Deficit spending causes a wealth transfer from taxpayers and government beneficiaries to investors and financial institutions. Even at our current low interest rates, every $1 in federal benefits costs $1.20 if financed on a ten-year note. Which is to say, for every $1 in benefits they fund, taxpayers pay 20 cents to a bank, a mutual fund, an insurance company, Caribbean offshore havens (the 14th-largest holder of Treasury debt), the oil-exporting nations, or our dear friends in Beijing.
Treasury interest rates approached 8 percent as recently as the Clinton years. Our national debt is headed toward $17 trillion. The portion of the debt held by the public (by banks, mutual funds, and other investors) is about $12 trillion. Financing that at 8 percent would cost just under $1 trillion a year, or nearly as much as Americans paid in personal income taxes in 2012. That means all of your 1040 money going to bond investors. Treasury interest rates have within my lifetime exceeded 15 percent — old ladies of my acquaintance still speak wistfully of the return on their T-bills during the Reagan years. But if interest rates should rise to that level again — and there is no reason to believe that such a thing is impossible — then interest on the publicly held portion of the debt would far exceed both personal and corporate income taxes, and in fact would take up 80 percent of all federal revenue. And the debt is growing every day.
The politics of that sort of development would be worrisome, to say the least. One of the least attractive features of life in the Obama era is that class-warfare politics is well and truly off the leash, and economic resentment has been harnessed as a political force to an extent not seen since the days of Huey Long. If the regressive nature of deficit spending should be unveiled in some particularly dramatic way — if 80 cents out of every $1 paid in taxes represented a direct wealth transfer from struggling taxpayers to relatively well-off investors — default would move from an unthinkable outcome to a politically viable option.