Despite voter concern over rising national debt, neither political party is incentivized to pursue deficit reduction. The necessary actions—cutting spending or raising taxes—carry immediate negative political consequences, making them highly unattractive policies, especially leading into an election.
The upcoming midterms offer a preview of the broader debt debate by testing voter appetite for specific Social Security fixes. Whether candidates who support raising taxes on high earners or those who propose benefit adjustments win will signal which fiscal solutions are politically viable for tackling the national debt in the future.
A divided government creates two distinct market risks. Government shutdowns have an indirect effect by delaying economic data, forcing investors to make decisions with incomplete information. In contrast, debt ceiling fights have a direct impact, forcing the Treasury bill market to price in default risk for specific maturities.