May 07, 2016
As the media erupt in fury over Donald Trump’s comments on the debt, it is worth taking the opportunity to remind people that the interest burden on the national debt is near a post-World War II low. While the debt-to-GDP ratio rose sharply in the Great Recession, because interest rates are extremely low, we face an unusually low interest burden.
This fact has largely been missing from reporting on the issue. For example a Washington Post piece warning of the end of the world if Trump tried to negotiate on the debt, told readers that the government would pay roughly $255 billion this year in interest on the debt. This includes the $113 billion that the Federal Reserve Board will receive and refund back to the Treasury. That leaves a net interest burden of $142 billion, a bit less than 0.8 percent of GDP. By comparison, the interest burden was over 3.0 percent of GDP in the early 1990s.
It is also worth noting that we actually could buy back debt at a discount if interest rates rose. When interest rates rise, the market value of long-term debt falls. This means that the government could issue new debt, which would pay a higher interest rate, to buy back debt with a higher face value, thereby reducing its debt, but leaving its interest burden unchanged.
There is no economic reason to do this sort of financial engineering, but there are people who worry about debt to GDP ratios apart from the interest burden, like Harvard economics professors, the Washington Post editorial page writers, and Washington budget wonks. As a result, this sort of financial engineering may be a useful way to alleviate concerns on the debt and free up public money for productive uses.
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