STEVE INSKEEP, HOST:
On Friday, the credit rating agency Moody's dropped the credit rating of the United States. That's us - our federal government. We had a AAA credit rating, the very best, but Moody's is the last of three credit agencies in recent years to downgrade us. David Wessel has no deficit of information about this. He's director of the Hutchins Center at the Brookings Institution. David, good morning.
DAVID WESSEL: Good morning, Steve.
INSKEEP: This seems to have something to do with budget deficits. What's going on?
WESSEL: Right. Well, Moody said that, quote, "successive U.S. administrations," plural, "and Congress have failed to do anything to reverse the trend of large annual deficits and a rising interest tab." And it said it doesn't expect this year to be any different. So it predicts that spending - particularly on benefit programs - will continue to rise. Government revenues will remain flat. That'll push up the debt and means we're going to spend more and more money on interest. Now, Treasury Secretary Scott Bessent was asked about this on "Meet The Press" yesterday, and here's what he said.
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SCOTT BESSENT: I think that Moody's is a lagging indicator. I think that's what everyone thinks of credit agencies. We didn't get here in the past hundred days. It's the Biden administration and the spending that we have seen over the past four years. You know, we inherited 6.7% deficit to GDP, the highest when we weren't in a recession, not in the war...
INSKEEP: OK. He says not our fault. Is he right?
WESSEL: Well, he's certainly correct that the Moody's downgrade is a lagging indicator. The other big rating agencies - S&P and Fitch - dropped their AAA ratings in 2011 and 2023, respectively. And he's right that President Trump did inherit a large federal deficit. But he is not recognizing that the Republicans in Congress, with President Trump's support, are doing things that will make it worse. So we were already on track to have a federal debt that is higher - measured against the size of the economy - than we ever had before or during World War II. The president has yet to publish a detailed budget. The bill pending in the House would not decrease the federal debt because it would cut taxes more than it would reduce spending, and it would add $2.5 trillion or more to the federal debt over the next decade.
INSKEEP: Yeah. I'm just trying to figure this out. We have House Republicans who have said, we're spending way too much. This debt is unsustainable. And they're adding more debt at a time when, if I'm not mistaken, the interest rates that we have to pay are going up because our credit is getting a little worse among other factors. Is that all correct?
WESSEL: That's absolutely right, Steve. What we think is going on in the bond market, where global investors buy U.S. Treasurys is, they're getting a little nervous about how we have - show no fiscal discipline, and there's all sorts of challenges to the rule of law, to norms and all the things that are going on, and that's pushing up interest rates a little bit every day. And when you owe as much money as the U.S. government does, pushing up interest rates just a few tenths of a percentage point makes a huge difference in how much we have to spend.
INSKEEP: Yeah. I'm thinking about the difference between right now and say, the beginning of the pandemic or other recent crises when people were able to say, we can borrow practically for free. There's virtually no interest rate on this money we're borrowing, so we might as well borrow to do important and necessary things. We're heading into a different kind of world now.
WESSEL: Absolutely. We're already spending more on interest than we spend on Medicare, the health care program for the elderly. Interest accounts for 13% of all federal spending, and it's heading up. And so what is that going to mean for us? Well, one thing, higher interest rates that the government pays also mean higher interest rates that we pay on mortgages and car loans. And over time, economists tell us that the more the federal government borrows, the less capital is available for private investment in factories, research and development, software and stuff like that. And so basically what we're doing is we're spending now and we're reducing the living standards of future generations below what they would otherwise be. And there is no relief in sight. The arguments that are going on in the House are changing this a little bit, but we're on a trajectory to be deeper in the hole at the end of this period than we were when we went into it, and we were already pretty deep in the hole.
INSKEEP: David, thanks for your insights. It's always a pleasure to hear from you.
WESSEL: You're welcome.
INSKEEP: David Wessel is director of the Hutchins Center at the Brookings Institution. Transcript provided by NPR, Copyright NPR.
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