Monday, November 23, 2009


Dean Baker or Dean Martin on Government Interest Payments?

(I know that post title is weak; I got nothin'.)

The Keynesians (e.g. Krugman and DeLong) have been high-fiving Dean Baker over his response to the NYT article which has the audacity to say that the federal government's $1 trillion+ deficits may come with some strings attached. (BTW I like Baker; I debated him on the San Fran NPR outlet on Easter Sunday earlier this year.) So here's Baker's take on the NYT deficit fear-mongering:
In Just a Decade the U.S. Interest Burden Could Be as High as It Was in 1992!!!!!!!

That might not sound scary to most people, but this was the punch line of a front page NYT news story that included all sorts of unsupported assertions about the crisis posed by the government debt.

The fourth paragraph asserts that:

"Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages."

No, this is wrong. There is no evidence presented in this article that the rise in interest rates will place the U.S. government in a situation where it will be unable to pay its bills and no one cited in this article makes such a claim.

The article is also completely unbalanced in not presenting the views of any economist who could put the deficit/debt issue in perspective for readers.

None of the Keynesians explains where Baker got that figure. If you look at the NYT article, it says early on:
With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.
So presumably Baker is looking at $700 billion divided by the estimated GDP in 2019, and the resulting percentage is about the same as it was back in 1992. I haven't verified that this is what Baker did, but that's my guess.

Here's my question: How can that be possible? The federal debt held by the public [.pdf] (which is what everyone is bandying about, I believe) was 48.1% of GDP in 1992. The CBO projects that the debt will break 80% of GDP by 2019.

Since the NYT article's scenario involves interest rates "that are sure to climb back to normal," how can it cost the same to finance 80% indebtedness as it did to finance 48.1%?

Again, I'm not accusing Baker of doing something fishy here, I think really what's going on is that the projected interest payments of $700 billion must be assuming interest rates lower than what the government had to pay in 1992. (I am especially confident of this statement, since Baker didn't pick the year with the highest debt/GDP ratio in recent vintage. 1993 and 1994 had higher ratios, for example. So presumably Baker picked the year with the highest interest payments as a share of GDP.)

In fact, if you check out the yields on 10-year constant maturity Treasurys, you'll see that they were falling throughout the early 1990s and then spiked in 1994. So when the NYT talks about interest rates returning to "normal," I think they mean, "The abnormally low yields of the 2000s."

Final point: Don't our Keynesian friends realize that they more they go nuts about "deficit phobia" etc., it will thereby neuter them all the more effectively when President Palin says we need to spend $1 trillion beefing up the military?

Dr. Bob, you're kidding about "President Palin", right? Please say that you are.
At the bottom of the "deficits are unworrisome" arguments from Krugman and others is the simple assertion that interest rates are at historic lows. That is it- nothing more and nothing less. It is almost as if they have no conception of past or future, only the here and now.

Right now, the government has lessened the impact of interest payments by shortening the average duration of its debts, and I have seen zero evidence that they are even yet looking to "lock in low, long term yields".
I listened to the debate between you and Baker and think you did well. However, you could have scored big time when Baker claimed that the gov't is more efficient at administering pension programs. Why didn't you respond with a statement about the big picture of bankruptcy under Social Security?
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