Budget angst is on the rise: markets edition.

That's fine. Welcome to my world. But can we think a beat on how we got here?

Here’s a headline from this AM’s WSJ:

Then there’s the chorus of Republican lawmakers complaining about the huge $5+ trillion this benighted budget bill now in the Senate would add to the public debt. (It’s scored as adding ~$3t, but that assumes phase outs of tax cuts, when the whole raison d’etre for the damn thing is to prevent the phaseouts from the last time they ran this play.)

The Journal story is riding a similar wave to ones I’ve surfed here, arguing that this time may be different, such that even long-term fiscal doves like myself are getting more hawkish. Roge Karma’s Atlantic piece is a great explainer of this emerging dynamic.

Far be it from me to not welcome all comers to what I believe is the correct angst for this fiscal moment. But just to keep it slightly real, let’s recognize that there’s a bit in here of the arsonists complaining about the heat from the fire. And to be fair, that’s not just a slap at Rs. Both sides, along with market participants cheering them on to this day (the same ones complaining about the debt implications of the bill are excited about the tax cuts tilted their way), have contributed to a politics that refuses to deal with our forbidding fiscal path.

First, why is this time different? Why are doves getting hawkish? Why are perma-hawks getting more of a listen than usual? Let me count the ways:

—The budget deficit is highly elevated absent war or recession. IOW, it’s structural. Consider this: in ‘23 and ‘24, the unemployment rate was below 4%, but the budget deficit was above 6% (that’s -6%, but you know what I mean). When I take the average historical deficit in (fiscal) years when the unemployment rate was that low, I get a deficit of ~2%. This is largely the result of decades of tax cuts that have broken the linkage between the economic expansion and revenue flows to the Treasury.

—Interest rates are elevated and potentially on the rise. This, second only to the politics I emphasize below, is the biggest deal. When the stock of your debt is $30 trillion, one point higher interest on the debt = $300bn in added debt service. The figure shows the interest rate on 5-year Treasuries (I use that maturity because it’s close to the blended rate the gov’t pays to service its debt), along with the “term premium,” the extra yield lenders expect to lock up their money. Both are elevated—the term premium was negative for a bunch of years, underscoring how riskless investors considered this debt—but importantly, neither variable is that elevated in historical terms.

—As long as the growth rate is higher than the interest rate, debt is a lot more sustainable. Intuitively, you’re generating enough income to handily service your debt. But the Trumpies cannot be trusted to maintain the solid growth trend they inherited.

Which brings us to the biggest constraint by far: the fundamental unwillingness of policy makers to deal with these fiscal developments. Doing so is not at all rocket science, and given the historical context of those rates shown above—they’re not that elevated yet—there is, at least in theory, time to hammer out a deal to raise revenues and cut spending (yes, it’s mostly a rev shortfall but political compromise requires both sides of the deal; to be clear, there’s no way to justify cutting spending on the poor).

But the market bigshots sounding alarms have almost always supported, and continue to support, the high-end tax cuts that got us into this mess. And, of course, Republican Congresses and presidents, from Reagan to Trump, have proposed and legislated these cuts. Democrats, more often than not, have then extended them, though to at least their partial credit, often nibbling away at the giveaways to the top (in the Biden admin, we proposed significant new high-end taxes to at least stop digging a deeper debt hole but they never got anywhere).

If you read my book review of John Cassidy’s book “Capitalism and Its Critics,” you’ll recognize a similar theme herein. The solutions, in that case the Keynesian macro agenda accompanied by strong policies to address market failures (e.g., climate), “abundance” blockages, and unaffordable necessities, are known but are blocked by the accumulation of concentrated wealth and power and its subsequent impact on politicians and the political process.

Today, some of those same folks are complaining about the path of the budget and lack of political will to improve that path. They’re right to worry, but the solution to jam that we’re in—you know, the one featuring an authoritarian regime that views the Constitution as an optional constraint—requires them to share more power with Democrats, progressives, and those who would raise their taxes and regulate their finance.

Simply put, we cannot get to where we need to be, whether it’s the budget, the economy, or the survival of democracy, without a politics, and a donor system that supports that politics, that looks quite different from what we have today.