The arrival of a new presidential administration invokes new beginnings and a break from the past. Still, realities from previous administrations remain, such as a fiscal challenge that demands immediate attention. It may weigh on the newcomers even more than they realize today. We can only hope they take it more seriously than their predecessors have done.

The longstanding notion that debt accumulation is benign, based largely on interest rates that for a time fell below growth rates, has proven dangerously misleading. This flawed thinking ignored both human nature and economic reality: Politicians rarely limit borrowing to one-time emergencies (as the theory requires), and interest rates inevitably rise. Today, we face the consequences of these miscalculations.
As economist Hanno Lustig of Stanford University rightly noted on X, "Right now, with the 10 year US Treasury yield trading well above 4.5% and the federal government spending roughly the equivalent of the defense budget just on interest expenses, a fairly broad-based consensus seems to be developing among economists that the fiscal path we're on is in fact not a sustainable one, as (Federal Reserve Chair) Jay Powell pointed out 4 weeks ago."
Treasury Secretary Janet Yellen agrees. She recently said, "Well, I am concerned about fiscal sustainability," adding, "I believe that the deficit needs to be brought down, especially now that we're in an environment of higher interest rates."
With inflation risks persisting and entitlement spending surging, the situation cannot be ignored. So here's hoping Lustig is right that "2024 may also be remembered as the year U.S. fiscal exuberance died."
My complaint, however, is that we got to this point to begin with.
Yes, incentives make politicians eager to spend while letting their successors figure out how to pay. However, encouraging this irresponsible behavior with theories about free lunches and interest rates always being low was always unwise. It was never a secret...