Interest on National Debt Payments — A Simple Primer.
This is written in an effort to expand on the Federal Government debt-deficit definitions and history that I explored in previous posts (https://trenzpruca.wordpress.com/2016/04/27/national-debt-and-deficit/ and http://www.dailykos.com/story/2016/02/14/1485087/-National-Debt-and-Budget-Deficits ). This post examines the historical size of the interest payments on the Federal Debt and their impact on the Government’s ability to manage its budget. I hope it is easy to understand and possibly correct some of the hysteria and misstatements on all sides.
Perhaps the most significant concept to keep in mind is how the interest on this debt relates to income. One of the easiest ways to think about it is in reference to a person’s household debt. Basically, it is not how much debt you have but whether your income is sufficient to meet the periodic payments to pay off your debt and allow you to retain enough money live a good and decent life and you expect that income not to change dramatically for the worse all of a sudden.
Now, some recent history:
1. Interest rates as a percentage of total federal outlay. (https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/ap_4_borrowing.pdf):
1950 (About end of Truman Administration) interest payment on federal debt amounted to 11.4 percent of all Federal Government spending.
By 1960 at the end of Eisenhower’s reign it had dropped to 8.5 percent.
1970 (through the Kennedy, Johnson, and half of Nixon’s administration) at the height of the Vietnam war it had decreased further to 7.9 percent.
1980, when Reagan assumed office, the ratio of interest payments to debt had increased to 10.6 percent largely because the inflation crisis of the 1970s increased borrowing costs.
Despite the end of the inflation crisis, by 1985, about half way through the Reagan administration, it had ballooned to 16.2 percent of Federal outlays where it remained until Clinton took office.
In 2000, when Clinton left office, it had fallen to 13 percent.
By 2014, it had further decreased to 7.4 percent where it has more or less hovered since.
So, today the ratio of interest payments on the Federal Debt to total federal outlays is among lowest it has ever been since 1950 (except for the early years of the Bush II administration as they used up the Clinton budget surplus).
2. Interest Rates as a percentage of Gross National Product (GNP).
Perhaps more significant is the ratio of interest payments to GNP.
Interest payments on the federal Debt as a percentage of GNP stood at 1.7 percent in 1950 and held relatively steady until 1980 when Reagan assumed the presidency. In 5 years it ballooned to 3.6 percent. Beginning with the Clinton Administration, It has steadily fallen until reaching 1.4 percent just before the Great Recession after which it grew to 1.8 percent by 2015. In great part, the recent growth was held in check by historically low interest rates.
To conclude, it appears the ability of the Federal Government to pay our debts remains more or less equivalent to any time in the last 65 years or so and substantially better than during the Reagan years. So, the sky is not falling.
If there is something to be worried about, it is the explosive growth of private debt especially household debt. Government debt has not grown much over the years and when it has it has been to bail out overextended Financial and Corporate interests.
So what about the future?
There are estimates that, if we do nothing, by 2020 Federal Debt interest payments as a percentage of total federal outlays will rise to 12.4 percent and to 2.7 percent of GNP. High but still lower than during the Reagan years when it was “Morning in America.”
Nevertheless, perhaps, something should be done to moderate that rise. Cutting Federal Spending seems unlikely. As the following chart indicates, Defense Spending, Medicare, and Social Security seem to make up an outsized portion of Federal spending. Cutting Food Stamps may please some people and assist others in their re-election but they have no significant effect on either the deficit or the debt. Democrats will riot in the streets to prevent tampering with Medicare and Social Security while Republicans, the Military Industrial Complex and a few Democrats will fight to the death to prevent the cutting of a favored military system.
So what to do?
Well, modestly raising taxes on non-productive income and wealth such as capital gains will probably do wonders.