly, that super spendy wing of the party has been mostly confined to college campuses.”Young said that spending plans such as these now have a fundamentally different fiscal calculation than they did in the early 2020s, when they were major talking points.“And I don’t think your average voter is going to be attuned to this, but interest rates are a big reason why,” he said. “I was looking at the 10-year bond rates, which are creeping up to 5%. A few years ago, they were as low as 1%.”Higher yields make borrowing and financing such massive spending proposals much, much more expensive. And some Democrats even blanched at the price tags back when rates were very low. For instance, then-Sens. Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ) used their leverage to reduce the size of Biden’s Build Back Better agenda.But now that rates are higher, it makes spending ever more perilous.In February, the Congressional Budget Office projected that federal debt held by the public would reach 101% of GDP this year. By 2030, debt will exceed 108% of GDP, surpassing the all-time high during World War II. The CBO said debt is projected to be 175% of GDP by 2056.A big concern with higher yields on Treasuries will be the increased cost that the government will incur in servicing that debt.Federal government payments on interest have risen to nearly 4% of GDP, up from 2.5% at the end of 2021. Interest costs have not been this high since the 1990s, when pressure on the federal government’s finances led to a deal to balance the budget between then-President Bill Clinton and the GOP.Former Rep. Carolyn Bourdeaux, a Georgia Democrat who is now the executive director of the Concord Coalition, which focuses on balancing the budget, told the Washington Examiner that for every tenth of a percentage point that gets added to the yield, some $380 billion in net interest over 10 years is added.“So it has an enormous impact,” she said.Ditch said that with the fiscal concerns, higher yields, and mounting debt, there “isn’t sort of the almost the consensus position” among Democrats to push for these big-ticket spending items.Some of the most ambitious spending programs were lauded by evangelists of modern monetary theory, which essentially posits that concerns about spending shouldn’t necessarily constrain governments.“I guess it’s using the monetary printing press as a first resort rather than a last resort,” Young said of MMT as a philosophy.Young said that such economic policies lead to inflation, which is now the No. 1 issue that voters are concerned about.“The MMTers have been pretty quiet since COVID because they did all the spending programs that they wanted, and then we got inflation because of it,” he added.And even before this year, many Democrats backed off endorsing sweeping spending legislation like the Green New Deal after inflation shot through the roof under Biden’s first term following the pandemic stimulus spending.For instance, in 2024, when Harris was running for president, the Washington Examiner first reported that she had reversed her support for a federal jobs guarantee, a key pillar of the Green New Deal.A federal jobs guarantee would mean that the federal government would provide a job to anyone who wants one, a massively costly proposal that harkens back to the New Deal policies of the 1930s.BUDGET COMMITTEE TO WEIGH FISCAL COMMISSION TO WRANGLE $40 TRILLION DEBTAlso, while some, like Ocasio-Cortez, who are aligned with the more socialist wing of the party, will likely still push for big spending programs like Medicare for All, others seen as frontrunners for 2028, like Gov. Gavin Newsom (D-CA), are unlikely to do so.“If we look at some of the more prominent names who are people being talked about in terms of 2028, Gavin Newsom isn’t someone who’s going to be promoting an MMT-style Medicare for All kind of agenda,” Ditch said, adding that he also didn’t get the sense that Harris was pushing for that in 2024.