The interest we pay on the national debt is for Value

[cthulu2016]

To avoid any misunderstanding, I am pasting this part of the OP up front, as a thesis:

Interest on the debt is not intrinsically unfair. It is as good a deal on money as anyone could hope for. Its fairness has, and will continue to be, a function of our POLITICAL decisions.

If (through some political miracle) our taxes become MORE progressive than they were back in the day then the national debt would have been a huge wealth transfer from rich people down to ordinary people.

If our taxes become more regressive then the debt will have been a money elevator, taking from the poor and giving to the rich.

Interest we pay on the national debt seems to be special in the minds of many folks across the political spectrum. Deficit hawks and radical progressives alike treat it as some sort of theft... lost money... waste... futility.

But is is actually a payment made for VALUE.

We all know that a dollar is worth whatever a dollar is worth on a given date. A 1920 dollar is not worth the same as a 1980 dollar, which is not worth the same as a 2014 dollar. So the word "dollar" does not indicate any particular value, but rather indicates an ever-changing unit of American money.

Having a unit of money has value. If somebody needs that money right now more than you need it right now then you can lend it to them and charge interest. If you do not charge interest then you are giving them a gift. (Unless you happen to be living in a very rare steep nominal-deflation environment.)

You are giving them a gift of the risk cost of the loan and also giving them a gift of the inflation cost of the loan.

The USA is considered the safest borrower in the world, and thus the risk premium on our bonds is as low as a risk premium is going to get.

Since any given dollar *could be* spent on a US treasury note, and the risk is very low, it becomes tricky to talk about a dollar (over a year) being worth less than (($1.00) + (whatever the annual return on a T-Bill is))

Anyone who does not think a dollar is worth that much need only use it to buy a T-bill (a hypothetical one dollar T-bill, in this example, but you see the point) and they will find that it is, in fact, worth that much, over a year.

Since interest we pay on our debt is essentially the raw value of money it is essentially a wash. It costs the same either way.

Whether we buy a $1.00 bullet for the army in 1982 with a 1982 dollar from the treasury or a $1.00 bond from the treasury, it works out about the same.

In one scenario the bullet will end up costing some large nominal sum... say $2.84. (I don't know the actual number) But $2.84 *when*? There is no worth to a dollar without saying when.

What if, instead of buying a bullet in 1980 the US government had bought a $1.00 T-bill? Then that bill would have paid us $2.84.

So that dollar really was worth $2.84. It makes no sense to say we lost $1.84 because we did not.

What we did was shift one dollar of 1982 taxes forward to a future point where it would be worth very close to one 1982 dollar in current taxes. (And the value of that 1982 dollar is $2.84... again, $2.84 is a number I pulled out of the air. It doesn't matter for these examples, except insofar we know a 1982 dollar was worth more than a 2014 dollar.)

And that, potentially, shifts WHO pays the debt. Some millionaire who saved $1.00 from the Reagan tax cuts so a dollar could be borrowed to buy a bullet, who then died in 1983 escaped the debt. He didn't pay anything for the bullet, but got a year of whatever value that bullet represented for free.

And now somebody else has to pay for it. Who? That is a matter of political fiscal policy that has nothing to do with the fairness of the debt. Maybe the super-rich of 2014 have to pay the $2.84 for that bullet. Maybe the poor have to pay for it.

But the $2.84 itself is a great deal. It is still very close to what someone could have MADE with the same 1982 dollar. Again, that same dollar could have been used to buy T-bills and would have ended up paying $2.84.

We could not, in 1982, have bought that 2014 $2.84 for as any less than a dollar. Our borrowing costs are the lowest, for anyone, on anything.



I understand why the kitchen-table economics fallacy is beguiling.

If you or I accumulate more and more interest then we are in terrible trouble because we pay interest that is much higher than the raw cost of money. Our personal debt is expensive. Unlike the government, we do not get to borrow at cost.

But for the government, it really has not mattered. (It could, in some scenarios, but it has not so far.)

Interest on the debt is not intrinsically unfair. It is as good a deal on money as anyone could hope for. Its fairness has, and will continue to be, a function of our POLITICAL decisions.

If (through some political miracle) our taxes become MORE progressive than they were back in the day then the national debt would have been a huge wealth transfer from rich people down to ordinary people.

If our taxes become more regressive then the debt will have been a money elevator, taking from the poor and giving to the rich.

Those are political decisions. As economics, the debt is close to being a wash. Fair value received.

And when someone says it isn't fair to pass these costs to our grandchildren then they need to be more specific. To WHOSE grandchildren? If the debt is paid by the heirs of fortunes built with the capital freed up by regressive taxation in the past then sure... why not?

Surely their plutocrat ancestors who got to keep a dollar back in the day were able to use that dollar in a way that beat the meager return on a fricking T-bill, right? If they put it in the stock market then they are way ahead of the game. Even subtracting the (very fair) interest on that dollar they made a substantial profit.

Re-cap: There is nothing wrong, shady or unfair about the interest we pay on the debt. It is very, very close to the real value of money, since anyone could have bought a T-bill with money they saved on taxes (while the deficit was run up) and it all would have evened out.

This would change only if the USA risk premium went up substantially. And that *could* happen. I am not saying debt is never a problem. I am only saying that the interest we pay on our debt is a bargain and we could not sensibly pay less.

The real question the debt poses is future tax policy. We do not yet KNOW who will pay for it. It is (or is supposed to be) for us to decide.

[lumberjack_jeff]

1. People can disagree about the prudence of deficit spending...

or the amount of debt that represents a problem, but I don't think a good case can be made that this is business as usual.



The important thing now is to increase the gdp, and doing things that transfer wealth from the rich to those who will spend it is important.

The problem with that is inflation. If we do all the right things to improve the economy, inflation will rise and the interest on a 70% debt-to-gdp ratio becomes nontrivial.

[Nuclear Unicorn]

2. If your interest payment exceeds your revenue you're bankrupt.

If your principle overwhelms your GDP you're bankrupt. Ergo the ability to assume unrestrained amounts of debt is impossible.

It sounds all well and good to say that by investing X amount of taxes will return Y economic activity which will translate back into Z tax receipts but the government is a lousy investor. If they were any good at investing we wouldn't be borrowing ever-increasing sums because their investments would pay themselves back plus profit for further investment.