Interest payments are very real

One of the reported snags between President Obama and Speaker Boehner reaching a (possibly) bid deal to avert the fiscal cliff and more is Republican insistence that reduced interest payments on the federal debt that accrue due to lower spending/higher taxes not be counted as “spending cuts” for the purpose of determining whether a deal in “balanced.” This is beyond absurd.

Here is a recent article noting the need to reduce our deficit so as to reign in the size of our interest payment on the debt (around $220 Billion in FY 2012, or around 40% as much as we spend on Medicare). I tend to worry more about budget deficits than the average progressive, hence I wrote a book called Balancing the Budget is a Progressive Priority. One of the main arguments is that if we don’t reduce the size of our planned deficits given our tax and spending defaults, then in 2020 instead of $220 Billion, we will be spending ~$1 Trillion in interest payments annually….and that is if interest rates don’t rise for some unexpected reason, which would make this problem even worse. Said Erskine Bowles in a recent interview:

Erskine Bowles, a co-chair of the president’s bipartisan deficit-reduction commission known as “Simpson-Bowles,” has called the nation’s compound interest burden one of the biggest long-term challenges facing the United States.

“We’ll be spending over $1 trillion a year on interest by 2020. That’s $1 trillion we can’t spend to educate our kids or to replace our badly worn-out infrastructure,”

One of the primary reasons to go ahead and begin seeking deficit reduction even as our economy grows slowly is to avoid the “reverse compound interest problem” that is caused by the non discretionary payment of interest on our national debt in the future. Anyone saying reduced interest payments “don’t count” as future spending cuts that will come about due to a reduction of planned spending and increased revenue (deficit reduction) either doesn’t understand, or is not very serous about worrying about the deficit.

About Don Taylor
Professor of Public Policy at Duke University (with appointments in Business, Nursing, Community and Family Medicine, and the Duke Clinical Research Institute). I am one of the founding faculty of the Margolis Center for Health Policy, and currently serve as Chair of Duke's University Priorities Committee (UPC). My research focuses on improving care for persons who are dying, and I am co-PI of a CMMI award in Community Based Palliative Care. I teach both undergrads and grad students at Duke. On twitter @donaldhtaylorjr

One Response to Interest payments are very real

  1. Brad F says:

    Don
    As I read your post, I thought of interest on college loans and 15 year projections. If I went to my financial planner and informed him my monthly payments could be lowered, and thus the enormous amortized interest accompanying them, I doubt his response would be, “irrelevant savings son, we only talk principal here.” Need I say more. You are 100% correct.
    Brad

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