One of the classes I am taking this semester is Public Economics. It examines the role of government in the economy, and how its goals can be accomplished with the least amount of economic efficiency lost. I’m really excited about the class, not the least of reasons why being that my professor describes herself as “fiscally right of Genghis Khan.” Nice.
Anyways, the first few days we have mostly focused on historical trends in government spending, taxation, and Gross Domestic Product. There was one trend in particular that I noticed and wanted to comment on.
One of the economic stories that we are constantly bombarded with is the fact that America is borrowing hoardes of money to finance its deficit spending. Far be it from me to argue with that, and I think it’s undoubtedly true. However, the amount of interest that we pay on our debt as a percent of GDP is at almost the same level that it was in 1959. It has increased only 2%, from about 8% of GDP to about 10%, in the last 50 years.
However, interest payments by themselves are nothing to be concerned about. In fact, I will be paying a very large amount of interest on the loans that I have taken out to pay for college. I cannot afford to pay for college myself, therefore I must borrow money and pay for the privilege of doing so. This doesn’t bother me because I know the returns from going to college and to law school far outweigh the amount that I will pay in loans. More generally, borrowing money is not a problem unless the capital borrowed isn’t generating as much value as you pay in interest.
That seems to be the position that the federal government is in. In 1959, when interest paid was 8% of GDP, government was spending 60% of its revenue on consumption (actual goods and services). If the government is receiving good value for its money, (i.e. high quality infrastructure, planes for defense, returns on healthcare, etc.) then the interest payments are worth the price.
What we see now though is that government spending is 60% transfer payments. These are payments to individuals where the government requires nothing in return. Social security, welfare payments, and Medicare especially are just transfers from the the government to its citizens. Therefore, the government does not receive any return on the money that it spends. It can’t possibly recoup the interest that it must pay in order to spend this money.
The main point of this is while the amount that we pay in interest as a percent of GDP is relatively unchanged, the return for the government’s investment was much higher 50 years ago than it is today.
[So I am not entirely sure about my arguments here, anyone think I'm way off? Anyone agree with me?]
Very good analogy. Unlike college tuition, which has a payoff in the future, our debt-driven spending will never be turned into a surplus.