While Republicans on Capitol Hill work toward passing President Trump’s “one big, beautiful bill” — with work and investment tax cut incentives, along with significant deregulation, and depreciation bonuses for equipment and factories — you hear a lot of talk from liberals that the legislation will cause high budget deficits … which in turn will crowd out investment, drive up interest rates, and actually depress economic growth.

Well, we heard the same exact fearmongering during the JFK tax cuts, the Reagan tax cuts, the Clinton tax cuts, and Mr. Trump’s first-term tax cuts.

None of the fears ever panned out.

Actually, the nub of the debate is the so-called link between budget deficits and interest rates.

Models from the Congressional Budget Office and the Penn Wharton argue that bigger deficits create higher interest rates. They are wrong.

Actually, a good case can be made for the inverse: that higher deficits actually lead to lower interest rates. And lower deficits lead to higher interest rates.

How is this possible?

Well, larger deficits mainly come from weak or even recessionary growth. That triggers automatic spending stabilizers in the budget, and it also sinks revenues from higher unemployment and falling corporate profits.

And recessions bring down interest rates.

On the other hand, strong economic growth reduces the demand for budget assistance programs, increases revenues as more people work and businesses deliver higher profits.

Economic booms raise interest rates.

It’s quite true that today we have high budget deficits and the federal debt to GDP ratio is about 100 percent, and people are complaining about this. Yet if you go back to the 1970s, the debt-to-GDP ratio was at nearly an all-time low of about 25 percent.

Except, wait a minute — that was during a very bad economy, with repeated recessions and hyper-inflation under Nixon, Ford, and Carter.

So, be careful what you wish for.

Let’s turn to a longer historical perspective.

Between 1947 and the year 2000, more than 50 years, the American economy grew at about 3.5 percent per year. However, over the past 25 years, economic growth slowed to 2.1 percent per year. So, we do have larger deficits and debt today, but it’s because the economy slowed so much.

And then you can look at some specific periods.

During the Reagan recovery years, real GDP increased by more than 4.5 percent per year, but interest rates were much higher than today, averaging close to 10 percent yield on the bellwether 10-year Treasury bond.

During President Clinton’s second term, aided by the Gingrich Congress, real GDP growth averaged 4.4 percent, but the 10-year bond yield averaged 6 percent.

Today’s 10-year bond yield is about 4.5 percent, much lower than the Clinton years or the Reagan years. Yet growth then was a lot higher then than it is now.

I think there are two major reasons for today’s high deficits and debt.

First, economic growth has slowed markedly during the past 25 years.

Second, we’ve had two terms of the very liberal Obama administration, Covid, and one term of an even more liberal Biden administration.

So while economic growth slowed during these years, automatic spending stabilizers kicked in, but on top of that there were vast increases in entitlements and the Clinton-Gingrich welfare to workfare reform was reformed — workfare was out, and welfare was back in.

All I’m pointing out here is that there’s no reason to assume that tax cuts will lead to deficits that will drive up interest rates.

In fact, I would argue supply-side tax cuts will keep short rates and inflation low, while longer rates could actually rise.

Even more, I would argue that a return to 3.5 percent growth, rather than the less-than-2 percent estimates from CBO, will go a long way toward reducing all the ratios: spending to GDP, deficits to GDP, and debt to GDP.

They’ll all move lower, which is a good thing.

In other words, put the fearmongering aside, and let economic growth solve so many of our problems.

From Mr. Kudlow’s broadcast on Fox Business Network.

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This article has been updated to clarify the economic impact of fiscal developments at Washington.