Republicans need to accept tax increases. Democrats need to accept limits on the welfare state.
America’s holiday from history is over: Debt matters again. It is not just that the national debt is so big it cannot be ignored. It’s that the end of the era of near-zero interest rates means it now costs money to borrow. Unfortunately, the Republicans’ budget bill currently under consideration in Congress doesn’t even pretend to take debt reduction seriously — though, to be fair, neither party does.
That will have to change. Higher rates will eat into the federal budget, forcing both parties to face some hard truths over the next decade. Republicans will need to accept that taxes will have to increase. Democrats will need to accept that the welfare state can’t keep expanding. The challenge for both parties, aside from acknowledging these realities, will be to respond in a smart way, with policies that are fiscally responsible and enhance growth. Instead of the other way around.
The great thing about near-zero rates, for individuals as well as governments, is that they create the illusion you can spend as much as you like without facing any trade-offs — after all, borrowing seems free. Some economists even argued as much, and politicians, who never need an excuse to spend, were happy to follow their advice.
Continue reading the entire piece here at Bloomberg Opinion (paywall)
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
Photo by ROBERTO SCHMIDT/AFP via Getty Images
