Over at the Weekly Standard, Larry Lindsey makes a very important point, pertinent to both the QE2 debate and the conversation in recent weeks about various proposals to reduce the deficit and debt. Most of the baseline assumptions about the size of our debt assume that today’s exceedingly low interest rates continue. If they don’t—even if rates just return to the average of the past 20 years—the picture looks far more grim.
Over the past 20 years, the average interest rate the Treasury has had to pay on money it has borrowed has been 5.7%. But over the past year, the average rate has been 2.2%. That’s no small difference given the size of our debt.
As Lindsey points out, if the current very low rate continues, and our fiscal policy basically follows the track laid out by the president’s last budget, then the interest on the debt 10 years from now will be a little over $350 billion. If the rate goes back to the 20-year average, however, interest on the debt 10 years from now will be more like $1.15 trillion. Again, no small difference. Indeed, it is enough to make some prominent elements of our deficit debate seem a little ridiculous. As Lindsey writes:
The increase in annual interest costs in 2015 alone—$557 billion—is nearly six times the additional revenue that is supposed to be collected by letting the higher end of the Bush tax cuts expire, the centerpiece of the current fiscal policy debate in Washington. The increase in interest costs in 2019—$795 billion—is two-and-a-half times the value of all the Bush income tax cuts of 2001 and 2003 that are due to expire.