National Debt Hysteria?
In a front piece story in today’s NYT, Edmund Andrews warns that the bill is about to come due on the massive borrowing the federal government has engaged in.
Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.
With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.
In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.
Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode. The competing demands could deepen political battles over the size and role of the government, the trade-offs between taxes and spending, the choices between helping older generations versus younger ones, and the bottom-line questions about who should ultimately shoulder the burden.
The problem, many analysts say, is that record government deficits have arrived just as the long-feared explosion begins in spending on benefits under Medicare and Social Security. The nation’s oldest baby boomers are approaching 65, setting off what experts have warned for years will be a fiscal nightmare for the government. “What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”
This sounds ominous and unsustainable. But Paul Krugman, recent winner of the Nobel Prize in economics, say these fears are overblown.
As Dean says, the numbers don’t fit the scare story — a decade from now interest payments will reach a level not seen since … 1992. And the market seems unworried, since long-term rates remain low.
The “Dean” is question is Dean Baker of The American Prospect. He sarcastically titles his post, “In Just a Decade the U.S. Interest Burden Could Be as High as It Was in 1992!!!!!!!”
There is no evidence presented in this article that the rise in interest rates will place the U.S. government in a situation where it will be unable to pay its bills and no one cited in this article makes such a claim.
The article is also completely unbalanced in not presenting the views of any economist who could put the deficit/debt issue in perspective for readers.
Krugman makes the same charge but, oddly, neither of them bother to actually present a counterargument.
Andrews argues that most of the debt is in short-term loans whose price will go up as there becomes more competition for money. He makes what strikes me as a plausible case that higher interest rates, growth in entitlement spending, and a smaller tax base will make servicing the debt very, very difficult. Countervailing factors could offset this but neither Krugman nor Baker tell us what they might be.
It’s true that we had gloom and doom forecasts during the 1992 recession. But we only solved those through the dual magic of the dotcom bubble and the post-Cold War defense drawdown. It’s not likely that those events will repeat themselves.
Photo by Flickr user kandyjaxx under Creative Commons license.