November 20, 2012
The affirmative action policy that major media outlets have for deficit hawks is widely recognized. Arguments that would never appear in a serious media outlet based on their merits, fill the pages of newspapers and fill the airspace of leading television and radio news shows. In keeping with this spirit, USA Today gave us a column from Evan Feinberg, a policy analyst at the Charles Koch Institute.
The main thesis of the column is that the United States government is like a subprime borrower who is about see interest rates rise and throw the country into bankruptcy. Here’s the key paragraph:
“Say by 2015 rates rise to 3.5 percent. Our projected debt of $20 trillion will cost Americans $700 billion in annual interest payments. At 5 percent — still a low number in historical terms — we’ll pay $1 trillion. And if rates return to 1990 levels, we’ll have to pay more than $1.5 trillion in interest before we can even begin paying down our actual debt.”
Wow, are we all really scared?
There a couple of big problems with Feinberg’s story. First, much of our debt is long-term debt. We issue bonds that have durations of 10 years, 15 years, and even 30 years. The interest rate we pay on these bonds is not affected by increases in market interest rates in future years. In fact, if we want to make the deficit hawk cultists happy, when interest rates rise we can even buy back these bonds back at sharp discounts, thereby reducing our debt burden.
Second, much of the debt in his story is held by the Social Security, Medicare, and federal employee retirement trust funds. Higher interest payments on the bonds held by these funds is a burden to the general budget, but improves the finances of these trust funds.
While Feinberg presumably thinks he has discovered something new, the Congressional Budget Office actually anticipated that interest rates would rise in future years when the economy recovers. They incorporated this fact into their projections (Table 1-3). CBO has our net interest payments rising to $282 billion by 2015, approximately 1.5 percent of GDP. This is a bit less than half as much as the interest burden that the country faced in the early 90s.
It is also worth noting that much of the publicly held federal debt is currently held by the Federal Reserve Board. The interest on this debt is rebated to the Treasury. Last year, the Federal Reserve Board rebated almost $80 billion to the Treasury. If the Fed continues to hold this debt, it can continue to rebate $80 billion a year to the Treasury. (It can rely on higher reserve requirements to limit the amount of money in circulation and prevent inflation, if that is a problem.)
This would mean, based on the CBO numbers, we would be looking at a net interest burden in 2015 of roughly $200 billion or 1.2 percent of GDP. That is only a bit more than one-third of the early 90s burden.
Yes, this is just like the situation of subprime borrowers. (Nevermind that our debt is in dollars, and we print dollars.)
You can see why USA Today and the rest of the media need to have an affirmative action policy for deficit hawks.
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