My earlier blog about the MoveOn commercial on the Super Bowl and the crummy economics underlying the spot has generated several questions. The following is my ineffectual response:
It is surprising that the inability of the Federal government to pass on a deficit is not easily understood, even though it is technically required of nearly all college graduates.
My live-in partner didn't know it and could barely understand my explanation. That may be because I taught econ.
I'll try again. The deficit of the Federal government is a transfer payment, just like social security.
Nearly two trillion was collected in taxes last year and more than two trillion was spent by the federal government. The difference between the two numbers was actually a third-of-a-trillion dollars; the deficit. The third-of-a-trillion was financed by increasing the outstanding amount of government bonds from 2.9 trillion to 3.1 trillion, an increase of two-tenths of a trillion dollars. The additional bonds were bought by pensions, money market funds and insurance companies; all with our money. (That's why it is a transfer payment).
The interest we pay on this total debt of 3.1 trillion dollars is about 7% of the federal government receipts. The current Bush deficit has increased this interest amount by seven-tenths-of-one percent. Less than a penny per tax dollar collected.
When 7% of our taxes are going to interest on the national debt it is not alarming to me. The highest in my lifetime was 1996 when interest on the national debt was 17% of total taxes collected. That did crimp our spending style.
Because this is the federal government, the only level of government that cannot pass on debt to future generations, you can see that the amount of interest that is paid on the debt is not related to any deficit, it is related much more to market interest rates. A fall of interest rates from the current 4.1% to 3.9% would mean we pay nothing for Bush's 2003 deficit. A rise of interest rates to 4.6% would mean we pay one percent more of our national budget on interest for all current and past deficits.
Fundamentally, the interest rate in the bond market determines what we pay for all the past debts or deficits since the founding of the nation 215 years ago. It has little or nothing to do with the amount of the debts in any period or any administration.
Our country is so wealthy and growing so fast that past debts and deficits disappear into insignificance. The current deficit is larger than the total federal budget in the year (1978) that the Sony Walkman was introduced, Annie Hall won best movie and the Eagles got the Grammy for Hotel California.
Worse than all that, the government never really has to sell bonds to pay for a deficit. It can inflate the currency (that is basically what happens if the government doesn't issue bonds).
I demanded that my students understand what I just said. Obviously it doesn't make much sense. But all economists agree on it.