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Don't worry: If you're concerned about rising Federal debt -- read this

How will our children know they face a crushing debt burden?

The question above may seem silly.

Of course, they will know because there are a number of well-funded policy shops that will be spewing out endless papers and columns telling them that they are facing a crushing debt burden.

Because these policy shops are well-funded and well-connected we can be sure that major media outlets, like The New York Times, The Washington Post and National Public Radio, will give their complaints plenty of space.

But let's imagine a world where our children weren't constantly being told that they face a crushing debt burden. How would they know?

Even with a higher tax burden due to the debt we are now building up, workers 10 years out should enjoy substantially higher living standards than they do today.

It might be hard if the latest budget projects are close to the mark. The Congressional Budget Office (CBO) just released new projections for the budget and the economy.

They show that in 2031, the last year in their budget horizon, the interest burden on our debt will be 2.4% of Gross Domestic Product. That's up from current interest costs of 1.4% of GDP. That implies an increase in the debt burden, measured by interest costs, of 1.0 percentage point of GDP.

Side note 1: The true debt burden is actually somewhat less. Last year the Federal Reserve Board refunded $88 billion, roughly 0.4% of GDP, to the Treasury. This was based on interest that it had collected on the bonds it held. That leaves the actual interest burden at around 1% of GDP.

Will an interest burden of 2.4% of GDP crush our children?

On the face of it, the deficit hawks have a hard case here. The interest burden was over 3.0% of GDP for most of the early and mid-1990s. And for those who were not around or have forgotten, the 1990s, or at least the second half, was a very prosperous decade. It's a bit hard to see how an interest burden of 2.4% of GDP can be crushing if burdens of more than 3.0% of GDP were not a big problem.

Imagining Even More Debt

But, the debt burden may be higher than the current projections show. After all, President Biden has proposed a $1.9 trillion pandemic rescue package. He also will have other spending initiatives. The CBO baseline includes tax increases in current law that may not actually go into effect.

CBO's latest projections put the debt (currently $22 trillion) at $35.3 trillion in 2031.

Let's assume that the rescue package and other issues raise the debt for that year by 10%, or $3.5 trillion. This brings the interest burden to 2.7% of GDP. That's still below the 1990s level.

Furthermore, insofar as the rescue package and other initiatives are successful in boosting growth, GDP, the denominator in this calculation, will be larger, which will at least partially offset the higher interest burden.

One point the deficit hawks add to this calculation is that interest rates are extraordinarily low at present.

CBO does project that interest rates will rise, But in 2031 they still project an interest rate on 10-year Treasury bonds of just 3%. This is up from 1.1% at present, but still well below the rates we saw over the 40 years before the Great Recession. It certainly is not impossible that interest rates will rise to 4% or even 5%.

Higher Interest Rates

Higher rates will mean that the debt poses a greater interest burden. But there are a couple of important qualifications that need to be made. First, much of our debt is long-term. The 30-year bond issued in 2021 at a 2% interest rate doesn't have to be refinanced until 2051. That means that even if interest rates do rise substantially they will only gradually lead to a substantially higher interest burden.

The other point is that we have to ask about the reason interest rates are rising.

It is possible that interest rates will be rising even as the inflation rate remains more or less in line with CBO's latest projection of around 2%. In that case, higher interest rates mean a greater burden over time.

However, interest rates may also rise because we see higher than projected inflation. Suppose the inflation rate rises to 3%, roughly a percentage point higher than projected. If interest rates also rise by a percentage point, so that the interest rate on a 10-year Treasury bond in 2031 is 4%, instead of 3%, we would still be looking at the same real interest rate. In that case, the value of the bond would be eroded by an extra 1 percentage point annually, due to the impact of higher inflation.

In the case where higher inflation is the reason for higher interest rates, the actual burden of the debt does not change.

With nominal GDP growing more rapidly due to the higher inflation, the ratio of debt to GDP would be lower than in the case with lower inflation. This means that we only need to worry about a higher interest burden if interest rates rise without a corresponding increase in the rate of inflation.

Side Note 2: If the economy grows at a 2% real rate over the next decade, and the inflation rate averages 2%, then nominal GDP will be 48% larger in 2031 than it is today. If it grows at a 2% real rate and the inflation rate averages 3%, nominal GDP will be 63% larger in 2031 than it is today. With nominal GDP 10% larger in 2031 in the case with higher inflation than the case with lower inflation, the same amount of interest would imply a 10% lower burden, relative to GDP. Alternatively, to have the same burden relative to GDP, interest payments would have to be 10% higher.

