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It is important to remember that most of the people in Washington debates on economic policy do not know much economics. They tend not to be very good at arithmetic either. That is why they were blindsided by the collapse of the $8 trillion housing bubble that wrecked the economy.
As we get endless pontification about the crushing debt burden it is worth touching base with reality on occasion. In that spirit, CEPR brings you the latest data and projections on the ratio of the federal government’s interest payments to GDP, courtesy of the Congressional Budget Office (CBO).
Source: Congressional Budget Office.
As the chart shows the interest to GDP ratio is currently at a crushing 1.3 percent, near the post World War II low. However this figure overstates the burden somewhat. Last year the Federal Reserve Board refunded almost $80 billion to the Treasury. This was interest earned on government bonds and other assets it now holds. That leaves a net interest burden of 0.8 percent of GDP, by far the lowest of the post World War II era.
Of course the burden is projected to rise in future years. The baseline projections shows the burden rising to 3.3 percent of GDP by 2021, the end of the forecast period. This baseline is probably overly optimistic in some respects, since it assumes that the Bush tax cuts are allowed to expire and some other items in current law that will probably not happen.
If we adjust the the baseline for these factors, the debt to GDP ratio is projected to be just over 90 percent by 2021, approximately 20 percent higher than in the baseline. If we raise the interest payments by the same percent, then we get a ratio of interest to GDP of 4.0 percent, still not exactly crushing.
It is also worth noting that if the Fed continued to hold $3 trillion or so in assets, and rebated the interest earned on this money to the Treasury, then it would reduce the net burden of the debt by close to 1.0 percent of GDP. This would mean that even in 2021, if we just left everything to run its course, we would still not face as large an interest burden from the debt as the early 90s.
Okay, this arithmetic interlude is over. You can rejoin the Washington elite and start panicking over the debt again.
39 Comments
What happens if interest rates go up?
Also, why aren’t we issuing 30 year bonds at these historically low interests rates? Wouldn’t that lock in a lower interest to GDP number?
If I understand correctly, the Fed holds only $1.6T of the national debt, i.e., about 11%. So, I’m a bit astonished that the interest refund to the Treasury is 38.5% [i.e., (1.3% - 8%) / 1.3%] of the interest paid on the total debt.
Note that the Fed’s rebate to the Treasury included all profits, e.g., seigniorage on currency, etc.
The last 30-year auction was relatively under-subscribed and rates were higher. That is to be expected given the long-term impacts of failing to manage the deficit.
But Dean! Panicking over the deficits and the debt is so much better because you can convince everyone that war on the middle class is truly, truly necessary!
Wouldn’t you have to take off the Fed’s refunds to the Treasury in the early 90s as well to make it apples-to-apples comparison the 3% expected burden in 2021?
As clear as an azure sky of deepest summer.
You’d appreciate the current headline at HuffPo:
Bush to Bush To Bush (to Barack-in-the-Bush)!
Off topic. That Air Force Sgt was is being discharged because a ‘birther’ can’t obey Obama. Seem familiar? Sgt. Moran?
Remember the Tea party sign…”Don’t be a MORAN”.
Great job. The hysteria on the right over this issue is disheartening. As someone notes above, they need to fan the flames to justify their attack on the programs that the vast majority of Americans depend on. How so many people can be fooled by this is the real tragedy. These are the same people who have always tried to attack government in the name of efficiency and the myriad other catch phrases that have been used since FDR. The only difference now is a lot of people are buying the con today…
OK. Somebody has to say it. Irrespective of that, we still have over $12 trillion in debt and will likely get to $14 by 2012-13. Isnt’ that right?
Perhaps it’s just me, but tha SOUNDS like a lot of money and surely the debt on that much money is a lot money too. Hey, I’ve seen that clock in NY on TV tha tracks the nationsl debt. That’s scary stuff.
CORRECTION: “debt” should read “interest” in the 2nd paragraph.
The debt to GDP ratio is projected to be just over 90 percent by 2021? Really?
Actually,
US borrowing tops 100% of GDP: Treasury
AFPAFP – Wed, Aug 3, 2011
Sure, the interest to GDP ratio is currently at a 1.3 percent but interest rates can’t be assumed to remain low nor can the GDP be expected to grow.
