MAKING SENSE -- October 25, 2012 at 3:59 PM ET
David Wessel on Virginia, Germany and Interest on the U.S. Debt
Photo of David Wessel and Paul Solman by Diane Lincoln Estes.
The Wall Street Journal's David Wessel recently took us on a D.C. "budget tour" for a NewsHour story on his new book "Red Ink." One stop on the tour landed us in front of the Treasury Department, under the statue of Alexander Hamilton, where Wessel told us about Treasury's origins and interest on the federal debt. Because we could use only small snippets in the broadcast, which aired Thursday (watch the full video below), an extended excerpt is published here.
David Wessel: Alexander Hamilton was the first Secretary of the Treasury and in many ways he's the father of the federal debt. After the Revolutionary War he convinced all the individual states that instead of trying to pay their debts off individually, which was proving a big problem for some of them, to combine them all so we had one federal debt.
Paul Solman: And that's the famous horse trade where Virginia, which has paid off most of its debt, doesn't want to sign onto this deal?
David Wessel: Right, just like Germany doesn't want to sign onto Italy's debt. So the deal was they agreed to make the debt federal, to share everybody's debt, and the [non-Virginians] agreed to move the Capitol south to Washington, right on the edge of Virginia.
Wessel and I then moved on to the reason for staging this segment of the tour at Treasury: the amount of our "red ink" accounted for by the federal debt that is issued here: a "low" 6 percent of all federal spending.
David Wessel: Interest rates are extraordinarily low right now, lower than they've been in my lifetime or your lifetime or the lifetime of the Republic, but we have borrowed a lot of money. So interest on the federal debt last year amounted to about $230 billion. That's more than the combined budgets of Commerce, Education, Homeland Security, Interior, Justice and the federal courts combined. It's 6 percent of all federal spending that went to interest payments last year.
Paul Solman: And 6 percent, even during my reportorial lifetime, is a low number. I can remember it being 9 percent, 10 percent of the total federal budget.
David Wessel: Right, but that's because the interest rates are really low now but they're not going to stay there. If you look at the President's budget, he projects five years out and he says if the economy is healthy in five years as he predicts it'll be and if Congress took every single suggestion that he made on taxes and spending then interest would be 12 percent of the federal budget. It's going to take a growing slice of all our revenue for interest unless we do something about it.
Paul Solman: And that's in part because the total debt will be growing, so interest on it will grow even if the interest rate stayed the same, but if the economy's revved up, interest rates will rise?
David Wessel: Exactly.
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