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Home Publications Blogs Beat the Press More Affirmative Action for Deficit Hawks: USA Today Prints Column by Koch Institute Policy Analyst Who Is Way Over His Head

More Affirmative Action for Deficit Hawks: USA Today Prints Column by Koch Institute Policy Analyst Who Is Way Over His Head

Tuesday, 20 November 2012 08:24

The affirmative action policy that major media outlets have for deficit hawks is widely recognized. Arguments that would never appear in a serious media outlet based on their merits, fill the pages of newspapers and fill the airspace of leading television and radio news shows. In keeping with this spirit, USA Today gave us a column from Evan Feinberg, a policy analyst at the Charles Koch Institute.

The main thesis of the column is that the United States government is like a subprime borrower who is about see interest rates rise and throw the country into bankruptcy. Here's the key paragraph:

"Say by 2015 rates rise to 3.5 percent. Our projected debt of $20 trillion will cost Americans $700 billion in annual interest payments. At 5 percent — still a low number in historical terms — we'll pay $1 trillion. And if rates return to 1990 levels, we'll have to pay more than $1.5 trillion in interest before we can even begin paying down our actual debt."

Wow, are we all really scared?

There a couple of big problems with Feinberg's story. First, much of our debt is long-term debt. We issue bonds that have durations of 10 years, 15 years, and even 30 years. The interest rate we pay on these bonds is not affected by increases in market interest rates in future years. In fact, if we want to make the deficit hawk cultists happy, when interest rates rise we can even buy back these bonds back at sharp discounts, thereby reducing our debt burden.

Second, much of the debt in his story is held by the Social Security, Medicare, and federal employee retirement trust funds. Higher interest payments on the bonds held by these funds is a burden to the general budget, but improves the finances of these trust funds.

While Feinberg presumably thinks he has discovered something new, the Congressional Budget Office actually anticipated that interest rates would rise in future years when the economy recovers. They incorporated this fact into their projections (Table 1-3). CBO has our net interest payments rising to $282 billion by 2015, approximately 1.5 percent of GDP. This is a bit less than half as much as the interest burden that the country faced in the early 90s. 

It is also worth noting that much of the publicly held federal debt is currently held by the Federal Reserve Board. The interest on this debt is rebated to the Treasury. Last year, the Federal Reserve Board rebated almost $80 billion to the Treasury. If the Fed continues to hold this debt, it can continue to rebate $80 billion a year to the Treasury. (It can rely on higher reserve requirements to limit the amount of money in circulation and prevent inflation, if that is a problem.)

This would mean, based on the CBO numbers, we would be looking at a net interest burden in 2015 of roughly $200 billion or 1.2 percent of GDP. That is only a bit more than one-third of the early 90s burden.

Yes, this is just like the situation of subprime borrowers. (Nevermind that our debt is in dollars, and we print dollars.)

You can see why USA Today and the rest of the media need to have an affirmative action policy for deficit hawks.

Comments (7)Add Comment
written by skeptonomist, November 20, 2012 9:23
In terms of the overall economy, the debt held domestically outside of the trust funds is not fundamentally different from that held in the trust funds. Even if Feinberg's figure of $1.5T were accurate, for the most part it would be money collected in taxes (assuming the budget is near balance) and then paid back out immediately to bondholders, for no net loss to the economy. There is an income-transfer issue, but while most actual bonds and notes are held by wealthy persons, as Dean says over $2.5T of the debt is held in the SS and Medicare trust funds, the benefits of which go mostly to wage-earners. (Of course this is one reason why Peterson, the Kochs and their employees like Feinberg campaign to have the trust-fund obligations dishonored).

Is Feinberg over his head or just lying about the effect of national debt? Does he really think that money collected in taxes disappears into a black hole and that interest payments are transferred to another galaxy? This is hard to believe but certainly many newspaper editors and pundits don't seem to care about the reality of national debt.
written by Lee A. Arnold, November 20, 2012 10:59
I got the same sort of interest-rate-fear comment at under this video already. CBO discusses interest rates in Ch. 3 of their Long Term Budget Outlook.
written by fuller schmidt, November 20, 2012 11:28
Great takedown.
Please don't use "affirmative action" so pejoratively
written by Melissa Belvadi, November 21, 2012 5:57
I know you're being tongue-in-cheek, but you're feeding into conservative talking points by casually using the phrase "affirmative action" to mean "allowing incompetents into the sphere". I would expect that of Bill O'Reilly, not you.
Professor of Economics (retired)
written by Richard Hattwick, November 21, 2012 6:07
I applaud your continuing effort to bring the Federal Reserves's various roles into the discussion of the deficit issue. What a difference it would make if the average citizen, politician and editorial page would understand the two points you make in one paragraph - the one where you remind the reader that the interest paid to the Fed goes back to the Treasury AND that the Fed can always use the reserve requirement to contain potential inflation. And, as a bonus, in another paragraph you point out that the Fed has the ability to buy publicly held debt. You might consider suggesting that debt held by the Fed be reclassified. That is, reports on "debt held by the public" would not include debt held by the Fed. You can figure out an alternative way of classifying Fed debt. KEEP UP THIS IMPORTANT EFFORT AT ECONOMIC EDUCATION.
written by kharris, November 21, 2012 9:38
I'm curious to know if Evan Feinberg has ever argued that the Fed's low interest rate policy is bad because it deprives bond holders of interest income. There is nothing new about arguing against stimulus in any form (gets in the way of "wringing out excesses"), but I'd like Feinberg to be consistent in his arguments. Low rates can be good and bad at the same time, but arguing one way one time, the other way another, that would be dishonest.
The average Treasury maturity is around 5 years.
written by AndrewDover, November 22, 2012 11:20

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.