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Home Publications Blogs Beat the Press Robert Samuelson Tells Us That Our Ratio of Interest Payments to GDP Is Near a Post-World War II Low

Robert Samuelson Tells Us That Our Ratio of Interest Payments to GDP Is Near a Post-World War II Low

Monday, 25 February 2013 05:11

Actually he neglected to mention this fact in his column this morning. (It's less than 1.0 percent of GDP and only about 0.5 percent of GDP if we net out the interest rebated by the Fed.) Samuelson tells us:

"The true national debt could be triple the conventional estimate, anywhere from $11 trillion to $31 trillion by my reckoning. The differences mostly reflect explicit and implicit “off-budget” federal loan guarantees. In another economic downturn, these could result in large losses that would be brought “on budget” and worsen already huge deficits. That’s the danger.

"My purpose is not to scare or sensationalize. It’s simply to illuminate the problem."

Actually, Samuelson may have inadvertently done the latter.

If you want to make the jump from the $11 trillion commonly used number, or the $16 trillion debt subject to the legal debt ceiling, to get to Samuelson's $31 trillion, you have to add $2.9 trillion in loan guarantees (largely student loans and small businesses), $5.1 trillion in mortgages guaranteed through Fannie and Freddie, and $7.3 trillion in federal deposit insurance. What's neat about these additional debts is that they are tied to assets.

In the case of small businesses, the assets are the businesses. In the case of mortgages, the assets are the houses. In the case of deposit insurance, the assets are the deposits and the banks' assets. (I left out student loans -- we can't force people to work, but it is pretty hard to imagine a situation where all of our doctors and lawyers can't pay any of the debt they owe.)

Should we be worried if the government has more debt, even if it is tied to assets that have considerably larger values? It is difficult to see why. Is a business that has debt of $2 billion and has $10 billion in assets in worse shape than a business with no debt but only $5 billion in assets? In Samuelson's scare story it is, because he only looks at liabilities, not assets. 

We certainly should have been worried about Fannie and Freddie's debt when they made massive commitments in a hugely over-valued housing market. Some of us, who don't have access to the Post's opinion pages, did raise such concerns. But now that the housing market has fallen by 30 percent in real terms, what is the probability of large-scale losses on loans that generally do not exceed 80 percent of market value?

Similarly, if we don't get the Robert Rubins of the world again playing crazy games at government insured banks, is it necessary to spend a lot of time worrying about the $7.3 trillion in insured deposits? (Wait, I forgot Robert Rubin is still a highly respected person in DC policy circles, maybe we should be worried.)

Seriously, in a normally functioning economy these liabilities should be no concern whatsoever. If Samuelson wants to suggest (he does) that the economy could go into a further downturn of Great Depression order of magnitude, then these debts would pose a problem for the government, but who gives a damn? If we are facing a decade of double digit unemployment, then worrying about the government's fiscal obligation is a trivial after-thought that is not worth the time of serious people. It's like asking how we pay for Social Security after a nuclear holocaust. That concern might employ people at the Washington Post, but it need not detain the rest of us.

The moral of the story is that we should focus on getting the economy growing again. If we did, we would have more people employed, we would be building up our capital stock (both public and private) and children would be doing better in school because they are being raised in homes with parents who have stable employment, and these government guarantees would be of no concern whatsoever.

Give Samuelson a lollipop for finding yet another way to scare people about the government's debt and then get back to thinking about real economic problems.

Comments (11)Add Comment
Government Will Probably Lose Money on Student Loans
written by LSTB, February 25, 2013 6:51
we can't force people to work, but it is pretty hard to imagine a situation where all of our doctors and lawyers can't pay any of the debt they owe.

A year ago, the news reported that Ben Bernanke's son finished medical school with $400,000 of student loan debt. Under the old Income-Based Repayment plan, he'd have to have a *starting* income of $259,000 for the loan not to be canceled in 25 years. Under the current IBR, his initial income would have to be $411,800 for the loan not to be canceled in 20 years. He may've chosen a 25-year or consolidated repayment plan, but it's pretty easy to imagine a situation where he doesn't pay all the debt he owes.

As for the law school debtors, they're nothing like Bernanke Jr. and the doctors. The BLS projects 212,000 lawyer jobs opening due to growth and replacement between 2010 and 2020 ("strong competition"), while in recent years ABA law schools have regularly churned out more than 40,000 graduates per year (~400,000 per decade). That number will drop soon, but there is vast oversupply of law degrees relative to professional jobs available to them, and their average debt levels (excluding interest and undergraduate debt) are $80,000 for public law grads and $120,000 for private law grads. The oversupply precedes the depression. Given the kinds of incomes and debts law graduates have nowadays, the government is certain to lose money on them too. Little imagination required.

