Monday, May 14, 2012

Interest Is "Trivial"

Paul Krugman and Dean Baker both claim that government debt is the safest investment in the world because government never defaults on its debt. They also claim that spending to an essentially unlimited degree is acceptable and that doing so does not burden future generations because government never repays its debt, which strikes me as contradictory.

Walk into a bank and tell them, “It’s perfectly safe to lend money to me, because I never pay off my debts,” and see how fast they give you a loan.

Paul Krugman said, as I remarked yesterday, that building infrastructure cost only the “trivial interest” on the money that the government had to borrow to build the infrastructure. Because, of course, concrete and labor are free when they are paid for with borrowed money. Which is actually true, in a sense, if the borrowed money isn't going to be repaid. Reminds me of my grandmother driving my father nuts with her, “These biscuits didn’t cost me anything because I already had all of the ingredients.”

How “trivial” is the interest paid by the United States on its debt?

Well, it turns out that “trivial” might not be quite the right word. The only larger budget items are defense and Medicare/Medicaid, and interest is one of only seven line items which have three digits west of the third comma.
I omitted Social Security, which has its own funding. In the fiscal year to date, which is seven months, we have paid $241 billion in interest, which works out to $413 billion for the year.

The only larger items on Obama’s budget was HHS at $941 billion and Defense at $673 billion, and the next largest after $246 billion for interest on the debt was Agriculture at $154 billion.

That $246 billion for interest might explain, in part, why there were precisely zero votes for the Obama budget in Congress, by the way, since we had paid $454 billion in interest the preceding year. What, precisely, did Obama think was going to happen to either the interest rate or the debt that was going to reduce our interest by a whopping 46% in one year?

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