“Elections come and go, but the United States is still careening toward bankruptcy. By 2020, the U.S. will be spending $1 trillion a year just to pay the interest on the national debt. Sometime between now and then the catastrophe will come. It will come with amazing swiftness. The bond markets are with you until the second they are against you. When the psychology shifts and the fiscal crisis happens, the shock will be grievous: national humiliation, diminished power in the world, drastic cuts and spreading pain.” — David Brooks
I still like the biblical version with the four horseman and the rivers flowing upstream, but hey, it’s the oped page of the NYT. No one expects that people will be reading this stuff 1,500 years from now.
Anyhow, let’s take a closer look at Mr. Brook’s apocalypse. The U.S. will be “spending $1 trillion a year just to the pay the interest on the national debt.” Pretty scary, huh?
Well, first it is probably worth noting that Brooks is somewhat more pessimistic on this score that the Congressional Budget Office (CBO) which puts interest in 2020 at $916 billion. How scary is that?
Let’s get out the GDP projections. CBO tells us that GDP will be $22.5 trillion in 2020. This means that Mr. Brooks’ scary interest burden will be equal to about 4.1 percent of GDP. Will that be the end of the world or least national humiliation, as Brooks promises? The interest burden peaked at 3.3 percent of GDP in 1991, so we would not be in hugely different territory than we were during the Bush I presidency.
But, there is a further complication. The Fed currently holds much of the federal debt and it is actually increasing its share. This is what QE2 is all about. Given the massive amount of excess capacity and unemployment, coupled with the trend towards disinflation, there is no reason that the Fed should not continue to hold this debt. (It can take other steps, such as increasing reserve requirements, to ensure that an increase in reserves in the banking system does not lead to inflation in future years.)
If the Fed holds the debt, then it poses no burden to the government. The Treasury pays interest on the debt to the Fed and then the Fed refunds the interest to the Treasury. Last year the Fed refunded $77 billion in interest to the Treasury, nearly 40 percent of the net interest paid out by the Treasury.
If the share of interest going to the Fed is the same in 2020 as it is today, then the interest burden on taxpayers in 2020 will be equal to about 2.6 percent of GDP, well below the levels of the late 80s and 90s. If the Fed increases the share of the debt it holds, as it is doing now with QE2, then the interest burden on future taxpayers will be even less.
This doesn’t leave much for Mr. Brook’s apocalypse story. Of course, if Brooks really wants to tell a story of national humiliation he just has to look around beyond the streets and restaurants that he and his friends frequent. The country has more than 25 million people who are unemployed, underemployed, or who have given up work altogether. Tens of millions of people are underwater in their mortgages and millions face the imminent prospect of losing their home through foreclosure.
This might not be the apocalypse, but it should be humiliating to the nation, especially since this suffering is entirely due to incompetent economic policy and therefore was and is entirely avoidable. And, Brooks doesn’t even have to wait for 2020 to talk about this picture.
Dean Baker is an economist and Co-director of the Center for Economic and Policy Research, in Washington, D.C. This article was first published in CEPR’s “Beat the Press” blog on 12 November 2010 under a Creative Commons license.