Budget Compromise Reached?

[Tiberius]

I think gatorman provides tremendous value to this board as he expresses very typical liberal views and lack of arguments. Most of the liberal agenda is very difficult to defend on its' merits.

 

Yup! That's me, actually calling someone that says Federal workers don't work a troll. How silly. Morons!

[keepthefaith]

Yup! That's me, actually calling someone that says Federal workers don't work a troll. How silly. Morons!

 

My comment has nothing to do with you calling someone a troll. Federal workers? No, there's no fat or low productivity in that workforce.

[Azalin]

Federal workers?

in fact, that is very nearly an oxymoron.

[TPS]

Lots of nice numbers I'm sure. Let's talk about the interest expense. Is it conceivable that in a couple decades the interest rate at which our debt (which could be $30T by then) will be financed is double or close to double what it is today? Shouldn't we expect that interest rates will have to rise over time? If so we could have an annual expense of roughly $1.25T - $1.5 T annually. Today it costs about $400B. If so, is it possible that taxpayers (I'm talking about people in the workforce then) could be really pissed off that such a large piece of the budget is committed simply to interest on debt? I really don't want to hear about debt/GDP or Interest/GDP or any other nice numbers. What I want to know is if taxpayers then and politicians then are gonna look at the debt expense and be really sorry that some spending discipline wasn't exerted previously. I want to know if an expense like that will be very problematic in the effort to fund the government then.

Sorry it took so long to get back to this...

Your example supports why it's important to focus on "relative numbers" not absolute. If the interest today is $400 bil, that would put it at 2.5% of $16 trillion GDP. Suppose it did hit $1.2 trillion in 20 years or so, a 300% increase. If GDP grows at a faster rate, then the relative interest expense declines. Say GDP goes up by 400% ($64 tril) over that period, the interest expense would fall to less than 2% of GDP.

 

this is why most economists focus on the shares of the budget as a % of GDP. Usually you separate the interest component from the total spending and taxes, the latter known as the primary budget. Regarding the size of government, pick any number you want as a share of GDP, say 20%. Then assume we want to make sure the primary budget is balanced, so we will bring in revenues = 20% of GDP too. As long as nominal GDP grows faster than the nominal interest rate on the outstanding debt, the interest burden will decline as a % of GDP and relative to total spending by the government.

 

I'll use the numbers already given.

20% of $16 trillion GDP gives G=$3.2 trillion. (Just for the sake of making it clear, let's assume the primary def is balanced. The FY 2013 deficit was $660 bil and you say the interest exp is $400 bil, so it's really about $260 bl). The interest expense is $400 bill or 2.5% of GDP. Total spending from this example is $3.2 + $0.4= $3.6 trillion. The interest payment as a % of total G spending is 11.1%.

 

Ok, 20 years later the interest expense is $1.2 trillion (300% increase). Government spending and taxes are both 20% of GDP, which I'm assuming increased by 400%, so it's now $64 trillion. G spending as 20% of GDP = $12.8 trillion + $1.2 tril interest = $14 tril. The interest expense has now declined to 8.6% of government's total spending (and 1.9% of GDP).

 

Are we worse off? Would you not look at corporations in the same way? Since they are growing over time, who cares about their nominal interest payment? What's important is their interest expense ratio. While my example is not precisely realistic, it does express the most important variables to focus on once you balance the primary budget, the growth rate of nominal GDP relative to the nominal interest rate on the government's debt. The keys to stabilizing the government's finances over time are 1) make sure we balance the primary deficit over time; and 2) the growth rate of NGDP is >= the nominal interest rate on debt.

 

There is no doubt that we will have to make sure we can balance the primary budget going forward (over the business cycle, not every year), then as long as the interest rate < the growth rate, the D/Y ratio will fall over time. To preempt an argument, If you want to argue that interest rates will be higher, then you will need a mechanism. If it's inflation, then that's also driving NGDP higher, so they offset.

Edited December 18, 2013 by TPS

[keepthefaith]

Sorry it took so long to get back to this...

Your example supports why it's important to focus on "relative numbers" not absolute. If the interest today is $400 bil, that would put it at 2.5% of $16 trillion GDP. Suppose it did hit $1.2 trillion in 20 years or so, a 300% increase. If GDP grows at a faster rate, then the relative interest expense declines. Say GDP goes up by 400% ($64 tril) over that period, the interest expense would fall to less than 2% of GDP.

 

this is why most economists focus on the shares of the budget as a % of GDP. Usually you separate the interest component from the total spending and taxes, the latter known as the primary budget. Regarding the size of government, pick any number you want as a share of GDP, say 20%. Then assume we want to make sure the primary budget is balanced, so we will bring in revenues = 20% of GDP too. As long as nominal GDP grows faster than the nominal interest rate on the outstanding debt, the interest burden will decline as a % of GDP and relative to total spending by the government.

 

I'll use the numbers already given.

20% of $16 trillion GDP gives G=$3.2 trillion. (Just for the sake of making it clear, let's assume the primary def is balanced. The FY 2013 deficit was $660 bil and you say the interest exp is $400 bil, so it's really about $260 bl). The interest expense is $400 bill or 2.5% of GDP. Total spending from this example is $3.2 + $0.4= $3.6 trillion. The interest payment as a % of total G spending is 11.1%.

