Bear in mind that we’re talking about the ratio of debt to G.D.P., not simply the level of debt. Deficits, which lead to more debt, increase the numerator of that ratio. But both inflation and economic growth increase the denominator, which, other things being equal, reduces the ratio. Do a bit of algebra, and you get this expression for debt dynamics:
Change in debt/G.D.P. = primary deficit/G.D.P. + (r-g)*(debt/G.D.P.)
The primary deficit is the budget deficit not counting interest payments, r is the interest rate on government debt, and g is the economy’s growth rate. You can get a debt spiral if r is significantly larger than g; in that case rising debt leads to faster accumulation of debt, and we’re off to the races.
But a few years ago, Olivier Blanchard, one of the world’s most respected (and, dare I say, respectable) macroeconomists, gave a presidential address to the American Economic Association in which he showed that historically, r has generally been less than g. Hence, no debt spiral.
Have rising interest rates changed this conclusion? Not much. Even after the rate surge of the past few days, the interest rate on inflation-protected 10-year U.S. bonds was 1.83 percent, which is close to most estimates of the economy’s sustainable growth rate. If you take the low end of such estimates, we could possibly face a debt spiral, but it would be a very slow-motion spiral. Put it this way: If r is 1.8, while g is only 1.6, stabilizing the debt ratio with debt at 100 percent of G.D.P. would require a primary surplus of 2 percent of G.D.P.; increase debt to 150 percent, and that required surplus would increase only to 3 percent.
So if we do face the prospect of large future increases in debt — which we do — interest payments on existing debt aren’t a major culprit. The problem instead lies with those primary deficits.
Which means that the issue is essentially political. As I said, you should ignore people who rant about TRILLIONS OF DOLLARS. You should also ignore people who rant about wasteful government spending. The federal government is basically an insurance company with an army: It spends mainly on things the public wants, like the military, Social Security and health programs. But we have an effective blocking coalition against raising taxes enough to pay for those programs. So we’ll keep accumulating debt until that impasse is resolved.