US economic strength is weakening drastically with GDP growth at an anemic 1.3%. Government spending, largely financed by income taxes, is increasing much faster than median income. In a paper by Carmen Reinhart and Ken Rogoff, the authors of This Time Its Different found that when government debt-to-GDP ratio rises above 90%, it lowers the future potential GDP of that country by more than 1%
The U.S. jobless rate has risen for three months straight, and more layoffs are expected especially by state and local governments who are also deeply in debt.
The simple fact is that the US government currently spends about ten billion dollars per day, every day of the year, but it only takes in about six billion per day. You lose four billion per day and very soon you’re talking about real money — well over a thousand billion (a trillion) dollars per year.
The 2010 interest on the national debt was $414 billion. This diary by MMTer letsgetitdone projects interest costs of $11.8 trillion over the next 15 years, i.e., an average annual expenditure of $800 billion, which is a helluva lot of money.
In words of William Proxmire: “A few billion here and a few billion there, and pretty soon you’re talking real money.” The bottom-line question is: “Why do we have to borrow at all?”
How many people (including corporations, which are “people,” recall) have a near-zero, zero, or negative net worth?
There, see…………..$414 BILLION does sound like a lot of money. Thank you wig.
Ah yes. Rogoff. He hasn’t been debunked already or anything like that.
Likewise, increase in government spending versus … median income growth?!
Government expenditures and household expenses aren’t the same thing.
Right, there are four options to cut virtually all of $11.8 trillion over 15 years from CBO’s projected deficits that would each be preferable to cutting entitlements (or for that, raising taxes):
1. Congress itself (or a “Tsy-Fed Accord of 2011″) could lock in current near-0 policy rate and require Tsy to issue short-term T-bills (<1 year) instead of long bonds (and notes).
http://en.wikipedia.org/wiki/1951_Accord
2. Or to allow the Fed to control interest rates, Congress (or Tsy alone) could choose to pay debt service obligations by depositing jumbo platinum coins with Fed.
3. Or, to allow the Fed to control money supply and interest rates, Congress (or Tsy-Fed Accord) could simple direct the Fed to rebate the cost of all debt service (and not just on Fed-held debt) back to Tsy to reimburse the taxpayers for so generously sharing the Nation's seigniorage power with the banking industry. Whether this would require lower bank profits or higher transaction fees and/or interest rates is the Fed's problem.
4. Or, something completely out of left field, the FDIC could walk on the field ! The FDIC Board could peg its new (as of April 1) asset-based premiums to m Fed's policy rate. Since amount of MZM almost perfectly matches publicly held debt, the Fed could raise its interest rates to the moon, the higher cost of Tsy borrowing would be offset by higher FDIC premiums.
Of course the FDIC doesn't refund excess premiums to Tsy… yet. That could be agenda item number one of the Tsy-FDIC Accord of 2012. :o)
http://pragcap.com/paul-krugman-again/comment-page-1#comment-71013
When interest rates on Treasuries are this low, borrowing a large amount now to stimulate the economy makes sense. A sum of $3T to finance infrastructure deferred maintenance and to backfill state budgets could be spent efficiently.
But…we should remember that interest on the national debt is a transfer of wealth from ordinary taxpayers to holders of T-bills, a dooH niboR transfer. So tacking the debt so as to reduce this regressive transfer should be a priority when the economy starts to show signs of a bubble. And we should not be sucked in by the idea of a Goldilocks economy again.
How can we get you on a national stage?
sixgill:
If your Rogoff claim is correct, then that makes two that have been “debunked” — him and Baker.
Government spending that depends largely on income taxes, which mandates a correlation between the two. Nobody mentioned household expenses until you did. Need some help?
Perry has declared increasing the money supply by “printing” to be treason
Bonds only in the future.
A sustained mania is less “mass psychology” than fraud and opportunism.
Shhhh! Dean Baker!
We shouldn’t let Standard and Poore know about this. Keep it to yourself and us at FDL. (grins)
Thanks for raining in some cold hard facts.
