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As there has been disturbingly little action on either climate or debt over the past decades, and the political system does not appear to be getting more functional, the problem that’s resolved first is the one where a solution is imposed from outside the political system. That means debt will come first, because the bond market—which supplies the money in the first place—will stage a boycott at some point. No input from the government is required for this to happen. The bond market has staged rebellions before in the United States and arguably did so recently in the European periphery, with some help from Berlin.
As for the environment, there’s little evidence that the United States will tackle the problem in a serious way for at least four more years, not with fuel efficiency standards under attack, the Clean Power Plan being rolled back, a climate skeptic in the EPA, and so on. And while it’s possible China, the world’s largest emitter, follows the Western European route and takes the high road on climate with or without the United States, I’m not overly optimistic. China will do something, but probably not enough without American participation. The longer we ignore climate, the more expensive remediation gets, which exacerbates the political coordination problem across different countries and makes a solution less likely.
So debt probably gets “solved” first, and third-party solutions tend not to be very pleasant, as Greece knows. One likely trajectory is that the bond market charges higher interest rates because it doesn’t believe the United States has the political will to tax at appropriate rates or reform its entitlements system. In the short-term it doesn’t even matter if the bond market is correct. The United States refinances up to $7 trillion annually and every time it refinances, the bond market can ask for higher rates. Higher rates then translate into more deficits and debt, making the crisis somewhat self-fulfilling—a negative feedback loop. Presently, rates are quite low—on the order of 1.3% real, using recent inflation and 10-year Treasury data, as anemic growth puts a lid on rates and as money flows from the rest of the world, which has its own problems, into the U.S. Nothing guarantees the bond market will love the United States forever. Should the bond market protest, rates go up. An increase in bond yields of about 2.5 percent gross (to around 5 percent gross, assuming nothing else deteriorates, which is optimistic) would cause the deficit to roughly double over time, prompting the bond market to ask for even higher rates.
Eventually, the bond market can force rates high enough that borrowers either reform themselves or default. Gross debt-to-GDP is already high, at 105 percent toward the end of 2016, up from ~34 percent in 1976, and heading towards World War II levels by the 2030s, if not sooner. (Greece went under at ~112 percent of GDP, for what it’s worth, though international comparisons are always fraught.) The debt just keeps growing, because deficits are projected to run from -3.2 percent of GDP for 2016, per CBO, and hitting -5.0 percent of GDP in 2027, a trajectory CBO elsewhere called “unsustainable.” And CBO is probably right. Something has to change.
Almost everyone would prefer for that “something” not to be an American default. Default would be catastrophic for the markets—and while Trump actually hinted at something like a default during the primaries and the US during one of its recent shutdowns flirted with a technical default—I think it’s not highly likely. Rather, I think we start hitting various budgetary limits and what programs can be trimmed (the “discretionary budget”) get trimmed until the public gets fed up and demands a comprehensive response. At that point, the bond market will probably become more optimistic, the pressure will relent, and we can start repaying the debt or grow our way out of it, or both. That would be a good outcome and indeed, it’s a great reason to have the bond market in the first place. The period between that crisis and resolution, however, will not be pleasant.
It would be better to address both climate and debt now. Slowing down climate change today gives us more time to adapt and do so more cheaply; ditto for debt. We all know from our private lives that maintenance is cheaper than emergency repair. There are limits to household analogies, naturally, but they’re instructive.
Which problem will we be most likely to solve first, national debt or climate change? originally appeared on Quora—the place to gain and share knowledge, empowering people to learn from others and better understand the world. You can follow Quora on Twitter, Facebook, and Google+. More questions:
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