Argument For More Debt

Mark Weisbrot writes yesterday in The Guardian about the benefit of an Obama second term and how the media facilitated that eventuality. His piece is, as Guardian pieces tend to be, fairly well reasoned in a liberally slanted manner, and I will comment on just one statement that he makes in support of America’s fiscal position. It is one much used by economists in arguing for continued deficit spending, and I regard it as absurd.

“For the record,” he says parenthetically, “the US currently pays less than 1% of GDP in net interest annually on the federal debt – less than it has paid during the past 60 years.”

When you make an application for credit, does the bank look at the amount of interest you pay as a percentage of your employer’s income? “I pay interest on my $400,000 mortgage at 3.9% which is $15,600. My employer’s income is $12.6 billion, so I am paying a mere 0.0012% of my employer’s income in interest.” Right, I don’t think so.

For a long time economists cited government interest as a percentage of government revenue. That, however, became a large and frightening percentage, so they began citing interest payments as a percentage of government expense. Since we spend more than we take in that was a smaller percentage, but eventually that also became a large and frightening percentage, and so now we are citing interest payment as a percentage of GDP. That is a completely meaningless number, but it has the advantage of being small and thus facilitates the argument for continued deficit spending.

Economists used to do the same thing with government debt, by the way. They cited the amount of the debt as a percentage of annual government revenue, then of annual government spending. When the amount of debt became larger than annual spending, that is the percentage was larger than 100%, the basis switched to a percentage of GDP and the basis for interest payments followed suit.

I have no idea what basis they will use when the debt as a ratio of GDP becomes too large as it has in, for instance, Japan, where it is more than 200% of GDP. Probably use the world economy or some fictional World Bank balance.

The other nonsensical aspect of this issue is that the reason for our low cost of interest on the debt is that government has artificially set interest rates at zero and left them there indefinitely. The reasons why this is a pernicious policy are too numerous to go into here, but the policy is idiotic in the extreme and eventually the interest rate which we pay on that debt is going to go back up to a sane level. When it does the grits, as we say in the south, are really going to hit the fan.

If you don’t know what grits are, I recommend Wikipedia, although it says that they can be fried in vegetable oil or butter. Good God. Frying them in anything other than bacon drippings or lard would be criminal.