Interest on the debt: What we get for it

I estimate that 99% of the voting public believes we get absolutely nothing for the interest we pay on the federal debt.  Okay, 99% plus-or-minus one percentage point, anyway. It's a false belief, and false fear of that false belief is played like a fiddle during campaign seasons.

Before I explain the important benefit we get from paying the interest, let's look at how we are faring on the indicator I consider the best indicator of "debt burden": the portion of tax receipts it takes to pay the net interest on the debt.  (It's more to the point than the debt/GDP ratio.)  As the chart shows, the debt burden (9.6% of tax receipts today) is still significantly lower than it was in the mid 1990s.

It's good to know our debt burden has improved, isn't it?  I wonder when The USA Today will start reporting that fact. Click to enlarge:

Some will recognize this indicator as the inverse of "times interest earned" -- commonly used as a measure of creditworthiness in the private sector. And that's a hint. Interest payments are not a waste of money; they buy something valuable (creditworthiness), and they prevent something catastrophic (default). 

Good credit enables us to employ a mix of tax and debt financing to fund both the government spending we like, and the spending we hate. We like the GI Bill, we like national security, we like the Head Start program, and we like beefed up embassies safe from terrorist bombs.  We hate government waste; if only we could isolate it, we could cut it out while simultaneously cutting taxes by the same amount. In any case, what's left is spending we like, plus waste we have no hope of cutting out, the total of which must be financed by some combination of taxes and borrowing.  Our ability to borrow is better known as our creditworthiness.  Our creditworthiness is dependent on our steady, reliable payment of interest to those who have chosen to park their money in "risk-free" US Treasury securities.

Next time someone is wondering what we bought for the interest, I wish they'd also wonder what we bought with the principal that interest is supporting.  Although it's impossible to pinpoint, I bet we have a Nimitz carrier, a few intelligence assets, several thousand more college-educated GIs, and a few more Head Start activities in the works because of the principal we were able to borrow -- all because we have been steady and reliable in paying interest on our debt.

It's not being wasted, it's buying something valuable: creditworthiness and default-avoidance.

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End note:

If you know anyone who still thinks interest payments are pure waste, suggest a fact-finding experiment involving their own budget for personal expenditures: tell them to stop paying the interest portion of their mortgage, their car loan, and their credit cards -- then observe the consequences their creditors will bring about. 

I predict they will conclude that creditworthiness and default-avoidance are valuable benefits of paying interest on the debt they had utilized to acquire desirable assets early.

Comments

[JIMB]

We get less than nothing. Interest rates are artificially low (the Fed is a price fixer) which causes consumption of capital (low interest rates allow greater use of money, which no longer matches the amount of real capital at market prices). Later in the process, input prices begin rising, signifying the artifical stimulus is over and the pain has begun.

[STS]

I agree with your main point that interest on debt isn't automatically a "waste". It really just depends on the soundness of the borrowing.

One reason I'm glad USA Today isn't trumpeting the "improvement" in our debt burden, is that the structure of our national debt has changed in the past decade. It has shifted to shorter maturities (eg. phasing out of the 30 year T bond) and has been "subsidized" by some periods of very low (arguably negative) real interest rates.

Uncle Sam right now has the "mother of all option ARMs". If credit markets weren't frozen up in sheer panic, treasury yields would be dramatically higher. Of course the low rates are also hammering the USD which does actually improve our debt situation by devaluing what we owe to some of our international creditors.

I'm not quite agreeing with JIMB only because the Fed as "price fixer" seems pejorative. I tend to think we're better off with that particular form of price fixing. But that's a long, arduous debate ;)

[Higgs Boson]

A lot of people (myself included) think that the Nimitz carrier and Head Start are a waste of money. Ergo, we get nothing for the debt.

[Jarrod Myrick]

Higgs Boson,

What evidence do you have that Head Start is a waste of money?

[Higgs Boson]

My views on Head Start will not fit in a comment box. Besides, I know from experience the futility of trying to change another's belief system, and that was not my intent. I simply remarked on the widely held view that Head Start and most government programs are a waste of money.

[Jarrod Myrick]

widely held beliefs and commonly held opinions and consensus leave
me hanging. please specify government programs you hate.
just how small can you guys get it? just how stupid have we been since the immaculate conception and philadelphian perfection of
july 4 1776. who was the worst
offender? raygun's watch we became a debtor.

*environmental protection programs

*food, drug, health programs

*business-finance officiating-
refereeing (Gazprom)

*defense of the populace from foreign and domestic foes seems useful (includes criminal justice
system-big prisons for bad guys)

*education of the populace, useful

*federal insurance for the most
vulnerable of the populace, unless
you too shall have them banished
to the woods

*social services for the daily casualties or shall we send the children straight to prison or
the factory?

*nasa

*mail in your door

*transportation infrastructure
constructed and maintained
for the populace

*national treasure preservation:
parks, monuments to our gods,

*unemployment benefits in a complex economy

*take the loan out from a greaser

*bank insurance

[Seaneiboy]

David Walker, The Comptroller General of the United States future financial crisis

http://www.youtube.com/watch?v=OS2fI2p9iVs