The Failure of Anti-Austerity Populism

To understand the populist revolt against free trade and other pillars of mainstream economics—a revolt that US President Donald Trump harnessed to his political ambitions with remarkable skill—one must look back to the anti-austerity movement that followed the 2008-09 global financial crisis.

- KENNETH ROGOFF

In the aftermath of the crisis, anti-austerity advocates began arguing that the so-called "government budget constraint" is less of an economic necessity than a malign intellectual construct that cruelly restricts social spending and transfers. In their view, governments—at least in advanced economies—could almost always issue more debt at minimal long-term cost.

During the 2010s, as interest rates—especially on long-term government debt—fell to historic lows, the anti-austerity case seemed not only politically convenient but also, to many, intellectually compelling. Even after the US government's debt-to-gross domestic product (GDP) ratio rose by nearly 40 percent in the years following the 2008 crisis, many economists asked: Why not borrow more?

The answer was that much of the debt was relatively short term, leaving the US highly exposed to rising interest rates. After the Covid-19 pandemic, as interest rates returned to more normal levels, US debt-service costs more than doubled, and they continue to climb as older bonds mature and must be refinanced at higher rates.