October 08, 2017
The Washington Post decided to highlight the Republicans’ flip-flop from being a party obsessed with debts and deficits in the Obama years to one that doesn’t really care, as long as it can give more tax cuts to the rich. In presenting the background on the deficit and debt, it makes a number of assertions that are likely to mislead readers.
The fourth paragraph tells readers:
“The moves come as the federal deficit, the difference between what the government earns in revenue and spends on programs, is growing more quickly. It will be $600?billion this year and is projected to reach $1.46?trillion in a decade, even without additional policy actions.”
This might sound like a rapid jump in the size of the deficit because it is not expressed relative to the size of the economy. In fact, the projections show the deficit rising from 3.6 percent of GDP in 2017 to 5.2 percent of GDP in 2027.
Furthermore, almost the entire increase in the projected deficit is the result of a projected increase in interest payments equal to 1.5 percentage points of GDP. This increase is due the Congressional Budget Office’s (CBO) projection that interest rates will be substantially higher in the future than they are today. In this respect, it is worth noting that CBO has consistently been wrong in its interest rate projections since 2010, hugely overstating the extent to which interest rates will rise.
It is also worth noting that another factor driving up projected deficits is the assumption that the Federal Reserve Board will sell off much of its assets so that it will refund substantially less money to the Treasury in future years than it is now doing. Currently, it is refunding about $90 billion annually (0.5 percent of GDP) based on the interest it receives from its assets. This is projected to fall to about 0.2 percent of GDP in a decade. For some reason, the Washington Post, in spite of its concern about deficits, has never mentioned the impact on the deficit of the Fed’s decision to sell off its assets.
The piece also wrongly asserts:
“This [larger deficits] adds to the debt, driving up the United States’ borrowing costs and making it harder for the country to respond to emergencies, especially during economic downturns.”
It’s not clear that a higher debt will either raise interest rates or make it harder for the country to respond to emergencies. Japan has a debt-to-GDP ratio of more than 240 percent, compared to less than 80 percent in the United States. Nonetheless, the interest rate on long-term Japanese treasury bonds is less than 0.1 percent.
The piece is also sloppy in failing to mention that the U.S. government also pays for services with patent and copyright monopolies. The higher prices paid on the protected items are equivalent to taxes that we are expected people to pay in the future on items like software, medical equipment, and prescription drugs. In the case of prescription drugs alone, the tax is on the order of $370 billion a year (2 percent of GDP) as the free market price would typically be less than 10 percent of the protected price. It doesn’t make sense for someone to be concerned about debt and deficits but not these privately imposed taxes. It is probably worth mentioning in this context that the Washington Post gets considerable advertising revenue from drug companies.
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