The Coming Age of Austerity
Worrying about the fisc is uncool, but the alternatives may prove worse.
When the author was young, lo! these many slipping years ago, one of the faddish ways people with degrees would complain about the world was to talk about “austerity,” a dirty word in the same vein as “neoliberalism” and a few other choice terms that were soon replaced by the new vocabulary of griping furnished by the then-cutting edge identity politics.
The basic argument was that government spending and headcounts declined after the initial spasms of emergency legislation dealing with the 2008 financial crisis. In the subsequent period of low interest rates, the argument ran, there was more latitude for aggressive government spending to solve whatever structural economic problems you thought ailed the country.
While this line of argument was deployed mostly as a socially acceptable way to grouse about Barack Obama for college-educated young people, a dispositionally disgruntled demographic, it did contain a kernel of insight. There were (and are) real causes of concern about our system, particularly financialization and stagnation; it is easier to do something when credit is cheap.
The details undercut this simple picture somewhat. While total government spending declined, federal spending still grew steadily, and it is federal spending specifically, not total government spending, that is the primary variable for the national debt. Nor was government spending necessarily a political winner: The bank and auto company bailouts were spectacularly unpopular, and quantitative easing ended up bolstering financial institutions’ cash reserves more than stimulating any kind of tangible growth. Hence the Tea Party revolution, which was, in its strange way, the right-wing counterpart of the Occupy movement.
In any case, whatever pretensions to austerity were still hanging around flew out the window during Covid and the Biden presidency. Joe Biden, for better or worse, had the sort of visionary scope that Obama eschewed. In addition to a second, larger, and probably unnecessary round of Covid stimulus, there were packages for green energy, the semiconductor industry, and a grab-bag of other causes and interests on whom the sun of Washington smiled for a season. The result was, perhaps predictably, the worst bout of inflation the country had suffered since the ’80s.
It turns out that Americans loathe inflation, which is pretty amusing for someone who spends a lot of time writing about parts of the world where a 20 percent inflation rate barely warrants comment. They delivered unified government to the Republicans in 2024 on inflation, and they seem primed to throw them out of Congress this year on the same grounds. (Although the residual classical monetarist in me would like to distinguish between supply shocks and inflation simpliciter.) At the same time, the Trump administration has an ambitious if not always coherent program that needs to be paid for and that only minimally involves the legislature’s oversight.
Bond markets have been going berserk as a result, tightening credit even apart from the Federal Reserve raising benchmark interest rates. This is less than ideal: Tightening credit cramps growth, and growth declining means there will be less revenue filling the kitty at the same time that servicing the American sovereign debt is getting more expensive.
Something’s gotta give here. Either the American people will have to make their political peace with running the economy hot and the consequent inflation, or real austerity will come and wash all this spending off the streets. A debt crisis could force the issue.
Fiscal hawks have had a bad habit of predicting catastrophes that don’t come on schedule. I’m not an economist or a financier, so I won’t pretend to know whether the decisive moment will be next year, or in 2028, or further down the road. Yet it is simply true that servicing government debt is becoming thematic: At $1.2 trillion annually, it accounts for 19 percent of annual federal spending, a line-item second only to Social Security. More money going to interest payments, even short of some sort of cataclysmic reckoning, will simply continue to drag on other spending priorities. By hook or by crook, the government will be doing less.
This condition comes at a bad time in American politics. The Democrats are currently duking it out among themselves over whether a little socialism or a horse’s dose of it is the winning formula. The Republicans have also decided they don’t mind cranking on the taps for their own pet priorities, whether it’s blowing up mullahs or trying to get middle-class women to have children. An actual statesman running for president in 2028 would be sounding the alarm, trying to ameliorate or obviate the crisis before it happens. In the real world, however, it looks like the politicos will do what politicos always do: pass the buck and hold on for dear life. When the music stops, though, it is unlikely to come back on for a long while. Welcome to the Age of Austerity.
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