Monday, November 11, 2019

Interest On The Debt

Dean Baker published a piece a couple weeks ago in which he opined that government payments of interest on the national debt are too trivial to deserve any attention, and are in any case smaller now than they were in 1991. You have to make allowances for Dean, he’s an economist, and his brain was destroyed in college.

What he said, specifically, was that “interest payments were around 1.7 percent of GDP last year,” which “compares to a peak of 3.2 percent of GDP in 1991.”

Interest payments are not subtracted from GDP, of course, they are subtracted from federal revenue, and I’ll get to that in a bit, but like most economists, Dean Baker is really lousy at math. In fiscal 2019 the government paid $574.6 Billion in interest and the GDP was $21.3 Trillion, so the percentage was 2.7%, not the 1.7% he claims. In 1991 the numbers were $286 Billion and $6.16 Trillion, so that year it was 4.6% rather than the 3.2% that his slide rule came up with.

He doesn’t say where he gets his numbers, possibly from a portion of his body that the sun never shines on. I get mine from the US Treasury Department website. 2.7% is a bit more than half of 4.6%, so the “less than half” part of his headline is bogus, but even so his theory would paint a pretty nice picture if it was the whole story. But, of course, it is not the whole story by a long shot.

For one thing, he takes the position of a man falling from a ten story building, who says as he passes the fifth floor, “Well, I’m okay so far,” because he disregards the factor of interest rates. And that is by no means a trivial issue.

In 1991 the debt was $3.66 Trillion, so that $286 Billion represented a 7.8% interest rate. Today the debt is $22.8 Trillion and the $574 Billion amounts to a 2.5% interest rate. What that means is that if the interest rate rises we have a problem. At the 7.8% rate of 1991, interest today would be $1.78 Trillion.

How big a problem is that? Well, at 8.5% of GDP, even Dean Baker might consider that a bit of a problem. I would not, because its relation to GDP is utterly irrelevant. Interest payments are not paid out of the GDP, they are paid out of federal revenue, and payments of $1.78 Trillion out of federal revenue is a disaster. That interest payment would consume 51.4% of federal revenue.

Even at the current 2.5% rate, interest payments of $575 Billion consume 16.5% of federal revenue, which currently is $3.46 Trillion. No spending item other than “defense” spends more. And since we continue to spend $1 Trillion more than we take in every year, the cost of the debt grows larger and more dangerous every year.

And yet not only is this issue entirely absent from the political discourse, every Democratic candidate continues to promise more and more “free stuff” as the foundation of their campaign, assuring the “middle class” that they will have to pay for none of it.


The Arthurian said...

Good post Jayhawk. I think you cover everything except the reason for the deficits, which is a little more complex than just the Federal government spends more than the Federal revenue. But you're definitely right about GDP being the wrong context.

bruce said...

I think they like using GDP since it's such a big number, everything else looks small next to it, thus the word "trivial". Of course, that doesn't mean much if anything in the normal business of income, taxes, debt, borrowing, inflation (or not), etc.

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