How long until the interest on our public debt exceeds 50% of the total revenue?
Can we estimate and include state debt? Local government debt?
Then we must include all government revenue.
How about our explicit guarantee to bail out the secondary mortgage market?
How much is all this compared to our $15 trillion debt?
Should we assume Social Security will fail?
If not that is also debt we must pay in the end.
We have to make some assumptions about future revenue, interest rates, and of course the annual deficit. Let’s turn to the CBO for the first two. 3.2% about right?
Can we use the current ratio of annual borrowing / government revenue as an estimate for the future?
The amount required to service the Federal debt in 2011 was about $450 billion, and revenues were about $2.3 trillion. Interest rates are currently low, but it would take a spectacular meltdown of the economy to make debt service costs explode by nearly three times the current rate. I’m going to go out on a limb here and say that debt service will never be a majority of Federal revenues.
In a practical sense, this is probably mostly pointless, because each of these sovereign governments manage their budgets differently. As a resident of Washington, DC, for example, the issue of how Nebraska or Iowa or Florida manages their bonds really isn’t an important issue for me, so it makes little sense to aggregate all levels of government budgets into single big numbers. To put it another way, if Walla Walla, Washington issues a $100 million bond for building a new school, it doesn’t change the price of tea in China.
Social Security isn’t simply going to implode one day. Even if no reforms are made, benefits will continue to be paid out for decades at reduced rates. If reforms are made, one would expect that the reforms would most likely increase the solvency of Social Security, leading us further away from the speculation that Social Security might “fail.”
On the second point, you can’t come up with a ratio for such a thing and simply expect it to remain the same. Not only do government policies change, but developments in the economy will effect the ratio as well. As is often said, the only thing constant is change.
On the larger point, you are better off not making assumptions, since you are not an economist. Rather, just read what real economists are saying about the economy and the budget. It is all here.
I agree that the debt servicing probably won’t reach half of federal revenues anytime soon. However, that’s an arbitrary measurement, and shouldn’t lead us to dismiss concerns about interest on the debt. Right now the debt clock tells me that the US National Debt is around 15 trillion dollars. Elementary school math tells us that if the interest rate increases by one percent, the annual interest on the debt will increase by about 150 billion dollars. If the interest rate increases by five percent, the annual interest on the debt will increase by about 750 billion dollars. If rates stayed elevated at that level for five years, the increased interest over those five years would be 3.75 trillion dollars. A trillion here, a trillion there, and after awhile it starts adding up to some serious money, as the saying goes.
Right now interest rates are at historic lows. However, that’s not because the U. S. government is handling its budget in a particularly intelligent way. Most people would agree it’s not doing so. That’s because most other investments during the world financial crisis have looked so bad by comparison that investors have preferred U.S. debt. However, if investors get skittish about a country’s debt, interest rates can pop up very quickly–just ask anyone from Greece, Italy, Portugal, Spain, …
We can agree that interest rates are by far the most single critical parameter in this question and answer. Nobody has a crystal ball, but it’s fun to play with these numbers to see the outcome. It’s easy to imagine a scenario where the interest on the public debt is significant compared to revenue in only 10 years.
The budget forecast we are supposed to believe is one where the revenue increases 10%/yr, yet interest remains under 6% around 4% for years. This is according to the CBO. In this case we will be OK for decades. I think this is unrealistic. Anyone else?
If it IS true we will lose the value of our investments due to inflation.
Why do you think that a growing economy means higher interest rates? That wasn’t the case in the '90s. The big spike in inflation around 1980 was definitely not associated with a robust economy.
BTW, reasonable levels of inflation actually help with the debt, since it gets repaid with inflated money. Reasonable inflation rates - perhaps higher than we are seeing - encourage investment and spending, since everything is getting more expensive. It is bad for fixed income and cash.
My relatively small college loans from 1970 - 73 only had to be paid back after 1980 when they gave me a PhD to get rid of me. After a few years of almost hyperinflation, they became so laughably small that I paid them off early since postage was getting to be significant versus the actual payment.