What would adding a 1 percentage point interest burden look like?

Paying The Bill

Suppose that the CBO projections prove to be exactly right.

At first glance, this higher interest burden implies that, if the economy is operating near its capacity, we would have to get by having the government spend roughly 1 percentage point less of GDP on various programs. This could mean, for example, cuts to spending on education and infrastructure, or the military. Alternatively, it would need to raise taxes by roughly 1 percentage point of GDP, or some combination in order to offset the additional interest payments on the debt.

In fact, the first glance story is likely to substantially overstate the impact of this debt burden. The reason we would need to cut spending and/or raise taxes is to keep the economy from overheating.

The interest burden increases this risk by increasing the income of bondholders, who then spend more money because of their higher income.

But the bondholders don't spend all of the interest income they receive, in fact, they might spend a relatively small share.

Bondholders Are Big Savers

Remember, the people who hold government bonds are disproportionately higher-income households. That's why it is possible to say there is a burden from interest payments. If the interest was paid out to all of us equally, then we would just be paying ourselves. As was the case with the pandemic checks, and there would be no burden.

With a large share of interest payments going to the wealthiest households, perhaps 70 cents on a dollar ends up being spent. This is what we have to offset with spending cuts or higher taxes. That means we need to come up with a combination of spending cuts and tax increases that will reduce demand in the economy by 0.7% of GDP.

If we did this on the spending side, we would need to cut an amount of spending roughly equal to this amount. In the current economy, 0.7% of GDP would come to around $150 billion in spending cuts, roughly a fifth of the military budget or twice the annual budget for Food Stamps.

On the tax side, we might be tempted to take it from the wealthy, but we then come back to the same issue, that the wealthy save much of their income. If we want to reduce the consumption of the wealthy by an amount equal to 0.7%, we may have to raise taxes on them by something close to twice this amount, or 1.4% of GDP.

Suppose this proves politically impossible, so we end up having to share the higher tax burden more or less evenly across households. This means a tax increase equal to roughly 0.7% of people's incomes. Is this a big deal?

Wages and Productivity Get Divorced

The figure above shows the impact of CBO's projected increase in productivity over the next decade on wages, assuming productivity growth is fully passed on in higher wages.

It also shows the 0.7 % hit from debt burden taxes. As can be seen, the projected wage gains from higher productivity growth are roughly twenty times the "crushing" burden of the debt calculated above.

This means that even with a higher tax burden due to the debt we are now building up, workers ten years out should enjoy substantially higher living standards than they do today.

There is the obvious issue that productivity growth does not automatically translate into higher wage growth.

While wage growth for the typical worker did track productivity growth from 1947 to 1973, that has not been the case since 1979. Average wage growth did not track productivity growth reasonably well in the last four decades. Most of the gains went to high-end workers, such as top-level corporate executives and Wall Street types. Typical workers saw little benefit.

This pattern of upward redistribution of before-tax income could continue for the next decade, which would mean that most workers cannot offset an increased tax burden with higher pay. That would be a very serious problem, but the problem would be the upward redistribution blocking wage growth, not the relatively minor tax increase they might see due to the debt.

Anyone generally concerned about the well-being of workers ten years out, or further in the future, should be focused on what is happening to before-tax income, not the relatively modest burden that taxes may pose due to the debt.

Monopolies Impose 'A Private Tax'

This brings up a final issue about burdens. As I have often pointed out, direct spending is only one way the government pays for services. It also grants patent and copyright monopolies to provide incentives for innovation and creative work.

By my calculations, these monopolies add more than $1 trillion a year (4.8% of GDP) to the cost of a wide range of items, such as prescription drugs, medical equipment, and computer software. The higher prices charged by the companies that own these monopolies are effectively a private tax that the government allows them to impose in exchange for their work. No honest discussion of the burden of government debt can exclude the implicit debt that the government creates with these monopolies.

At the end of the day, we hand down a whole economy and society to future generations. Anyone seriously asking about the well-being of future generations must look at the education and training we have given our children, the physical and social infrastructure, and, of course, the state of the natural environment. The government debt is such a trivial part of this story that is hard to believe that would even be raised in the context of generational equity, if not for the big money folks who want to keep it front and center.