Okay, between 1.3 and .8 percent. Well, I guess we must crush Social Security now so that in 27 yrs. there will be no need to borrow to pay out current benefit levels … if you believe the smart guys in the govt. can predict out that far, when they can’t even predict what the economy is doing next quarter correctly!!!
No, I don’t need any help. You’re the one who has been reduced to posting puerile little theses in the comments sections of web sites in order to attempt to rebut the writings of credible figures.
Furthermore, I find you obnoxious.
Baker hardly lacks credibility, nor am I going to get into some silly little argument here with you, nor will I spend time defending someone who doesn’t need my assistance.
(Hint: you’re lucky even I read what you wrote. Obscurity must suck when you want to attack credible public figures but lack any credibility or public stature yourself.)
To whom does this future massive ~4.0% of GDP go? If it would be removed from reinvestment, would it not kill any growth and possibly cause a decline? If not removed, how much adjustment in investment flows would make business (who are regressively distributing the burden) estimate the risk of non-growth to be intolerable?
The debt burden in present circumstance does not compare, even if numerically approximate, to that post WWII. The risk is much higher because opportunity for growth is clearly less (the reason for financialization in the first place.)
Furthermore, should growth decline, this anticipatory attack frames government debt as cause and justifies privatization, etc. as the solution. So, this would not be just a crisis of “greed” but rather a strategy to segue out of this failed stage of financialization.
It is insufficient to present estimates which demonstrate that this is simply a mistaken strategy. One must address the covert justifications. After all, the shame of greed doesn’t restrain the crew the US has cultivated.
sixgill:
I didn’t mention Baker’s credibility, I referred to my debunking of his above misuse of statistics which you have not specifically disputed. Apparently you are unable to do so, which doesn’t do anything for your credibility, does it.
In other words, try to get some facts and “get into some silly little argument here.” Who knows, you might be good at it.
Well, Mr. Baker, you do a great job of trivializing the interest on the national debt, but perhaps we should take a moment and ask ourselves this:
Which of the many, many programs and services being scaled back or cut could have been saved with the $414 billion paid out last year as interest?
Treasuries are the biggest bubble in the history of the world.
That said it is certifiably insane for political leaders not to borrrow every possible free dollar offered. Instead embracing deflation and depression. On the theory I suppose it will be good for people and make them act more conservatively. While any sane leader would take the money now and spread it around, maybe even to citizens, and plan to stiff the lenders later, when the time came.
Correct. Many people mistakenly compare the present times to the forties, when the boys came back from war, vast housing projects sprang up and the manufacturing-based economy exploded. The current situation differs in many, many ways. The US demographics are different and the world outside the US has changed, with Asia in its ascendency and the West in decline, among other factors.
Perzactly!
As @donbacon says, the situation is different because in 1945 and 1946, the folks mustered out of the military had substantial savings because of the rationing during the war. And it sparked inflation because the productive capacity was not totally switched over to domestic production when the Republicans insisted on ending price controls.
Instead of a housing glut, there was a housing shortage because of the large number of families formed during the war who were separated, with the wife staying with relatives.
The same folks scared about the debt now were terrified when Al Gore campaigned on halving the then $5T debt in 10 years.
The more significant point is that that that $414B is as transfer from ordinary citizens to holders of T-bills, who generally are substantially more affluent than ordinary citizens–or are managed institutions that take out a management fee for funds like 401(k)’s, are corporations, or are foreign governments.
A debt of $5T was a whole lot of money in 2000. But the panic on Wall Street was over Al Gore’s campaign promise to cut the debt in half (remember we were running surpluses) within 10 years. Instead, two wars, unfunded (no new taxes) Medicare Part D subsidies for Big PhRMA, and a housing bubble ran that amount up to $10T in 8 years.
But not insane for mis-leaders.
Did I read that right? The sane leader of a sovereign nation should borrow everything he could, intending all along to stiff the lenders later?
Seems like paying four times the DOE budget in just interest is a bad idea for multiple reasons, huh? Price just went up, too.
But, hey: it’s “not exactly crushing”, right?
If you are going to look at debt as a percentage of GDP you should look at total debt (federal, state, municipal, business, personal) which is 57 trillion giving an interest to GDP ratio that is more like 16% and probably more like 20%. Isn’t that correct?