The big cliff that Nate Silver didn’t see
Nate Silver of the New York Times weighed in with his substantial analytical skills on the growth of government spending. For a data source, he used usgovernmentspending.com, and most of the federal spending he analyzed appeared to be in line with the general consensus. But there was one area that has been very contentious, the federal debt, which is where his data source did not serve him well. Here is how he describes America’s debt:
Another surprise is how little we are paying in interest on the federal debt, even though the debt is growing larger and larger. Right now, interest payments make up only about 6 percent of the federal budget. In addition, they have been decreasing as a share of the gross domestic product: the federal government spent about 1.5 percent of gross domestic product in paying interest on its debt on 2011, down from a peak of 3.3 percent in 1991.
The interest payment total that Silver uses, saying that U.S. debt interest payments are “only about 6 percent of the federal budget,” seems to be $247 billion. But the Government Accountability Office said in their GAO-13-114 Schedules of Federal Debt (see chart above) that total interest expenses on the federal debt were $432 billion, or 11.4 percent of the federal budget.
The $180 billion difference between Silver’s figure and the GAO is from the interest being paid on federal debt that is held within the Social Security Trust Fund and other intragovernmental debt holdings. This interest does not require a current cash outlay, but it is accrued into the amount owed to Social Security. It’s easy to think of it as a credit card that lets you skip paying interest for years and is added to the amount outstanding. You feel like you are getting off easy, but the total you must pay is ballooning out of sight.
Silver also underestimated the drag on current and future GDP from interest on the debt. If the total amount of interest due annually (including the debt held by the federal government) was factored as a percent of gross domestic product, it would be 2.7 percent rather than the 1.5 percent that Silver calculated ($432 billion of interest payments versus $15.8 billion GDP). It may appear that we are getting off easy on the federal debt, but we are not really. We are just kicking the payments down the road.
Silver’s biggest misunderstanding relates to the maturity profile of the federal debt. He implies, without citing any sources, that much of the federal debt has long maturities (over 10 years in the bond market). He implies that U.S. debt, like a 30-year fixed rate mortgage, has locked in a low rate:
Borrowing costs aren’t expected to remain this low forever, so this ratio is bound to increase some. Fortunately, much of the debt we have issued has relatively long maturities, meaning that we have locked in low rates.
Actually the reality is just the opposite of what Silver alleges. The GAO report says that about 58 percent, or $6.2 trillion of the securities currently held by the public, will mature within the next four years (see chart below). The maturity profile of federal debt is in fact weighted toward the short end, and we have no guarantee that interest rates will be low when the debt must be refinanced.
I can understand Silver and others missing the nuances and importance of the interest costs on the federal debt. But so many commentators (cheered by Paul Krugman) insist that the U.S. can and should increase deficit spending to boost the economy. But the federal debt created to fund those deficits must eventually be repaid, and the possibility of the nation going over over the interest rate cliff is very real. Interest costs could easily consume a lot more spending, pushing out other social needs.
An aside: The maturity profile of U.S. government debt is not that different from the average profile for European governments. See page 34 of this ECB paper.