Send a Tweet
Most Popular Choices
Share on Facebook 4 Share on Twitter Printer Friendly Page More Sharing
OpEdNews Op Eds    H3'ed 3/30/18

Will Interest Payments Take Up the Entire Federal Budget?

By       (Page 1 of 1 pages)     (# of views)   1 comment
Author 2529
Message Dean Baker
Become a Fan
  (41 fans)

From CEPR

- Advertisement -

Greg Ip gave us another rendition of this old scare story in a Wall Street Journal column. The argument is that the interest paid on U.S. government debt will soon impose an enormous burden on the federal government, choking off spending on important government programs.

The key part of this story is that interest rates will jump at some point in the not too distant future. While this is in fact what the Congressional Budget Office predicts, it is also what it has been predicting even since the Great Recession, and consistently been shown wrong.

The key question is, why would interest rates rise? There are two stories where we see interest rates rise. One is that we start to see an uptick in the inflation rate. In that case, long-term rates would almost certainly rise since investors would have the option of getting a better return just by holding physical commodities. Of course, the Fed would almost certainly raise interest rates in response to higher inflation, which would more directly cause interest rates to rise. One point about higher inflation that is worth noting is that it reduces the real value of the debt.

- Advertisement -

The other reason interest rates could rise is that the Fed raises rates even in the absence of higher inflation. In that case, the Fed as a matter of policy would be increasing our interest burden. (Selling off its assets also has the same effect, since the interest on the assets held by the Fed are refunded to the Treasury.)

Arguably, the Fed's rate increases in the last year and a half have not been justified by higher inflation, as the inflation remains well below the Fed's target. It is striking that none of the deficit hawks, including the Committee for a Responsible Federal Budget, which is cited in this piece, have ever expressed concern about the higher debt service burden resulting from these interest rate hikes.

The deficit hawks have also never raised any concerns about the burdens created by government granted patent and copyright monopolies. This is bizarre, since these monopolies are an alternative mechanism to direct funding. The government could directly pay for research on drugs, software, and other items, paying for it through taxing or borrowing, or it can tell private companies to do the research and then give them monopolies to allow them to recover their costs.

- Advertisement -

The deficit hawks hyperventilate endlessly about the former route of paying for things, but completely ignore the latter, even though it poses a much larger burden. In the case of prescription drugs alone the burden is more than $370 billion a year (we pay more than $450 billion for drugs that would likely cost less than $80 billion in a free market). This sum if just under 2.0 percent of GDP and more than twice the interest burden net of money rebated by the Fed. The total cost from these monopolies, including medical equipment, chemicals, software, and other items would likely be more than three times the cost of drug patents.

Anyone who is seriously concerned about the burden of government debt on future generations must also be concerned about the burden posed by patent and copyright monopolies, if they are consistent.

Of course if their goal is simply to cut Social Security, Medicare, and other social programs then it is understandable they would not want to discuss patent and copyright monopolies.

 

- Advertisement -

Well Said 1  
Rate It | View Ratings

Dean Baker Social Media Pages: Facebook page url on login Profile not filled in       Twitter page url on login Profile not filled in       Linkedin page url on login Profile not filled in       Instagram page url on login Profile not filled in

Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. (more...)
 
Go To Commenting
The views expressed herein are the sole responsibility of the author and do not necessarily reflect those of this website or its editors.
Writers Guidelines
Contact AuthorContact Author Contact EditorContact Editor Author PageView Authors' Articles
Support OpEdNews

OpEdNews depends upon can't survive without your help.

If you value this article and the work of OpEdNews, please either Donate or Purchase a premium membership.

STAY IN THE KNOW
If you've enjoyed this, sign up for our daily or weekly newsletter to get lots of great progressive content.
Daily Weekly     OpEdNews Newsletter
Name
Email
   (Opens new browser window)
 

Most Popular Articles by this Author:     (View All Most Popular Articles by this Author)

The Federal Reserve Board and the Presidential Candidates

The Deficit Hawks Target Nurses and Firefighters

The Attack of the Real Black Helicopter Gang: The IMF Is Coming for Your Social Security

The profit on the TARP and Bernie Madoff

Poverty: The New Growth Industry in America

The Real Reason For The Government Shutdown