It depends on where the revenue increase comes from. If it is from raising the tax rate, you are probably right. If it is from a robustly growing economy, where people are getting raises that push them into higher brackets, then there will not be much of a negative effect.
For instance this page shows US tax revenue over time. It grew from about 1.3 trillion in 1995 to 2 trillion in 2000. I don’t remember offhand what the interest rates were on bonds, but it was not too bad. If there were negative consequences, I wish they would come back!
That chart is for revenue only. There was also a benefit from government having less expenditure on unemployment and welfare due to more than full employment.
I’m looking at it from a different perspective than you are. If the government is collecting and spending 10% more each year it must have some effect on the money supply compared to 1%. In some cities half the people are government employees or welfare recipients. That’s gotta make some inflation. Please don’t get all technical on me, I’m looking at this point from a Kindergarten level today. 3% interest does not cover the losses due to inflation. People will be unhappy with these investments.
The CBO projections do not show revenue raising 10% every year. The last outlook had revenue rising by 16% next year because of the expiration of the Bush tax cuts and the growing economy; and then tapers off to revenue growth of a little more than 4% a year from roughly 2016 on.
You said revenue, not spending. Clearly during the time in question spending did not keep up with revenue, which is why the deficit decreased. Keynesian economics says that you should increase taxes somewhat and decrease spending during flush times, since the economy does not have to be stimulated and this puts the government books in better shape for the next recession, where taxes should be cut and spending increased.
I’m not an economist, only the father of one, and there is nothing very technical at this level.
And of course what you get in interest depends on inflation. It has little to do with revenue. T bills are paying so little now partly because there is almost no inflation and partly because they are the safest place to park money.
That’s exactly my point Voyager. Interest rates on T-bills must be higher than true inflation, or the net gain would be negative taking into account inflation. Nobody would buy them. They will not always be the safest.
This isn’t true. Theoretically, even if interest rates are very low, I am better off having T-Bills than cash. T-Bills are seen as a basically zero risk investment, and it is essentially guaranteed that I will get my cash back. That isn’t true for any other investment out there. Factually, this simply isn’t true as interest rates have gone negative in real terms a few times over the last couple years.
While I agree that inflation has been low over the last 20 years overall…
Especially at the grocery store which we notice first and often.
The way the government calculates it does not accurately reflect our true costs of living.
The rates on the 10-year T bill are hovering around 1.9% lately, a rate that is most likely less than inflation. They have been around this level for around 9 months now IIRC. The primary reason this negative return has been around for so long is that investors are scared about the current debt crisis in Europe and are worried that the Euro may collapse. This makes all the current political posturing about debt and stimulus stupid in my opinion. Surely, if the United States borrowed money and invested it into infrastructure, education, R&D, etc… they would get more of a return than 1.9%. While I agree the debt is a serious problem, mostly a problem with Medicare spending, now is not the time to cut back on other government programs. If anything we should reform Medicare to make it pay for itself and then borrow money from the world to invest in our economy.
Yes, borrowing money to invest in our infrastructure and education is a good idea at 2%. But we are already doing it so much. So you mean borrow MORE, at least temporarily. I do not think we can sustain that as rates rise.
Eh, the problem is that people have a weird idea that inflation is supposed to accurately reflect the “true cost of living”. Its not, its supposed to reflect changes to the value of the currency. Obviously the latter is convolved with the former, but they aren’t supposed to be the same thing.
People’s confusion on this point is doubly weird because the government has a measure of changes to cost of living thats released by the bureau of Labor. But everyone ignores that and instead mutter darkly about how the gov’t is somehow trying to trick us because their measure of inflation measures inflation instead of something else.
But if, for example, I issue $10 billion in bonds so that I can build an additional rail tunnel under the Hudson River (a project that the governor of New Jersey shot down), the interest rate on those bonds won’t rise over time. Normally, government debt has a fixed rate of interest.