January 27, 2013
A COUPLE TWEAKS FROM SURPLUS:
Why Government Spending Is Not Out of Control (BRUCE BARTLETT, 1/25/13, The Fiscal Times)
[V]irtually all the growth in projected spending comes not from entitlements or giveaways to the poor and lazy, as Republicans would have us believe, but rather from interest on the debt. This is a problem, but not nearly to the extent that it appears.The reason is that interest on the debt is what economists call a pure transfer. Economically, it is little different from taking money out of your right pocket and putting it into your left pocket. That is because the vast bulk of interest goes to people and institutions who simply use it to buy more Treasury securities.Back in the days when the federal debt was owned almost entirely by Americans, one could reasonably say that we owed it to ourselves and it was a matter of no economic concern. As Franklin D. Roosevelt put it Our national debt after all is an internal debt owed not only by the Nation but to the Nation. If our children have to pay interest on it they will pay that interest to themselves. A reasonable internal debt will not impoverish our children or put the Nation into bankruptcy.Of course, we no longer owe the debt all to ourselves; about half of the publicly-held national debt is owned by foreigners, but most of that is held by central banks that will hold it pretty much forever. Nevertheless, there is still a fundamental economic difference between a debt arising from higher government spending on goods and services and one arising from higher interest expense.When government buys stuff or employs workers, they are not available for use by the private sector. If the economy were growing and the unemployment rate was low, this would be a bad thing. Under current circumstances, however, when GDP is far below its potential and unemployment is high, government spending on goods and services is not displacing private use, but rather putting otherwise idle resources to good use.My point is that economists have long differentiated between non-interest spending and that for interest, which, as I said, is a pure transfer that has essentially benign economic effects. For this reason, they are mainly concerned about what is called the "primary deficit," which is non-interest spending as compared to revenues. As the chart shows, the primary deficit going forward is actually quite small - just 1.7 percent of GDP in the long run.Moreover, this estimate is high because it was calculated before the effects of the fiscal cliff deal, which substantially raised revenues and reduced projected deficits relative to the assumptions used in the Treasury report.
If it's important to pretend there's a crisis to get the policy changes we want, it's also important not to swallow our own rhetoric whole.Posted by Orrin Judd at January 27, 2013 8:45 AM