NCPA - National Center for Policy Analysis

Why Growth Matters More than Debt

February 6, 2012

Headlines regarding the U.S. debt level continue to make the front page, as a national audience of readers grows increasingly uneasy.  Politicians and pundits clamor about unsustainability and the economic burden of chronic deficits, and constantly question the ability of the U.S. Treasury to attract new investors.  However, much of this discussion is misleading.  In order to make clear the dialogue about the debt, it is first necessary to understand who owns it, says Steve Conover in The American.

  • The largest holder of the government debt (31.2 percent), confusingly, is the government, which owes money to a Social Security trust fund that has been investing in safe U.S. T-bonds.
  • The second-largest holder is the American public with 26.3 percent.
  • The Federal Reserve, the third-largest holder, owns 11.1 percent.
  • The remainder, 31.5 percent, is controlled by foreign holders (central banks and private individuals), with China and Japan alone holding 7.5 and 6.9 percent of the U.S. debt, respectively.

These investors must decide each time their bonds mature if they want to rollover their new dollars into another treasury bond.  One of the most important metrics that they use in ascertaining the likelihood of repayment is the "interest bite" -- the portion of federal tax receipts that are necessary to service the interest on the debt.  This speaks to the lack of importance of the absolute principle on the debt, as almost all foreign investors simply rollover their redeemed bonds to buy more bonds.  The interest bite is determined by three separate factors:

  • The absolute debt level -- this is the consideration that receives the most attention.
  • The interest rate demanded by investors.
  • Total tax receipts.

In light of these considerations many might think that, because the debt level is reaching record highs, so too must the interest bite.  However, near-zero interest rates have kept the interest bite between 9 and 11 percent throughout the Obama administration -- much lower than the 19 percent reached during the Clinton years.

The most important conclusion to draw from this information is that paying off the debt should not be the primary concern of lawmakers.  Rather, they should focus on fostering a growing economy, as this will ensure long-term fiscal security and limit the growth of the interest bite by increasing total tax receipts.

Source: Steve Conover, "Why Growth Matters More than Debt," The American, January 29, 2012.

For text:

http://www.american.com/archive/2012/january/why-growth-matters-more-than-debt

 

Browse more articles on Economic Issues