Tuesday, March 19, 2013

The Debt Crisis

There's been a controversy about the ratio of federal debt to GDP--is there some level beyond which more debt hurts economic growth?  But I haven't seen any discussion of the ratio of interest payments to GDP, which seems like a more straightforward issue--the more you have to devote to interest payments, the less you have left over for everything else.   Since it's spring break, I have time to indulge my curiosity, and I did some calculations using the National Income and Product Accounts.     

First, this is the annual deficit (or occasionally surplus) as a percent of GDP.   In 2010-12, deficits have been much higher than at any previous time except the height of World War II.  

Second, this is interest payments on the debt as a percent of GDP.  It's a totally different picture--payments on the debt are about what they were in the 1960s and 1970s, and less than half as large as they were in the 1980s and early 1990s.  I knew that interest rates were low, but didn't expect to see that they have completely offset the effect of large deficits.  

Of course, you can argue that things aren't as good as they seem--that if interest rates go up, we'll be stuck with higher payments.  But looking at this figure, it's hard to see a crisis.  


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