May 06, 2018
Yes, we have yet another column warning about the government debt from George Will, with a brief interlude warning about household debt as well. Yes, the national debt is a really big number, but quickly, here is why we need not be as concerned as George Will wants us to be.
First, on the debt service point, Will wants us to be scared that interest rates will rise, making debt service a very large share of the budget. Well, the Fed controls interest rates and unless inflation starts to rise rapidly (in which case the real value of the debt falls), there is no obvious reason that it should allow interest rates to rise to high levels.
It is also important to note that the Fed itself owns much of the debt. (It has more than $4 trillion in assets.) The interest on the debt owned by the Fed is refunded to the Treasury, meaning there is no net burden from this debt for taxpayers. The amount of this refund was more than $100 billion last year, or 0.5 percent of GDP. The interest burden net of money refunded now stands at about 1.0 percent of GDP, compared to more than 3.0 percent of GDP in the first half of the 1990s.
Suppose we get Will’s bad story and the economy goes into recession. Of course, the deficit will rise due to the recession, as tax collections fall and we pay out more money on programs like unemployment insurance and food stamps. Also, we would likely want a fiscal stimulus to boost the economy.
The deficit hawks would like people to believe that no one will lend to us because of our high debt burden. That seems unlikely (Japan’s debt-to-GDP ratio is more than twice that of the United States and its long-term interest rates are near zero), but let’s assume it is true. What would stop the Fed from directly buying up debt issued by the US government that private investors didn’t want?
The folks yelling “inflation” have to go back to the start of this story. The economy is in a recession, how would we get inflation? There is a story that the Fed’s actions could cause the dollar to fall against the currencies of our trading partners. Let’s imagine the dollar falls by 20 to 30 percent against the currencies of our trading partners as it did in the years from 1986 to 1990.
This would be equivalent to imposing tariffs of 20 to 30 percent on imports and granting a subsidy of 20 to 30 percent on all US exports. That would mean a sharp reduction in the size of the trade deficit, providing a huge stimulus to the U.S. economy. Are you scared yet?
Let’s turn to the private debt story.
“Gelinas [Manhattan Institute economist Nicole Gelinas] says that by the end of 2017, Americans’ household borrowing stood at $15.3 trillion, ‘just shy, in inflation-adjusted dollars, of what it was in 2005, the year before the housing bubble peaked.’ And although ‘Americans are now spending less of their income on debt — about 10.3 percent, down from roughly 13 percent between 2005 and 2008 — they didn’t use the period of super-low rates to reduce their debt, which means they’re vulnerable to higher rates.'”
Actually, the vast majority of this debt is fixed rate mortgage debt. This debt is not going to be affected by a rise in interest rates. Car loans are also a large part of the debt. The vast majority of these loans are also fixed rate. Student debt and credit card are the other major components. Much of the former is also fixed rate. Credit card debt is generally variable rate, but this accounts for less than 10 percent of household debt, so the impact of higher interest rates on debt burdens is not likely to be large. (This doesn’t mean that many households are not seriously burdened by debt. But this is a problem of income distribution, not aggregate debt burdens.)
Finally, let’s discuss the debt burden that Will and the rest of the debt mongers never want to talk about. The government pays for many items (like innovation and creative work) by granting patent and copyright monopolies rather than direct spending. In the case of prescription drugs alone, these monopolies cost us roughly $380 billion a year (almost 2.0 percent of GDP) in higher drug prices. If we add in the additional costs in medical equipment, software, and other areas we are likely over $1 trillion a year.
It is incredible that the folks who claim to be so concerned about the future and the burdens we are imposing on our kids never seem to notice the burdens created by rents from patent and copyright monopolies. It almost could cause someone to question their honesty.
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