Krugman is still on his “We should do deficit spending because borrowing costs are low” kick and in one of his posts today shows a chart illustrating the interest rates on 10-year government bonds in England and the US. They are currently, for all practical purposes, at 1.5% on these bonds. Lets assume that borrowing money merely because you can is, indeed, a valid theory for anyone over eighteen years old.
So our government sells $1 trillion in bonds this year and it’s a terrific bargain because we can use it to kill people all over the Middle East, making a lot of rich people richer in the process, and it only costs us $15 million per year in interest. That is a bargain indeed, because $15 million is barely more than a rounding error in terms of government spending.
But these are 10-year bonds, so what happens in 2022 when the holders want to cash them in? We have to cough up $1 trillion in addition to our current spending, which means that in the next ten years we will have to have revised our budget by $2 trillion. Not very likely, right?
So, no problem, we’ll sell some more 10-year bonds to pay off these, and that’s where Krugman’s “spend freely because borrowing is cheap” argument begins to break down. Will rates still be 1.5% ten years form now? I failed crystal ball in college, but I’m guessing that they will not. What if rates are 12% or so? Paying $15 million interest on that loan was no problem, but paying $120 million is a little different matter.
Krugman is like the mortgage broker in 2007, who talked you into a house that you could not afford but which had a low, low monthly payment by assuring you that you could refinance that 3% adjustable mortgage before the rate adjustment kicked in. We all know how that worked out, don’t we?
Not to mention that Paul Krugman claims to follow Keynes on economic theory, and that theory says that government does deficit spending in economic lean times, but that it pays that debt off in times of prosperity. Krugman not only fails to suggest the latter, he specifically claims that governments do not ever pay off debts. He has, instead, some rather odd theory about debt becoming an increasingly smaller and smaller fraction of GDP until it eventually vanishes.
So, even if the rate does stay low, debt accumulates. The $15 million that we are paying on the $1 trillion borrowed in 2012 adds to the $15 million for the $1 trillion borrowed in 2013 which adds to the… We are, in fact, still paying interest on the debt incurred to fight World War Two, and how many “seasons of prosperity” have we had since that war ended?
Krugman is right about borrowing being fairly cheap; interest expense for the federal government was only $360 billion this year. But the fact that it was $454 billion last year is proof that government debt is on an adjustable rate basis and a pretty good clue that rates might not stay that low.