January 25, 2017
The NYT decided to scare its readers about the budget deficit with a headline warning “[f]ederal debt [is] projected to grow by nearly $10 trillion over next decade.” While the article does put this figure in some context, expressing it as a share of GDP, readers who only look at the headline will undoubtedly be scared by this huge number.
Given the past commitments of the paper to express large numbers in context, a headline telling readers that the Congressional Budget Office (CBO) projections show the debt-to-GDP ratio rising to 89 percent of GDP, would have been more informative. Of course, it likely would have been less scary.
In addition to the headline, the piece is on questionable grounds when it tells readers:
“Such a high level of debt could increase the likelihood of a financial crisis and raise the possibility that investors will become skittish about financing the government’s borrowing.”
The link between levels of debt and financial crises is dubious, at best. The United States, Spain, Ireland, and Japan all had financial crises with very low levels of debt to GDP. On the other hand, Japan’s ratio of debt to GDP is now close to 250 percent, yet there are no obvious signs of financial instability.
Nor is clear that high debt-to-GDP ratios will cause investors will become skittish. Japan can currently borrow long-term at an interest rate of 0.05 percent. Other countries with high debt-to-GDP ratios like France can also borrow at very low interest rates.
It is also worth noting that much of the cause of the projected rise in deficits is due to a projected rise in interest rates. CBO projects that the 10-year Treasury rate will rise from 2.4 percent today to 3.6 percent by the end of the 10-year forecast period. While this is possible, CBO has been over-projecting interest rates ever since the recession. It did this again last year, projecting a 3.0 percent average interest rate for 2016. The number ended up being 2.1 percent.
It is also worth noting that interest payments on the debt (net of money refunded by the Fed) are projected to still be less than 2.5 percent of GDP by the end of the period in 2027. This is still lower than levels close to 3.0 percent in 1990s. It is also likely to be considerably less than the burden the government will be imposing on the public by granting patent monopolies for prescription drugs, medical equipment, and other areas. These government granted monopolies already cost us almost 2.0 percent of GDP for prescription drugs alone.
Anyone who is actually worried about the burden the government is placing on our children would be far more attentive to the burden posed by these monopolies than the much smaller burden imposed by the debt. Of course, the burden imposed by the imposition of austerity following the recession is far larger than either.
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