Featured image: Visual Capitalist

Why no one is paying the price for their lousy rollout of the COVID vaccines

The vaccine rollout process has been painfully slow in the United States. More than 40 days after the first vaccine was approved for emergency use by the Food and Drug Administration, just over 6.0 percent of our population has been vaccinated. And that is with just the first shot, very few having gotten the two shots needed to hit the targeted levels of immunity. Thankfully the pace of the vaccination program is picking up, both as kinks are worked out and now that we have an administration that cares about getting people vaccinated.

But we still have to ask why the process has been so slow. We have an obvious answer in the United States, the Trump administration basically said that distribution wasn't its problem. As Donald Trump once tweeted, he considered the distribution process the responsibility of the states and gave the order "get it done."

As bad as the U.S. has done so far, we have vaccinated a larger share of our population than any country in Europe with the exception of the United Kingdom.

If we can explain the failure to have more rapid distribution in the United States on Trump's Keystone Cops crew, what explains the failures in other wealthy countries? As bad as the U.S. has done so far, we have vaccinated a larger share of our population than any country in Europe with the exception of the United Kingdom. That's right, countries like Denmark, France, and even Germany have done worse in vaccinating their populations than the United States. And these countries ostensibly have competent leaders and all have national health care systems. Nonetheless, they have done worse far worse in the case of France and Germany, than Donald Trump's clown show.

The Vaccine Agenda if Saving Lives Was the Priority

The pandemic is a worldwide crisis, that requires a worldwide solution. This is a classic case where there are enormous benefits from collective action and few downsides. This is not a case, like seizing oil or other natural resources, where if the United States gets more, everyone else gets less and vice-versa. Sharing knowledge about vaccines, treatments, and best practices for prevention is costless and the whole world benefits if the pandemic can be contained as quickly as possible. This point is being driven home as new strains develop through mutation, which may spread more quickly and possibly be more deadly and vaccine-resistant.

The logical path would have been to open-source all research on treatments and vaccines, both so that progress could be made as quickly as possible, and also intellectual property rights would not be an obstacle to large-scale production throughout the world. This would have required some collective agreement where countries agreed to both put up some amount of research funding, presumably based on size and per capita income, and also that all findings, including results from clinical trials, would be quickly posted on the web. This way, the information would be quickly shared so that researchers and public health experts everywhere could benefit.

This sort of international cooperation was obviously not on Donald Trump's agenda. Mr. "America First!" was not interested in the possibility that we might better be able to tame the pandemic if we acted in cooperation with other countries. But it wasn't just Donald Trump who rejected the idea of open research and international cooperation, it really wasn't on the agenda of any prominent politician, including progressives like Bernie Sanders and Elizabeth Warren. It was an issue in the scientific community, but as we know, people in policy circles don't take science seriously. (I describe a mechanism for advanced funding of open-source research in chapter 5 of Rigged [it's free].)

The big problem, of course, is that going this route of open-source research and international cooperation could call into question the merits of patent monopoly financing of prescription drug research. After all, if publicly funded open-source research proved to be the best mechanism for financing the development of drugs and vaccines in a pandemic, maybe this would be the case more generally. And, no one in a position of power in American politics wanted to take this risk of a bad example.

Making the Best of the Single Country Route

If we had gone the route of publicly funded open-source research, then the scientific community would have access to all the clinical trial results of all the vaccines as they become available. This would mean that countries could decide which vaccines they wanted to use based on the data. They could also begin to produce and stockpile large quantities of vaccines, as soon as they entered Phase 3 trials. Incredibly, it seems no country has done this.

While we could not know that a vaccine entering Phase 3 trials will subsequently be shown to be safe and effective, the advantages of having a large stockpile available that can be quickly distributed swamp the potential costs of buying large quantities of a vaccine that is not approved. Suppose the United States had produced 400 million doses of a vaccine that turned out not to be effective. With the production costs of a vaccine at around $2 per shot, this would mean that we had wasted $800 million. With the country seeing more than 4,000 deaths a day at the peak of the pandemic and the economic losses from the pandemic running into the trillions, the risk of spending $800 million on an ineffective vaccine seems rather trivial.

For whatever reason, no country went this stockpile route. Just to be clear, there was no physical obstacle to producing billions of vaccines by the end of 2020. If we can build one factory to produce these vaccines, we can build ten factories. If some of the inputs are in short supply, we can build more factories to produce the inputs. There may be questions of patent rights, but that is different than a question of physical limitations.

