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  July 29, 2011

Interest Payments at Historic Low - There is no Debt Crisis

Robert Pollin: Interest payments on US debt well below average, there is time to deal with long-term debt
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Robert Pollin is Distinguished Professor of Economics and Co-Director of the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst. He is also the founder and President of PEAR (Pollin Energy and Retrofits), an Amherst, MA-based green energy company operating throughout the United States. His books include The Living Wage: Building a Fair Economy (co-authored 1998); Contours of Descent: U.S. Economic Fractures and the Landscape of Global Austerity (2003); An Employment-Targeted Economic Program for South Africa (co-authored 2007); A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the United States (co-authored 2008), Back to Full Employment (2012), Green Growth (2014), Global Green Growth (2015) and Greening the Global Economy (2015).


PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. And in Washington and across the United States, and in fact across much of the world, the debate about what to do about the current economic crisis intensifies, and mostly it focuses on the issue of too much state debt and what to do about it. Only a couple of years ago the debate was about stimulus, but that has shifted 180 degrees. There's almost no talk anymore about stimulus, because we're told we're at historic levels of debt and that will drag down the American and then the global economy. But what does the math actually say? Now joining us is Bob Pollin. He's codirector of the PERI institute in Amherst, Massachusetts. Thanks for joining us, Bob.

PROF. ROBERT POLLIN, PERI, UMASS AMHERST: Thank you very much for having me, Paul.

JAY: Alright. So you sat down and you went through the numbers and you made a kind of interesting discovery that isn't being talked about too much. What is that?

POLLIN: The basic point that is not talked about is--. When we talk about a debt crisis, when--any reference to a debt crisis for a government or for a household, it means you can't pay back your debts. It means it's getting harder and harder. You're running out of money, and you can't pay back your debts. And the best measure of that is actually how much you have to pay out next month. So here's the measure we have for the United States now. The interest payments that we are obligated to pay now--or the actual data is for last year--is at a near historic low--not a high, a low. Right now, or as of 2010, we paid 5.7 percent of total government expenditures for interest on the debt. Two thousand and nine was the only year from 1950 to 2010--2009 was 5.3 percent. Other than that, the average over 60 years, from 1950 to 2010, is about 10 percent. So we're actually paying half as much. There is no debt crisis.

JAY: Okay. So let's just break this down into--there's two pieces of this, if I understand it correctly. The overall debt itself is at historic highs, correct? But the interest rate or the interest that the United States is paying on that debt is so low that you wind up paying at historic low levels of interest. Have I got it right?

POLLIN: More or less. The deficit, the amount we're borrowing per year for the last three years, that's at historic highs since World War II. That's true, and that's the thing that's freaked everybody out. Now, what happens when you borrow, borrow, borrow? Of course, you accumulate debt. So that's the total amount of debt that you've accumulated. That is not at historic highs. It's gone up a lot from the last three years because of the borrowing. The borrowing went up, so you accumulate debt. But that is actually still not--nowhere near what it was at the peaks after World War II and then coming down from World War II. It's at about 50 percent of GDP. In World War II it was 110 percent of GDP. So that's the debt. The deficit, how much we're borrowing per year, is high. But you noted the key point. Because we're borrowing at such low interest rates, the rate on a five-year Treasury bond is about 2.5 percent or less, which is also historically extremely low. And because we're borrowing at such low rates, the actual amount we are obligated to pay back is itself also not average--historically low. Now, that's not--I'm not saying this is the only thing that we need to consider, but I have not heard this even discussed in the debates in Washington that are going on that we have been getting something like a free ride with such low interest rates. There is no debt crisis.

JAY: So just to put this again in language everybody can get, if you own a house, you're--the principal you owe on your mortgage may be concerning if you have a very big mortgage compared to your equity. But if your interest rates are 1 or 2 percent and you have no problem servicing that interest, those interest rates, you're not in a crisis. You may want to find ways to deal with how to get your equity paid off, but you're not in a crisis. And your point is we're being told we're facing the apocalypse.

POLLIN: As I actually write in the same paper you're referring to, over the long term I do think we need to make adjustments as regards the debt and do it in a fair, egalitarian way. But that is not a crisis of the moment. There is no crisis at the moment, because, yes, let's say you have a $100,000 loan on your house, and let's say you borrowed at 10 percent. Well, that means you have to pay $10,000 a year. That's very relevant. Now, but let's say you borrow at 1 percent. That means you're only paying $1,000 a year. There is a big difference between, on the same debt, on the same $100,000 in debt, of having to pay $10,000 a year in interest versus $1,000 a year. And we, the US government, are in a situation now where effectively we're at the 1 percent scenario. The interest burden is very, very low.

