The fiscal-prudence debate
Edmund Andrews has a long front-page story today on what he calls “the United Statesâ€™ long-term budget crisis” — and has occasioned a strangulated “Urg” out of Paul Krugman in doing so. Krugman wrote a very smart blog entry on Friday (Tyler Cowen called it one of the best recent economics posts in some time) which talks about exactly the issue that Andrews is addressing — the question of whether and how the interest rates that the US pays on its borrowings might rise in future. But none of that nuance made it onto the NYT’s front page. Instead, we get this:
With the national debt now topping $12 trillion, the White House estimates that the governmentâ€™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.
In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.
Economic forecasting is hard enough a few months out; trying to guess what a certain number is going to be in a decade’s time is a fool’s errand, and it’s sad that Andrews didn’t give the other side of the story. What’s more, this scary chart doesn’t seem quite as scary when you look at the y-axis:
Most developed countries can cope quite happily with net interest payments around 3% of GDP. According to the OECD, Belgium is already at 3.8%, and Italy’s at 5.2%; the average for the euro area is 2.7%. So while there might be a big rise in this metric, it would be a big rise from a low level and to a number very much within the bounds of precedent.
None of which is to say that Andrews doesn’t raise an important question. But fiscal prudence is the kind of thing which get rich financiers like Pete Peterson and Bill Gross very excited; it doesn’t have nearly as much effect on the populace as a whole. Just ask the Japanese: if they’re having problems right now, it’s not because of their massive government debt. So it would have been nice to see a slightly less one-sided article.