While our debt to GDP ratio is approaching levels not seen since the years immediately following World War II, there is another key ratio that has been going in the opposite direction. This is the ratio of interest payments to GDP. This fell to 1.3 percent of GDP in 2009, its lowest level since World War II. While it has risen slightly in the last couple of years, the ratio of interest payments to GDP is still near a post-war low.
This gives us yet another example how the U.S. Government is not like a household. How many of us can pay a lower interest rate as our debts grow bigger? You and I can't. But the USG can and does.
Baker goes on to illustrate how interest owed on the national debt is more important than the absolute dollar value of outstanding debt, or the debt-to-GDP ratio:
Suppose that we issue $4 trillion in 30 year bonds at or near the current interest rate of 2.75 percent. Let's imagine that in 3 years the economy has largely recovered and that long-term interest rates are back at a more normal level; let's say 6.0 percent for a 30-year bond.In this case the bond price would fall by over 40 percent meaning, in principle, that it would be possible for the government to buy up the $4 trillion in debt that it issued in 2012 for just $2.4 trillion, instantly lowering our debt burden by $1.6 trillion, almost 10 percentage points of GDP. If we had been flirting with the magic 90 percent debt to GDP ratio before the bond purchase, we will have given ourselves a huge amount of leeway by buying up these bonds.Of course, this would be silly. The interest burden of the debt would not have changed; the only thing that would have changed is the dollar value of the outstanding debt. Fans of the 90 percent debt-to-GDP twilight zone theory may think that the debt burden by itself could slow the economy, but in the real world this doesn't make any sense.
Let's recall that America's debt-to-GDP ratio was nearly 120 percent after WWII. "Yeah, but that was WWII!" you might say, "And after the Great Depression! No comparison!"
Well, yeah, it's hard to compare a war that lasted four years with two simultaneous wars that have lasted about 10 years and counting. Meanwhile, the Great Recession wiped out $15.5 trillion in U.S. wealth -- about equal, coincidentally, to one year of U.S. GDP, and our total federal debt.
And Dubya's Great Recession cost us 8.8 million jobs (more than the previous four recessions combined); as a result, many of those jobless people have qualified for "income security" payments built into our system that didn't exist in the 1930s, such as unemployment insurance, disability pay, food stamps, housing assistance, etc. Income security outlays increased from $431 billion in 2008 to $533 billion in 2009 to $622 billion in 2010 to $597 billion in 2011. Next, more people opted for early Social Security benefits, plus they got a 5.8 percent cost of living increase in 2009, and for the first time the program ran a deficit. Social Security outlays jumped from $617 billion in 2008 to $683 billion in 2009 to $706 billion in 2010 to $731 billion in 2011. And let's not forget national defense spending, which increased from $616 billion in 2008 to $661 billion in 2009 to $693 billion in 2010 to $705 billion in 2011.
And Dubya's Great Recession cost us 8.8 million jobs (more than the previous four recessions combined); as a result, many of those jobless people have qualified for "income security" payments built into our system that didn't exist in the 1930s, such as unemployment insurance, disability pay, food stamps, housing assistance, etc. Income security outlays increased from $431 billion in 2008 to $533 billion in 2009 to $622 billion in 2010 to $597 billion in 2011. Next, more people opted for early Social Security benefits, plus they got a 5.8 percent cost of living increase in 2009, and for the first time the program ran a deficit. Social Security outlays jumped from $617 billion in 2008 to $683 billion in 2009 to $706 billion in 2010 to $731 billion in 2011. And let's not forget national defense spending, which increased from $616 billion in 2008 to $661 billion in 2009 to $693 billion in 2010 to $705 billion in 2011.
Finally -- and this is the factor so many people, especially on the right, overlook -- decreased economic activity -- combined with an extension of Dubya's tax cuts -- led to lower income and corporate tax receipts (and FICA receipts): down $419 billion in 2009 and $360 billion in 2010, compared to 2008.
Meanwhile, overall spending increased $535 billion in 2009 (most of it thanks to Dubya) and $475 billion in 2010, compared to 2008.
(See all the OMB's historical spending and revenue data here.)
So there are objective reasons why our deficits and debt have climbed. It's ludicrous to blame it all on $475 billion in stimulus spending.
Next, let's look at the GAO's historical picture of annual net interest paid on the federal debt as a percentage of annual federal spending. In 2011, interest payments were 6.4 percent of federal outlays. From Reagan thru Dubya, that figure never fell below 7 percent. In the decadent '80s it never fell below 8.9 percent. In the dot-com '90s it never fell below 13.5 percent.
Sure, interest rates will eventually go up as the economy recovers. But first it has to recover. Economic recovery should be our top priority right now, not paying off our debt when we enjoy historically low interest rates and suffer historically high unemployment. Debt reduction now, which would cut GDP and raise unemployment, is putting the cart before the horse.
Just trying to put things in perspective. Not that my Tea Partying friends will care....
By Dean Baker
September 24, 2012 | Huffington Post
No comments:
Post a Comment