JAY: Okay. So let's talk about some of the arguments that would be posed against what you're saying. One of them is that these interest rates won't stay low forever. Part of the effect of having so much debt, and also things like they talk about, quantitative easing and other sorts of things--in other words, inflation will arise sooner or later, and when it does, there'll be this enormous debt, and then it will matter how much one's paying, how much the state's paying. How do you answer that?

POLLIN: I've heard that argument for three years. And, you know, there is a chance, there is a chance that at some point, you know, Wall Street, the bondholders, are going to say this--US government bonds, they're very risky because they keep borrowing so much, so we're going to jack up the interest rates. I've heard that for three years. It hasn't happened. There's no evidence that it's about to happen. It could happen in--. By the way, even if it happens next year, in six months, we still are going to have low interest payments for the next 2 to 3 years, because we've been borrowing at low rates. So we will have plenty of time to make whatever adjustments are needed. We may have to make--I think we do need to make some long-term adjustments. We have to start taxing Wall Street. We have to cut the military budget. We have to fix the health care system. We do have to do all those things. But those are not things that should be causing this immediate global economic crisis and the notion that the United States is about to go bankrupt, which is the perspective that we're getting day after day in the mainstream political debate.

JAY: I thought a couple of points you made in the paper were interesting, that in spite of different commodity bubbles, especially food bubbles in 2010 and big oil spikes over the last couple of years--it goes up and down, but there's been big spikes--there still hasn't been any significant inflationary--overall inflationary pressures, and it hasn't affected interest rates.

POLLIN: That's right. I mean, as we've discussed very recently, the--as everybody knows who goes to the gas station, gasoline prices have doubled over the last two years. So that's one item in the overall consumer budget. But the overall consumer budget, that is, the official inflation rate, is--again, it's next to nothing. It's 2 percent, which means, actually, that everything besides oil and food, besides those commodities which are subject to speculative pressures, those things are down. They're down. And therefore, actually, the real danger continues to be deflation, that prices are going to go down. And other than oil and food, that's more or less where we've been. Again, despite warnings that we are about to face this gigantic inflation, it hasn't happened.

JAY: Okay. Let's go into another issue you raise in the paper. And because a lot of--when we get to your policy recommendations, you know, a lot of the recommendations have to do with don't--because we're not in this deficit crisis [snip] seems to have been manufactured, as you're suggesting, there needs to be a focus on jobs and stimulus. So the question comes up, why hasn't the stimulus that's already been put into the economy accomplished more? Certainly the Obama administration thought employment or at least said unemployment would be a lot lower than it is right now.

POLLIN: The stimulus was very large by historic standards. So, again, basically, the stimulus was the government borrowing money to put out into the economy to increase spending, demand in the economy. And by historic standards, yeah, the deficit at 10 percent of GDP, we haven't seen anything like it since World War II. So the question, yeah, why didn't it work, well, the reason is the stimulus was historically large, but the economic crisis caused by Wall Street was even larger. So the stimulus, the debate around the stimulus was was it going to be too small. It's large by historic standards, but we haven't seen a crisis like this, a financial crisis, since the 1930s. And people didn't believe that the crisis was as severe as turned out to be. And I include myself in that. I myself didn't think that a stimulus this big would fail to reverse the crisis. It wasn't big enough. Why wasn't it big enough? Well, number one, because the bubble, the financial bubble, when it burst, led to a complete evaporation of people's wealth. So peoples'--the household wealth went down by something like $15 trillion. Now, if you say, well, why do people decide to spend money, sometimes you just spend because you have to spend on day-to-day things. But another thing that is causing people to want to spend more is if they feel richer. And if the--when the wealth collapses, you have that in reverse: people feel poorer and their debts are heavier. Yes, there's foreclosures. And so that's what's dragged down the economy. The second thing is the financial system itself. Once the crisis hit and we started--the Federal Reserve started shoveling money into the banks--and the banks are now loaded up with cash, and they won't lend it. It's sitting there. It's $1.4 trillion sitting there that was meant to go into job creation but is sitting there as--effectively, as a free, unlimited insurance policy for the banking system to do as they wish whenever they wish. And right now they've decided they just want to sit on their cash.

JAY: Okay. In the next segment of the interview, let's dig into--further into the debt itself, and also some of the ideas or theories that this kind of stimulus even bigger is never very effective. And then we'll get a little bit more into the kind of policy recommendations that you're recommending. So please join us for the next segment of our interview with Bob Pollin. And let me just say, 'cause we get a lot of email about these multipart interviews, like, where's part two, when is part two, and just let me explain that it sometimes takes us a little time to do these part twos and part threes. So if you're watching part one, then come back and you'll find part two in a day or two. And you'll also see them all assembled, when the series is over, in one place, and you'll be able to see the whole interview in one go if that's what you'd like to do. So please join us for part two of our interview with Bob Pollin on The Real News Network.

End of Transcript

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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