November 21, 2017
Andrew Ross Sorkin had a good piece mocking the Peter Peterson funded Fix the Debt campaign since many of its CEO leaders are now gladly on the tax cut bandwagon. Unfortunately, the piece ends with sermonizing on the need to reduce deficits and debt.
“In the end, Mr. Peterson is right. The country — and businesses — will ultimately do better if the nation’s balance sheet is not bloated with debt. Part of the issue is generating enough revenue from taxes, and part is dealing with costs like health care and entitlements, which the tax overhaul plan does not even begin to tackle.”
There are two ways in which deficits and debt can do actual damage to the economy. The first is the classic crowding out story. This is one in which government spending is pulling away resources from the rest of the economy. It has a lasting impact insofar as this leads to higher interest rates, which in turn reduce investment. The reduction in investment means the capital stock is smaller than it would otherwise be, which means that workers will be less productive. That means less future output and lower take-home pay.
There is also the story that higher interest rates will lead to a higher valued dollar due to an inflow of foreign capital. This means a larger trade deficit. In addition to turning the mix of employment away from items that are traded (e.g. fewer manufacturing jobs), the foreign borrowing associated with this capital inflow means a larger share of future output will be paid out to foreigners as interest and dividends on the assets they own in the United States.
This is a difficult story to tell about the current economic situation. Interest rates remain at historically low levels. The 10-year Treasury bond rate is less than 2.4 percent. This compares to a rate of more than 5.0 percent during the period when we were running budget surpluses in the late 1990s. Inflation is somewhat lower today than the late 1990s (roughly 2.0 percent now, compared to 2.5 percent in the 1990s), but even taking into account differences in inflation rates, real interest rates are considerably lower today than in the years of budget surpluses. In other words, there is not much of a case for the crowding out story.
In fact, if the government spent more money on various types of public investment, which would include infrastructure, research, education, and early childhood education, the long-term benefits would almost certainly swamp the impact of any crowding out that could result from higher interest rates. In this case, the problem is, and has been, the deficit is too small, not too large.
The other issue with the debt is that it commits a portion of future GDP to making interest payments on the debt. At present these payments come to about 1.3 percent of GDP. Almost half of these payments are refunded to the Treasury by the Federal Reserve Board, which is currently collecting interest on more than $4 trillion in assets. (Incredibly, none of the deficit hawks seem at all concerned about the Fed’s plan to sell off its assets, thereby reducing the money refunded each year to the Treasury.)
If anyone thinks the current level of interest payments are a disastrous burden to pass off to our children, consider that we were paying more than 3.0 percent of GDP in interest in the early 1990s. That much larger interest burden didn’t prevent the late 1990s from being the most prosperous period in the last four decades.
The other point for those concerned about interest burdens is that they better look at patent or copyright rents, or they are not being honest. One way the government pays people to do things is to directly pay them. Another way is to give them patent and copyright monopolies. These government-granted monopolies allow them to charge prices that can be several thousands of percent above the free market price. They are in effect a privately collected tax.
The area where these monopolies are most important is prescription drugs. We will spend more than $450 billion this year on drugs that would likely cost less than $80 billion in a free market. The difference of $370 billion is almost 2.0 percent of GDP. It is far larger than our interest burden, especially if we deduct the money rebated from the Fed. If we added in the rents from medical equipment, software, and other areas, it would almost certainly be at least twice as large.
It is incredibly dishonest to tout interest on the debt as a burden on our children (some of whom will collect this interest) and not pay attention to the amount of money being paid to patent and copyright owners in rents. It should make no difference to our kids if we impose a high tax on drugs to pay interest on the debt, which was accrued in part by paying for developing new drugs, or whether we let Pfizer charge higher prices because of its patent monopoly.
Since patent and copyright rents dwarf interest on the debt, we should assume that the debt-deficit hawk gang really don’t care about our kids or are extremely confused about economics.
Comments