James Carville may not be right about many things in politics, but one of his truisms from three decades ago held true in recent days. In 1994, Carville quipped that he had changed his mind about wanting to be reincarnated as the pope or a great baseball player: “Now I would like to come back as the bond market. You can intimidate everybody.”
Donald Trump implicitly conceded as much when deciding to delay his “reciprocal” tariffs, admitting that “people were getting a little queasy” in the bond markets. That unease should provide all the reinforcement that Republicans in Congress need to get serious about tackling budget deficits by ending the overspending that has plagued the federal government for far too long.
American Overspending
Within the tariff announcements lies an unspoken irony. Tariffs intend to bring back jobs and industries to the United States from overseas — at the same time that we still need investments from countries overseas to buy the Treasury bonds that fund our multitrillion-dollar budget deficits.
Yes, the budget deficit and trade deficit are two distinct concepts. But in this case, the two have a distinct correlation, because our country — both the federal government, and we as Americans collectively — has been spending beyond its means for far too long. If government had not overspent as much as it has, our trade deficit would not stand as high as it does, because families would not be able to afford all the imported goods they buy absent transfer payments from Washington.
As some observers have noted, there are two ways to tackle America’s overspending problem — by addressing the trade deficit or by tackling the budget deficit. Imposing tariffs may lower trade deficits, but may also make industries less efficient and productive. If imposed for a prolonged period, American businesses will not face a realistic threat of foreign competition, which will reduce their incentive to keep innovating.
By contrast, tackling the budget deficit — which has as its root cause spending on entitlement programs — could yield positive economic benefits. Whereas tariffs could make American businesses less competitive and dynamic, reforming entitlements in a way that rightsizes the welfare state could increase the labor force (e.g., through work requirements in Medicaid, reforming Social Security disability, etc.) in ways that help promote economic growth. Yet Republicans keep falling into the leftist trap of opposing “cuts” to government programs, rather than tackling unsustainable spending.
More Rough Seas Ahead?
The recent queasiness in the bond markets may just be the tip of the proverbial iceberg. The White House has made no secret of its desire to leverage this summer’s impending debt limit deadline to muscle through its “big, beautiful” budget reconciliation bill.
One can easily envision a scenario where Senate Republicans lose their nerve (to the extent that they ever had any), pass a bill with tax cuts galore and no spending restraint, and then attempt to “jam” House conservatives by saying that the world will end if they refuse to enact it. White House staff are already admitting as much: “Gun to the head, the whole agenda, and the country’s credit rating and global depression all rolled into one.”
But even if that scenario happens — and it shouldn’t — passing yet another spendaholic budget may no longer pass muster with the bond market. As one financial analyst observed about federal fiscal policy: “They’re pushing this very undisciplined budget, and the market’s not taking it well. … Trust is going down.”
There’s a reason why Michael Mullen, then the Chairman of the Joint Chiefs of Staff, said in 2010 that “the most significant threat to our national security is our debt” — not least because interest on that debt now roughly equals the size of our entire military budget. The ructions in financial markets over the past few weeks and Washington’s dependence on foreign entities to keep funding our (over) spending illustrate why lawmakers need to do something to get our fiscal house in order. Congress should (finally) show some spine and get to work.
