NPR warns listeners that “the federal government is still adding to its overall debt”–even though the economy could actually benefit from increased deficit spending.
Billionaire Pete Peterson spends a lot of money to get people to worry about the debt and deficits, and National Public Radio is doing its part to try to promote Peterson’s cause with a Morning Edition piece that began by telling people that the next president “will have to wrestle with the federal debt.”
This is not true, but Peterson apparently hopes that he can distract the public from the factors that will affect their lives–especially the upward redistribution of income–and get them to obsess instead on the country’s relatively small deficit. (A larger deficit right now would actually promote growth and employment.)
According to the projections from the Congressional Budget Office, interest on the debt will be well below 2.0 percent of GDP when the next president takes office. This is lower than the interest burden faced by any pre-Obama president since Jimmy Carter. The interest burden is projected to rise to 3.0 percent of GDP by 2024, when the next president’s potential second term would be ending, but this would still be below the debt level encountered by President Bill Clinton when he took office in 1993.
Furthermore, the reason for the projected rise in the burden is a projection that the Federal Reserve Board will raise interest rates. (The president appoints seven of the 12 voting members of the Fed’s Open Market Committee that sets interest rates.) If the Fed kept interest rates low, then the burden would be little changed over the course of the decade. Of course, the Fed’s decision to raise interest rates will have a far greater direct impact on people’s lives than increasing interest costs for the government will.
The reason the Fed raises interest rates is to slow the economy and keep people from getting jobs in the name of fighting inflation. This will prevent the labor market from tightening, which will prevent workers from having enough bargaining power to get pay increases. In that case, the bulk of the gains from economic growth will continue to go to those at the top end of the income distribution.
The main reason that we saw strong wage growth at the end of the 1990s was that Fed chair Alan Greenspan allowed the unemployment rate to drop well below 6.0 percent, ignoring the accepted wisdom in the economics profession, including among the liberal economists appointed to the Fed by President Clinton. At the time, almost all economists believed that if the unemployment rate fell much below 6.0 percent, inflation would spiral out of control. The economists were wrong; inflation was little changed even though the unemployment rate remained below 6.0 from the middle of 1995 until 2001, and averaged just 4.0 percent for all of 2000. (Economists, unlike custodians and dishwashers, suffer no consequence in their careers for messing up on the job.)
If the Fed raises interest rates to keep the labor market from tightening, as it did in the late 1990s, this would effectively be depriving workers of the 1.0–1.5 percentage points in real wage growth they could expect if they were getting their share of productivity growth. This is like an increase in the payroll tax of 1.0–1.5 percentage points annually. Over the course of a two-term president, this would be the equivalent of an 8.0–12.0 percentage point increase in the payroll tax.
That would be a really big deal. But Pete Peterson and apparently NPR would rather have the public worry about the budget deficit.
Economist Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC. A version of this article originally appeared on CEPR’s blog Beat the Press (5/28/15).