How debt interest is becoming a bigger problem for the U.S. government

William Brangham:

Since you started watching the "News Hour" tonight, our nation's debt has grown by more than $140 million. Its total sum is $37 trillion. There's mounting concern in some quarters over how soon that ballooning debt will impact the lives of everyday Americans.

As economics correspondent Paul Solman explains, simply paying the interest on that debt is already swallowing a larger portion of the federal budget.

Paul Solman:

Interest on the national debt paid to investors for lending the U.S. money. In return, they get U.S. government IOUs, treasuries, the interest rate on which tends to rise as we borrow ever more to cover the growing gap between expenses and revenues.

Phillip Swagel, Director, Congressional Budget Office:

When I look at our fiscal situation, the words that come to my mind are daunting, challenging, difficult.

Paul Solman:

Why daunting? Well, one tasty way to depict the interest problem, a budget pie. OK, here's the pie back in 2015. Interest on the debt, a low-cal 6 percent slice, but, today, 13 percent more than double the share just a decade ago. Why?

Claudia Sahm, Chief Economist, New Century Advisors:

As we issue more and more debt, more and more U.S. treasuries, then investors are going to demand more for that.

Paul Solman:

For that, and another reason too, inflation.

Kenneth Rogoff, Economist, Harvard University:

Which makes the debt worth less. You get paid back in dollars that don't buy as much as when you lend them.

Phillip Swagel:

The burden of the debt every year is rising and putting a strain on our finances.

Paul Solman:

Head of the devoutly nonpartisan Congressional Budget Office, Phil Swagel.

Phillip Swagel:

And that means those are funds that don't go to anything else. Someone wants more money for national security, someone wants more money for tax relief or for social benefit, the resources paying the debt are excluded from that. They're not available for those other purposes.

Paul Solman:

But wait a minute. U.S. interest rates are down over the last three months, even as our debt has climbed.

Phillip Swagel:

Our demographics are putting downward pressure on interest rates. The aging of the U.S. population and the reversal in immigration that we have seen this year puts downward pressure on interest rates.

Paul Solman:

In other words, says Swagel, who doesn't have to worry about the presidential axe, by the way, since he works for Congress, there are conflicting pressures. Interest rates rise with debt, but only according to the age-old hedge of economics, all else equal, which it never is.

For instance, say the economy stalls.

Phillip Swagel:

We have slower income growth, so we have fewer resources with which to pay our debt.

Paul Solman:

That is fewer tax revenues, which would mean borrowing even more. Plus, lower growth means less demand from businesses to borrow money for investment, which also tends to lower rates.

So maybe that's why rates have subsided recently, a possible recession. And that brings us to an unusual counter to debt threats.

Stephanie Kelton, Stony Brook University:

I think the word debt is the thing that gets people really concerned, and I think unnecessarily so.

Paul Solman:

Unorthodox economist Stephanie Kelton thinks government debt's actually no problem at all.

Stephanie Kelton:

They hear $29 trillion or $36 trillion, and they say, oh, my God we're drowning in debt. This is some impossibly large sum that we're going to have to pay back somehow.

Paul Solman:

But she has another way to look at it, known as modern monetary theory, which argues that a government like ours that prints its own currency can't run out of money.

Stephanie Kelton:

There is no finite sum of money that is available for the federal government to work with. The United States has a sovereign currency, has a fiat currency, and there is no hard financial constraint on governments that operate with the kind of currency that we have.

Paul Solman:

Moreover, says Kelton, there's a benefit to U.S. government debt.

Stephanie Kelton:

These are all of the dollars the government has spent over the entire history of time and not taxed away from us. Those dollars are sitting in what are effectively savings accounts with the U.S. government.

Paul Solman:

The potential problem would be too many dollars and thus inflation, often defined as more and more dollars trying to buy a fixed amount of what our economy can produce.

Stephanie Kelton:

The question I would ask is, is it becoming excessive? Is the government spending so much, not just on health care and education and infrastructure and defense, but also on interest, that it is feeding inflationary pressures?

Paul Solman:

At the current inflation rate of less than 3 percent, Kelton says no. Look, she says, it's we U.S. citizens who hold almost all of the Treasury's debt.

Stephanie Kelton:

Most of the treasuries that are being held are just being rolled over and people are reinvesting.

Paul Solman:

People like me. I asked CBO head Phil Swagel. At my age I better have retirement funds.

And a lot of them are in money market funds. And the money market funds pay, I don't know, something like 4 percent a year. And that's mainly government short-term IOUs, right? So the government owes the money, but it's paying it to me, and thank goodness.

Phillip Swagel:

What you're pointing to is both a positive and a negative. The positive is that the money, as you said, that we owe on debt, a lot of that goes to Americans. And so higher interest rates might be bad for the government, but they're good for savers.

Paul Solman:

Like me and my wife.

Phillip Swagel:

Exactly. On the other hand, we also owe a lot of money on debt held by foreigners. And so the interest that we pay on bonds on by people in other countries represents resources that are going from the United States out of the country to other people. And that amount is rising as well. And so that's part of the fiscal challenge.

Paul Solman:

Harvard and former IMF economist Ken Rogoff is similarly skeptical of Kelton's argument, as are many economists, worrying about more debt spurring higher interest rates.

Kenneth Rogoff:

I suspect we're going to see longer-term interest rates. And those are the ones that affect car loans, mortgages, student loans, et cetera. I think they're going to on balance continue to drift up.

Paul Solman:

Economist Claudia Sahm is more sympathetic to Kelton. She does worry a lot about one thing though, the uneven burden of higher interest rates.

Claudia Sahm:

The higher interest rates are a bigger problem, a bigger constraint on individuals who need to or choose to borrow, individuals who are lower-income that can't afford to go buy the car all in cash.

Paul Solman:

But back to the big picture. What's the worst-case scenario?

Kenneth Rogoff:

If we have problems, we could have another pandemic, we could have a financial crisis, God forbid we could have a war of some type, and we will want to borrow a lot. And the fact our debt is starting so high, it's a risk. It gives us less flexibility for dealing with these things.

Paul Solman:

Not counting such catastrophes though, what's the CBO's projected budget pie a decade from now? Interest? Seventeen percent of the national budget and rising. Make of it what you choose.

For the "PBS News Hour," Paul Solman.