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The U.S. Is Spending More on Debt Even as Other Rich Countries Spend Less

The U.S. Is Spending More on Debt Even as Other Rich Countries Spend Less

(Bloomberg Opinion) -- Back in olden times (you know, the 1990s), it was believed that large federal deficits would lead to higher interest rates on federal debt and higher interest rates overall, thus crowding out productive investment and stunting economic growth. Lately the deficit has been rising, the debt is bigger relative to gross domestic product than at almost any time in U.S. history and interest rates have been … falling. Even as the Congressional Budget Office sparked a minor media tizzy last week with its projection that trillion-dollar federal deficits will become the norm starting next year, it ratcheted back its 10-year forecast of federal interest spending by $1.1 trillion.

This seeming failure of the “crowding-out” theory of how deficits affect the economy has of course led to all sorts of conflicting theories about how big a government debt is sustainable. It would be helpful to know which of these theories are right, but they involve prediction, and prediction is difficult, especially about the future. So I am instead going to offer some simple comparisons of how the current U.S. interest burden stacks up, against other countries and against the past.

The U.S. Is Spending More on Debt Even as Other Rich Countries Spend Less

The U.S. is the standout here. Its interest burden is both:

  1. Higher than that of other major Western economies (I’ve included the not-so-major Netherlands for reasons that will soon become apparent), and
  2. Rising since 2013, while those of the other countries have been falling.

The Organization for Economic Cooperation and Development, the source of the data in the above chart, is the club of the world’s wealthy democracies. Aside from the U.S., it has only two members with higher projected net interest spending for 2019: Greece and Italy, at 3.6% and 3.5% of GDP, respectively. These are both countries beset by perennial worries about the sustainability of their government debt. As already discussed, people in Washington spent a lot of time talking about such concerns in the 1990s but haven’t so much lately. If you look at a long-run interest spending chart, it’s easy enough to see why: the late 1980s and early 1990s were a time of staggeringly high interest payments.

The U.S. Is Spending More on Debt Even as Other Rich Countries Spend Less

In the 1800s, interest payments rose during and immediately after major wars but otherwise tended toward zero. In the 20th century, they rose with wars and stayed somewhat elevated. Then, in the 1980s, big deficits and high interest rates sent interest payments skyrocketing to previously unimaginable levels. Now the big deficits are back. Interest rates are so low that servicing the debt doesn’t impose nearly the economic burden it did 25-30 years ago, but viewed over sweep of U.S. history, current net interest payments aren’t exactly nothing.

Things worked a lot differently in the U.S. in the 19th century, of course. Congress gifted one-tenth of the nation’s land area to private railroad companies, for instance, instead of borrowing the money to pay for transcontinental railroads as it did a century later with interstate highways. Still, I make the comparison because other countries did borrow a lot in those days. The Dutch, for example.

The U.S. Is Spending More on Debt Even as Other Rich Countries Spend Less

It was seeing a version of the above chart in a tweet by University of Leiden economist Wimar Bolhuis that got me going on this column. The data are from the Dutch counterpart of the CBO, which is called Centraal Planbureau in Dutch but in English goes by the name CPB Netherlands Bureau for Economic Policy Analysis. They show interest outlays by all levels of the Dutch government to be lower now — a lot lower — than at any time since the country gained independence from Napoleon’s French Empire in 1813. I’m not aware of a similar readily available long-run dataset for Germany, but given that its recent interest spending trajectory has looked a lot like that of the Netherlands, I would guess that its interest burden is now lower than it has been at any time since the founding of the unified German state in 1871.

This is the product largely of falling interest rates, with the Dutch 10-year bond currently yielding -0.5% and the the German one close to -0.7%. But the two countries have also been running budget surpluses for the past few years. They’re getting paid to borrow, but choose not to. Which is interesting! As Paris-based sociologist Sander Wagner put it this week:

Are the Germans (and the Dutch, who generally follow the German lead on economic policy) going about things all wrong? Or is the U.S. unwisely piling up debts that will burden it in the future? Looking at a bunch of charts doesn’t really answer those questions. But it does make clear which approach is the historical outlier.

Except for a few years during and immediately after World War II.

The reason the U.S. numbers in this chart don’t match up with those in the first chart is because the first includes state and local interest payments, which I couldn’t get my hands on for the 19th century. The 19th century ratios are calculated using interest-payment figures from the Historical Statistics of the United States and the GDP estimates made by economists Louis Johnston and Samuel H. Williamson at MeasuringWorth.com.The GDP numbers are for calendar years and the interest-spendingdata for fiscal years, so I wouldn’t get too caught up on, say, the exact percentage for 1808.

To contact the editor responsible for this story: Sarah Green Carmichael at sgreencarmic@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”

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