But apart from the physical availability of the vaccines, there is also the issue of distributing the vaccine and actually getting the shots in peoples' arms. It seems that, rather than making preparations in advance, most governments acted like the approval of the vaccine was a surprise and only began to make plans for distribution after the fact.

This is really mind-boggling. While we could not know the exact date a vaccine would be approved, it was known that several vaccines were approaching the endpoints of their Phase 3 trials. In that situation, it is hard to understand why governments would not have been crafting detailed plans for how they would get the vaccines to people as quickly as possible, once the authorization had been made.

This would have meant pre-positioning stockpiles as close as possible to inoculation locations. These locations should also have been selected in advance, with plans to have the necessary personnel available to oversee and administer the shots. There are reports that there are shortages of people trained in administering the shots. The fall would have been a great time to train enough people to administer the vaccine.

In a normal flu season, close to 2 million shots are given every day, without any heroic efforts by the government. Given the urgency of getting the pandemic under control, it is hard to understand why we could not have administered shots at this pace, if not considerably faster. The fact that it wasn't just the United States that missed this standard, but also every country in Europe, indicates an enormous failure of public health systems.

As a result of these failures, we will see millions of preventable infections and tens of thousands of avoidable deaths. We will also see hundreds of billions of dollars of lost economic output, as the pandemic will disrupt the economy for longer than necessary.

Will There be a Penalty for Failure?

I raise this issue primarily because I'm fairly confident the answer is no. To be clear, my point is that not being prepared for the mass distribution of vaccines as soon as they were approved was a massive policy failure both in the United States and Europe. I have no idea who was responsible for the failure, but it was presumably several high-level people in each country. In any reasonable world, these people would suffer serious career consequences for not getting the vaccines out quickly.

I am not making this point out of any vindictiveness—I don't know any of these people—I just want to see high-end workers held to the same job performance standards as those lower down the ladder. The dishwasher that breaks the dishes gets fired. The custodian who doesn't clean the toilet gets fired. Why doesn't the person who messes up vaccine distribution pay a price?

Unfortunately, the lack of accountability at the top is the rule, not the exception. To take my favorite example in economics, to my knowledge Carmen Reinhart and Ken Rogoff suffered no consequences (other than embarrassment) for their famous Excel spreadsheet error. To remind people, this was when they produced a paper that purported to show that countries with debt-GDP ratios above 90 percent took a huge hit to GDP growth. It turned out that this result was driven entirely by an error in a spreadsheet. When the error was corrected, the result went away.

Reinhart and Rogoff's paper was used to justify austerity policies in Europe and the United States. As a result of these policies millions of people needlessly went unemployed and many important areas of social spending, like education and health care, saw serious cuts.

Reinhart and Rogoff's error was surely an honest mistake (they are both competent economists, who could have come up with much better ways to fake results if that was their intention), but their failure to check their numbers was inexcusable. As they explained after the error was uncovered, the mistake was the result of rushing to finish a paper for a conference presentation.

Mistakes like that happen, and most of us have committed similar errors. That is not a big deal. The big deal was that, as their work was being cited by members of Congress, finance ministers, and central bankers, that it never occurred to them to review their rushed work.

Should Reinhart and Rogoff have lost their tenured positions at Harvard? Perhaps this would have been appropriate. At the very least, they should have lost their named chairs, after all, many people had their lives ruined in part because they couldn't be bothered to check their numbers.

Accountability for Our Elites

As I have written endlessly, we have seen a massive upward redistribution of income in the United States over the last four decades. Other countries have also seen increases in inequality over this period, although not as large. I have argued that this upward redistribution was by design, not the natural development of the economy, but for this issue, the question of causes is beside the point.

The people who have been able to enjoy rising incomes and financial security over the last four decades ostensibly justify their better position by their greater contribution to the economy and society. But when you mess up in your job in big ways that lead to major costs to the economy and society, that claim doesn't hold water.

We have seen a massive rise in right-wing populism where large numbers of less-educated workers reject the elites and all their claims about the world. When we have massive elite mess-ups, as we now see with vaccine distribution, and there are zero consequences for those responsible, this has to contribute to the resentment of the less advantaged.

It is appalling that we have structured the economy in such a way that the elites can be protected from consequences for even the most extreme failures. The fact so few elite types even see this as a problem (seen any columns in the NYT calling for firing?) shows that the populists have a real case. The economy is rigged against the left behind, and the people that control major news outlets, which include many self-described liberals or progressives, won't even talk about it.

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