 

Ok, 20 years later the interest expense is $1.2 trillion (300% increase). Government spending and taxes are both 20% of GDP, which I'm assuming increased by 400%, so it's now $64 trillion. G spending as 20% of GDP = $12.8 trillion + $1.2 tril interest = $14 tril. The interest expense has now declined to 8.6% of government's total spending (and 1.9% of GDP).

 

Are we worse off? Would you not look at corporations in the same way? Since they are growing over time, who cares about their nominal interest payment? What's important is their interest expense ratio. While my example is not precisely realistic, it does express the most important variables to focus on once you balance the primary budget, the growth rate of nominal GDP relative to the nominal interest rate on the government's debt. The keys to stabilizing the government's finances over time are 1) make sure we balance the primary deficit over time; and 2) the growth rate of NGDP is >= the nominal interest rate on debt.

 

There is no doubt that we will have to make sure we can balance the primary budget going forward (over the business cycle, not every year), then as long as the interest rate < the growth rate, the D/Y ratio will fall over time. To preempt an argument, If you want to argue that interest rates will be higher, then you will need a mechanism. If it's inflation, then that's also driving NGDP higher, so they offset.

 

I follow your math and reason but I don't think it's realistic to expect that GDP will grow at a faster rate than debt. Many believe it's far more likely that the opposite will occur, that debt growth will be much greater than GDP growth even with some inflation and an improving economy. Many believe it's far more likely that interest rates on debt will increase significantly from the very low rates that exist now. All this adds up to much greater annual interest expense. I for one lose sleep at night with the thought that annual federal interest expense could reach 10%, 15% or more of the annual budget especially when there are so many demands on tax dollars and elected officials that don't have the will or the guiding principles to solve this. This is why I believe the 30 and under generations need to wise up and vote for politicians that will make a real effort to stop the bleeding.

[TPS]

 

 

I follow your math and reason but I don't think it's realistic to expect that GDP will grow at a faster rate than debt. Many believe it's far more likely that the opposite will occur, that debt growth will be much greater than GDP growth even with some inflation and an improving economy. Many believe it's far more likely that interest rates on debt will increase significantly from the very low rates that exist now. All this adds up to much greater annual interest expense. I for one lose sleep at night with the thought that annual federal interest expense could reach 10%, 15% or more of the annual budget especially when there are so many demands on tax dollars and elected officials that don't have the will or the guiding principles to solve this. This is why I believe the 30 and under generations need to wise up and vote for politicians that will make a real effort to stop the bleeding.

"Many believe..."

As I tried to preempt, interest rates rise with faster growth. Nominal gdp increased by 6.2% in Q3, and the average interest on government's debt is 1%. The government's finances will actually improve for the next 10 years, so worry about something that matters, and get some sleep.

 

At some point during that time, We'll need to reduce healthcare costs and defense spending to keep expenditures at 20% (or less) of GDP, and revenues will need to rise another 1-2% and things will be fine for at least another 10 years after that. I think you will find more important issues to worry about before even the first 10 year changes need to be made...

 

[keepthefaith]

"Many believe..."

As I tried to preempt, interest rates rise with faster growth. Nominal gdp increased by 6.2% in Q3, and the average interest on government's debt is 1%. The government's finances will actually improve for the next 10 years, so worry about something that matters, and get some sleep.

 

At some point during that time, We'll need to reduce healthcare costs and defense spending to keep expenditures at 20% (or less) of GDP, and revenues will need to rise another 1-2% and things will be fine for at least another 10 years after that. I think you will find more important issues to worry about before even the first 10 year changes need to be made...

 

Not sure where you got the Q3 GDP number or government debt interest rate. I've seen numbers closer to 4% for Q3 GDP and our average debt interest rate (that's the number that matters, right?) is in the neighborhood of 2% which is very low historically. My concern still is that in 2-3 decades, the interest rate at which we finance our debt will be higher than today and the principal will be in the $30T range and the annual cost of interest will be a far more significant budget item than it is today even with growth in tax receipts. We'll look back on the first 2 decades of this century and be really sorry more fiscal restraint wasn't in place. Any organization that spends 15% or more of its' revenue on interest payments is in a bad place.

[TPS]

Not sure where you got the Q3 GDP number or government debt interest rate. I've seen numbers closer to 4% for Q3 GDP and our average debt interest rate (that's the number that matters, right?) is in the neighborhood of 2% which is very low historically. My concern still is that in 2-3 decades, the interest rate at which we finance our debt will be higher than today and the principal will be in the $30T range and the annual cost of interest will be a far more significant budget item than it is today even with growth in tax receipts. We'll look back on the first 2 decades of this century and be really sorry more fiscal restraint wasn't in place. Any organization that spends 15% or more of its' revenue on interest payments is in a bad place.

My GDP # was nominal, not the real value. You are correct on the average interest rate.

The deficit continues to fall.

“The deficit is going down, will continue to go down as percentage of GDP and in nominal terms through about 2018, 2019 under current forecasts,” said Stan Collender, executive vice president at Qorvis/MSLGROUP in Washington and a former congressional appropriations aide. “It will essentially cease to be much of an economic issue over the next five years.”