By COLBY SMITH
With inflation still above the Federal Reserve’s 2% target, economists and policymakers are on high alert for anything that may rekindle price pressures and make the central bank’s job all the more difficult.
Most of the focus in recent weeks has been on the side effects of President Donald Trump’s trade war amid an array of tariffs. But one economist warns that high government debt levels pose a risk, too.
New research by Ernie Tedeschi, the director of economics at the Budget Lab at Yale University and a chief economist at the White House Council of Economic Advisers under the Biden administration, underscores the linkage between government indebtedness and higher inflation.
“When you deficit finance policies, that is going to put upward cost pressure on American households,” Tedeschi said in an interview. Deficit financing involves using borrowed money to pay for government spending, like tax cuts and other policies.
As the recent pandemic era showed, the generous fiscal stimulus programs spearheaded by the Trump and Biden administrations stoked demand when supply chains were severely constrained, ultimately heating up inflation. The Federal Reserve was then forced to take aggressive action by raising interest rates, further increasing the costs borne by households.
Tedeschi estimates that a sharp rise in the deficit of around 1% of gross domestic product — roughly the same cost of extending the tax cuts Republicans are eyeing before they expire this year — would lower the purchasing power of U.S. households as much as $1,250 on average after five years.
If the Fed responded to rising price pressures by increasing interest rates, that would most likely feed through to not only higher mortgage payments but also those related to automobile loans and those for small businesses. Mortgage payments alone could rise as much as $1,240 per year in today’s housing market, Tedeschi found.
After 30 years, the cumulative loss per household from price pressures could reach $16,000. Household wealth, once adjusted for inflation and with higher mortgage costs factored in, could decline as much as $36,000 on average.
Trump and his top economic advisers have made reining in government spending a cornerstone of the administration’s economic agenda, with Treasury Secretary Scott Bessent recently calling for a “detox” from government spending.
But economists are skeptical about how much progress the president will make, especially given the haphazard nature so far of the cuts spearheaded by Elon Musk and his Department of Government Efficiency.
The Republican budget plan recently approved by the House calls for $2 trillion in spending cuts but $4.5 trillion in tax breaks.
“If you are truly worried about debt and deficits for debt and deficits’ sake, then you really need to be just as worried about revenues,” Tedeschi said. “As in, don’t cut taxes.”
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