Congress and the President Will Focus on Debt Even Though Interest Payments Remain at Historic Lows

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Thursday, 17 October 2013 04:22

The Washington Post article on the budget agreement told readers:

"Senate Budget Committee Chairman Patty Murray (D-Wash.) was to have breakfast Thursday morning with her House counterpart, Rep. Paul Ryan (R-Wis.), to start a new round of talks aimed at averting another crisis. Obama repeated his vow to work with Republicans to rein in a national debt that remains at historically high levels.

It obviously felt it necessary to the not especially accurate tidbit that the debt remains at historically high levels. (It was considerably higher immediately after World War II.) Since the Post is playing the game of adding in random pieces of information, it could have equally well ended this this sentence by telling readers that efforts at deficit reduction came in spite of the fact that the ratio of interest to GDP is at historically low levels at 1.5 percent of GDP. While this ratio is projected to rise (because of projections of higher interest rates), in a decade we will just be getting back to the interest share of GDP we saw in the early 1990s.

Also, since the Fed is refunding roughly $80 billion a year from its asset holdings, the true interest burden to the Treasury is less than 1.0 percent of GDP. The Fed is projected to reduce its asset holdings and therefore the size of this refund later in the decade, but that is a policy choice. If the Fed feels the need to pull out reserves to raise interest rates and slow the economy, it can also accomplish this by raising reserve requirements for banks. It may opt not to go this route, but if the concern is that interest payments will be a serious burden, this is a problem that could be easily avoided. 

The Post could have also ended the sentence by pointing out that this focus on deficit reduction was occurring in spite of the fact that the economy is still down almost 9 million jobs from its trend levels of employment.