From: platt@watson.ibm.com (Daniel E. Platt)
Subject: Re: This "Interest Rates are Sucking up the GNP" Thing
Date: Tue, 26 Jan 1993 17:48:23 GMT
Distribution: usa
Disclaimer: This posting represents the poster's views, not necessarily those of IBM
Organization: IBM T.J. Watson Research Center

In article <C1Fy16.Bxs@newsserver.technet.sg>, ipser@solomon.technet.sg (Ed Ipser) writes:
|> In article <1993Jan25.153216.10311@Princeton.EDU> niepornt@phoenix.Princeton.EDU (David Marc Nieporent) writes:
|> >In article <C17LIt.1AME@austin.ibm.com> alan@auntbea.austin.ibm.com (Alan R. Weiss) writes:
|> >>Would a sizable percentage of the GNP being sucked up by interest
|> >>charges to service the debt prove it to you?  Because that's exactly
|> >>what's happening.  Is $4 trillion biggies enough to prove it?
|> >
|> >Sizeable?  It isn't that big.  The interest on the debt is ~$300 billion
|> >a year.  The GNP is ~$5 trillion.
|> 
|> It seems to be an article of faith among the Perotians that interest payments
|> are a drag on the economy; that when interest is payed on the national
|> debt, it goes into a big black pit never to be seen again. Thus, the bigger
|> the debt, and resulting interest payments, the bigger the cause for panic.

Sounds like the interest on the federal debt is 6% of the entire GNP.  That
sounds like there's roughly the entire GNP's worth of capital tied up in
financing the federal debt.  That does not even count for private corporate
debt, personal debt, revolving debt, etc.  Its also a huge fraction of
the federal government's budget.  The federal government has precious little
money to work with beyond entitlements and debt (since there's a deficit,
it could be argued that they're funding their debt service charges with
more debt).  Thus, its harder for the federal government to be proactive
participants in the economy.  What's left is things the fed's manipulation
of the debt markets, bank loans, etc.  But that's like 'pushing on a
shoe string;' it doesn't work that well.

|> 
|> Of course, the truth is far less dramatic. Interest payments are not taken
|> out of the GNP any more than any other element of the budget. Every dollar
|> which the federal government expends in interest payments is income which
|> somebody holding treasury bonds earns. It is a transfer, nothing more.
|> 

It can be viewed as transfer payments to the rich... sort of the way
wellfare payments are transfer payments to the poor.  At the very least,
it can be considered to be a regressive taxation program.

In a way, even the above isn't quite fair, since ostensibly, the government
is supposedly doing something with the debt (don't know what -- looks like
they're trying to balance their budget with it, rather than actually
making capital investment with it).  However, it does represent large
amounts of capital being absorbed by a bond market in a way that doesn't
get invested in any economically productive use in the private sector.

|> I feel silly pointing this out be to listen to the discussions on the net,
|> you would think that this was news to certain people.

Pointing out that interest payments are taken out of the GNP is not news
to anybody.  However, the impact on GNP of such an attractive investment
that does nothing for the productivity and markets in this country --
measured in GDP, GNP, or NNP (take your pick) -- seems to be news to you.

Dan

-- 
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Daniel E. Platt                                      platt@watson.ibm.com
The views expressed here do not necessarily reflect those of my employer.
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