We’ll All Pay for Uncle Sam’s Cheap Debt Fantasies

All the talk lately about the size of the national debt is obscuring the real problem: The US government made the wrong bet on interest rates, and that will cost taxpayers for years to come.

The government took on an unprecedented amount of debt in the last five years. Reasonable people can disagree about the level of spending, but the clear policy error was choosing to finance that spending with short-term debt while rates were at record lows. Now that rates are rising, so are the costs of financing all this debt.

It didn't have to be this way. We could have locked in rates when they were low. But at the time there was a pervasive belief that rates would never increase — even though, eventually, they always do. Now, as we face high debt service costs for decades, we can't afford to ever forget this lesson.

We got used to low rates, since they have been well below 5% for nearly two decades and only seemed to go down. Now rates are rising and causing all kinds of disruption in many sectors of the economy. One saving grace is that many households have a fixed-rate mortgage that shields them from interest-rate risk. The government could have made a similar choice when it took out its debt. Borrowing short is the basic equivalent of taking on an adjustable-rate mortgage when a fixed-rate loan could have been obtained at an absurdly low interest rate. Now the government — and its taxpayers — face interest-rate risk that may limit spending in the future.