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Bruce Bartlett: It's All About The Interest

27 Jan 2013
Posted by Stan Collender

CG&G alum Bruce Bartlett has an important column about federal spending in The Fiscal Times that does what Bruce does best: Say it straight with no BS.

What Bruce shows -- convincingly -- is that, contrary to those that say federal "spending" is the long-term problem, the real problem is spending in just one area -- interest payments on the national debt. Spending on virtually every other area of the budget is flat over the long term while interest starts to rise precipitously in 2020 and keeps rising over the next 60 years.

This isn't to say that interest payments on the national debt don't constitute federal spending because that obviously isn't true. But, as Bruce points out, the deficit for the non-interest part of the budget -- the "primary deficit" -- is only 1.7 percent of GDP over the long run and that makes it far less scary than the deficit scolds want us to believe.

Although Bruce doesn't mention it in his article, this situation argues persuasively for the government to convert its debt from short- to long-term so that the current low interest rates can be locked in for as long as possible. Doing that obviously depends on market conditions as well as inside-the-beltway desires, but any shift toward the longer end of the yield curve could be the most important deficit reduction effort the government will make over the next 20 years.

I agree with the premise, but....

What about the possibility that this spending-to-GDP ratio is not temporary due to revolutions in technology that have made a lot of jobs redundant? Specifically, that technology has not only replaced a lot of manual labor (this has been the case for decades) but has replaced a lot of "intellectual" (generally white-collar) labor as well? Paul Krugman has recently taken this idea seriously.

This implies that current spending and unemployment rates may be the "new normal," which means that Republican talking points will probably not go away any time soon. I really hope I'm wrong, but I fear that 25% of GDP may be necessary just to prop up basic safety net and entitlements from now on.

Yes, but... C'mon, you know

Yes, but...

C'mon, you know this. By increasing the average maturity of Treasury debt outstanding, we are also likely to steepen the curve. The extent to which that would happen is uncertain, but there would be a reaction to extending the Treasury maturity profile. We would end up paying more in the near term by missing out in the near term on lower short end rates to avoid someday paying higher rates.

To the extent that higher long-end rates in response to longer average maturity leads to higher private borrowing rates, maturity extension could slow growth in the near term.

There are pretty obvious short-term costs to dealing with a long-term deficit issue. Normally, we might want to argue that our culture values the near term to much relative to the longer term, but I'm not sure that is a great argument to make when there are millions more unemployed looking for work than is normally the case.

Completely agree...

Agreed on fetishizing the near term and the opportunities we may end up missing. I just fear that myopic talking points will continue to get political cover as we collectively confront an aging demographic structure, resulting in some unnecessarily cruel policy.

I still wring my hands about

I still wring my hands about the prospects for long term control of health care costs. They are still rising above the rate of inflation, making long term projections somewhat dubious.

Still, it is notable that the most important steps to address this issue occurred during the construction of the Affordable Care Act, a bill that received not one Republican vote.

duration fantasies

Articles like this make it seem like we can just issue long term debt in place of short term debt with no impact. As if such a massive shift in duration would have no impact on rates. If we ramp up long duration supply rates will go up to some degree, dampening the positive budgetary impact. The interest rate reaction could be larger than we anticipate, because this shift would be understood by buyers to indicate a higher willingness to tolerate higher inflation. While the U.S. continues to borrow heavily at the short end, it sends a signal that inflation is not a planned strategy to de facto default on the debt.

Also, it's important to understand that short term U.S. government debt plays an important role in many markets, including money markets. Eliminating (sharply curtailing) short term government debt will have ripple effects.

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