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Catfish and Cod
Thursday, July 17, 2003
A sane deficit policy in a recession.
(Link path: Slate)

OK, people, let's review.

Even though our national debt is growing rapidly, at $6.72 trillion and counting, the near-term situation isn't particularly dire.

No, but the long-term situation is. That may not matter to aging baby boomers, but it sure does to Millennial Generation youths, like me.

Last year, interest costs fell to $332 billion (roughly the 1995 total), amounting to only 16.5 percent of total layouts...Indeed, it turns out that taxpayers have been among the largest beneficiaries of the downdraft in interest rates. The Treasury Department constantly refinances its existing debt, replacing old or expired bonds and bills with new bills and notes. And like home owners, it has been able to do so at progressively lower interest rates... Of course, the bias toward short-term borrowing means the Treasury has to roll over debt more frequently, so if rates rise, interest payments could quickly rocket up.

This phenomenon is short-term. I feel certain that Greenspan was not ignorant of the budgetary consequences of low interest rates: according to Keynesian economic theory, governments should increase spending in recessions, so lowering interest rates (and debt service payments) allows the government to spend more. It would actually make sense for the Treasury to refinance as much of the debt as possible, while Greenspan keeps interest rates low: "lock in the mortgage", as the annoying DiTech commercials urge us to do.

The problem with the exploding deficit isn't that we can't afford to service the debt or repay the principal during the next few years. The problem is the Bush administration's faith in a phony solution. The Republicans' conventional wisdom is that once the economy starts growing rapidly again, it will generate the sort of '90s tax revenue gusher that will rebalance the budget by the end of this decade. Tomorrow I'll explain why that hopeful theory is wrong.

Exceedingly rosy budget projections are hardly restricted to this Administration. Does anyone remember the FY 2000 OMB budget projections claiming a $1 trillion surplus by 2005? But the author is wrong on principal payments. Anyone who honestly believes that Congress will choose the long-term investment of debt repayment over the short-term gains of pork barrel spending, please give a loud yell.

[sound of crickets chirping]

I rest my case. Without broad public support, the debt will not be addressed until the load of debt service becomes too much to bear. Then we'll either all buy war bonds, or we'll soak the rich for a couple of years. The alternative -- a default on credit by the United States Treasury -- is unthinkable.