Paul Krugman had another of his “don’t worry, be happy” pieces cheerleading for the current government establishment a few days ago, in which he tries to assure us that we should be entirely comfortable with government debt in any amount. He has told us many times that the amount of debt is not a concern because government debt is never repaid, and in this piece he assures us that the interest we are paying on that debt is a miniscule amount not worthy of concern, being barely over one percent of our nation’s Gross Domestic Product. He gives us a nice graph and asks if we,
"See the crisis?" adding that, "Neither do I." Right.
He could also tell us how the interest payment is related to the whale count off the coast of Patagonia, which I’m sure would be even more comforting, and would be just about as meaningful as its relationship to the GDP. Economists like to relate everything to the GDP, because it turns big numbers into small numbers and makes everyone comfortable with things that should be scaring the shit out of them.
I am not one of those silly pundits that says that the federal budget is like your family budget (because I am well aware that the average family can’t print money), but comparing the government’s interest expense to the GDP really is like comparing your budget spending item to the amount of revenue that your employer generates. The amount that the federal government is able to spend is not constrained by the GDP, but by federal revenue, that is by the amount that it taxes the public.
If interest expense eats up too large an amount of the money that is being taken in by the government, then it has to either collect more taxes or it has to cut back on the spending it does for other things, and the rise and fall of the GDP has very little to do with that directly. Yes, a rising GDP will increase revenue, but not sufficiently to justify using the ratio of interest expense to GDP as a meaningful measuring stick.
Of real concern to us, then, should be the question of what percentage of the money taken in by our government is consumed in paying interest on the federal debt, and is therefor unavailable to be spent for other purposes such as a social safety net. Now, I don’t have a Nobel Prize like Dr. Krugman, but I can make graphs too.
That’s a much different picture than the 1.2% number painted by Paul Krugman, isn’t it? And, on the face of it, it’s a bit more comforting one. Although it reflects that the debt is costing us a whole lot more than he wanted to admit with his “percent of GDP” chart, it also shows that while we were paying more than 35% of our income in 1996, our interest cost has dropped to a bit under 20% of revenue now. That would seem to confirm that the rising GDP validates Paul Krugman’s “don’t worry, be happy” position on government debt. Well, only if you're happy spending 20% of revenue on interest payment, of course.
Not really, though, because although revenue has increased the last few years, it is not that which has caused the ratio to drop so much as it has been a dramatic drop in interest rates, from an overall rate on the debt of 6.6% in 1996 to 2.2% today. Why did those interest rates go down? Because the government decreed that they go down. Interesting, right?
Can those rates go back up? Not only can they do so, they absolutely have to do so. Paul Krugman says in this little piece that “the market wants to lend us money for almost nothing,” but the truth is there is no place else to lend money because no one else who is able to borrow money wants to do so.
Let’s add another line to the graph; what we would be paying as a percent of revenue if the interest rate had remained at 6.6% until now. Yikes.
And this graph is the part that no one wants to talk about, and it’s why the stock market almost crashes when the Federal Reserve even hints that it is going to raise interest rates. Because when the federal government is coughing up 60% of its revenue to pay interest on the debt it is going to raise taxes, and that raise is going to hit businesses and the rich.
We live in interesting times, but the establishment does not want for us to know just how interesting these times really are.