February 4, 1992
"You Owe $800 in Federal Interest"
San Jose Mercury News
By Timothy Taylor
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AS THE federal government makes $199 billion in interest payments in 1992,
your share, along with every other man, woman and child in the United States,
is about $800. The borrowed money didn't seem to buy better education or national
infrastructure or industrial competitiveness, or anything that is still with the
nation today. The feeling is more like paying off credit cards for trips already
Interest payments exploded in the late 1970s and early 1980s. Over the quarter
century from 1951 to 1975, they had always fallen in a narrow band, between 1.2
and 1.5 percent of gross national product. Since the gross national product in
1992 should be about $5.8 trillion, that level of interest payments would have
been $70 billion to $87 billion.
But from 1979 to 1985, interest payments exploded at a rate of 13 percent per
year faster than the rate of inflation. At the end of that burst, interest payments
were 3.3 percent of GNP, more than double their usual historical level, and they
have stayed at that level since. In other words, current interest payments are
about $120 billion per year above the level of the '50s, '60s and '70s.
Two main factors spurred the runaway interest payments. In the late 1970s and
early 1980s, the federal government had to pay more for its borrowing. The interest
paid on three-month Treasury bills rose from 7 percent in 1978 to 14 percent in
1981, before sinking back to the 7 percent range by 1985.
Then as interest rates fell, huge budget deficits were piling up, keeping the
total cost of borrowing high. From 1983 to 1986, the deficit averaged $206 billion.
Currently, about $2.7 trillion in federal debt is held by investors outside
the federal government. (Another $900 billion is held by other agencies of the
federal government, but since this is a matter of the government owing money to
itself, it isn't counted as part of the government drain on private sector savings.)
Who receives this $199 billion in federal interest payments? As the table shows,
it's a varied group. Foreign investors hold about 18 percent of the debt directly;
if they receive a proportionate share of the interest payments, that would be
about $40 billion. Clearly, it isn't quite right to conclude that the federal
government has been financing its borrowing directly from Japan and Germany and
other foreign investors.
While U.S. individuals hold only 11 percent of the debt directly, they hold
much more through their banks, insurance companies, money market funds, pensions,
and so on. So how can you tell whether your household is a gainer from federal
Consider a statistically average family of four. Total interest payments for
this family are $3,200 per year. To receive that much interest from the federal
government (at the 6 percent rates currently being paid), the family would have
to own more than $50,000 in federal debt, whether directly or indirectly.
Since only the wealthy have tens of thousands of dollars invested in anything,
the moral is clear: Federal interest payments are a $199 billion payment that
generally flows from the average taxpayer to the rich.
Reducing interest payments isn't easy. Four options are available, two fast
and foolish, two slower and sensible.
One option might be called the Latin American solution: default on the loans.
A second method is to generate high inflation to reduce the costs of paying debt.
If inflation rose to 10 percent, for example, it would shrink the economic value
of $2.7 trillion in debt by $270 billion in a single year.
The world's biggest borrower, the U.S. government, has a financial incentive
to create high inflation, but this cure for high interest payments is obviously
worse than the disease.
The sensible ways to cut interest payments are to reduce interest rates and
the amount borrowed. Reducing the deficit by much isn't slated for this year or
next. However, the recent decline in interest rates will help reduce interest
costs on this year's borrowing. The immediate savings are not huge, because the
government must still pay last year's interest rates on last year's debt, but
in four years, a sustained one- point drop in interest rates will be saving about
$30 billion per year in interest payments.
Whether your fancies run to a lower deficit, or a tax cut, or spending more
on health or education or something else, it would help if interest payments were
at their historical levels, about $120 billion less. But the hard lesson for those
who borrow too much, whether the medium is credit cards or junk bonds or the national
debt, is that it's too late to repent after the money has been spent.
Wednesday: Elderly Support
|WHO HOLDS THE DEBT?
|As of September 1990, these were the investors who held the $2.2
trillion outstanding in federal debt.
|State, local governments
|| $238 billion
|Money market funds
Source: 1991 Economic Report of the President, Table B-86. The category of
"other" includes savings and loans, credit unions, pension trust funds,
dealers and brokers, and still others.
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