As to the Direct Loan Program generally, I agree with the CBO that accrual accounting masks the losses from defaults and the opportunity cost to taxpayers. I don't think the CBO has ever evaluated IBR, but for many graduate/professional students, it's likely a loss for the government. I'm doubtful those losses are offset by "profits" from English majors' loans.
Economic Moralism
written by bakho, February 25, 2013 7:15
Robert Samuelson is not a pragmatist. He is a moralist who promotes "moral" policies, not necessarily "pragmatic" policies. Attacking the strongly held beliefs of a cult causes the members to cling more tightly to their beliefs. Deprogramming may be necessary.

It is important to inform the public that the policies promoted by Mr. Samuelson are cult beliefs, not reasoned opinions.
written by skeptonomist, February 25, 2013 9:11
The problem with the various liabilities that Samuelson brings up is that the government has abdicated the responsibility for regulation that should go along with them. In the case of the FDIC, for example, there were originally stringent regulation on what covered banks could do - for example they could not be in the stock-broking business. As "conservative" politicians and finance- and banking-industry lobbyists (not to mention Randian Fed Chairmen) have succeeded in weakening regulations, risk-taking in these areas has expanded greatly. This already led to a round of failures of S&Ls in the 80's, but little was learned from that.

Samuelson's solution is his usual knee-jerk "conservative" dogma - eliminate these government commitments, for example (presumably) eliminate the FDIC. This would take us back to the way things were in 1929, but the experience of the Great Depression convinced most rational people that an unregulated laissez-faire system is prone to disastrous crashes. The recent crash was apparently not bad enough for most people to relearn the lesson - maybe the next one will do the trick.
written by jjmsan, February 25, 2013 9:58
I don't know where you get the loan being cancelled in any number of years. Everyone I know who has a loan will be paying for most of their lives.
Guaranteed loans are limited
written by Arne, February 25, 2013 10:09
The max undergraduate aggregate loan guarantee is only $31K for dependent children. LSTB is throwing around scary numbers without knowing what they mean.

Parents can borrow a whole lot more on top, but that does not relate to federal liabilities.
student loans are mostly predatory
written by pete, February 25, 2013 10:13
bulk of loans are at trade type schools, very low job placement, not doctors and lawyers.

but of course the only debt that matters is that held by foreigners....

Same guys
written by Charlie, February 25, 2013 10:38
call the Social Security trust fund 'worthless IOUS' in the next oped as rant about unfunded liabilities.

Why did we bother to pre-tax for Social-Security benefits and create accounts to formalize the obligations if some a$$#01e$ will just steal it, or demand political ransom to pay back part of it?

What I don't get is how Samuelson can square a demand for austerity with a concern about defaults on government insured assets. About the only way those assets will be non-performing is if there is a deflationary spiral, asteroid strikes, tsunamis and war notwithstanding.

With the publicly held debt not held by the Federal Reserve already stabilized as a fraction of GDP, and the off-budget trust fund accounts also roughly stabilized as a fraction of GDP, I don't see a deflationary debt spiral in the cards, as long as the course selected is steady as she goes. But an awkward government halt and restart with austerity might set up a government approved tipping point into a deflationary default on obligations, for both the public and private sectors.

As for the federal reserve debt, there is an offsetting asset, which is held by the nation.
written by Chris Engel, February 25, 2013 11:44
It's mind-boggling that in our debt-based fiat currency fraction-reserve banking system, people like Samuelson get away with these kinds of scare tactics.

Just a bunch of old farts stuck in a gold-era mindset pushing their morality plays on us.
Graduate and Professional Students Aren't Undergraduates
written by LSTB, February 25, 2013 2:44
The max undergraduate aggregate loan guarantee is only $31K for dependent children. LSTB is throwing around scary numbers without knowing what they mean.

Parents can borrow a whole lot more on top, but that does not relate to federal liabilities.

Graduate and professional students are eligible for up to $20,500 per year in unsubsidized Stafford loans and they can borrow the remaining amount in tuition plus living expenses in Grad PLUS loans.


Arne, I am throwing around scary numbers, but they're scary because I know precisely what they mean.
Net interest
written by Jim, February 25, 2013 7:27
1.4 for 2011 1.5 of GDP for 2012 as per white house historical tables. Where do you get less than 1? Thanks
Your response must have been read by Ben Bernake
written by jumpinjezebel, February 26, 2013 11:46
He used it this AM back to an TeaPotty boy trying to make a point for his talking points!!

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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.