I wrote a blogpost about the CBO's latest downwward revision of its long-run forecast of interest rates on federal debt. It's a big downward revision!
On the Roosevelt Institute blog: rooseveltinstitute.org/behind-the-num…
On my personal blog: jwmason.org/slackwire/the-…
On the Roosevelt Institute blog: rooseveltinstitute.org/behind-the-num…
On my personal blog: jwmason.org/slackwire/the-…
I'm genuinely curious what deficit scolds, and/or, less pejoratively, people who think the fedeal debt is a serious constraint on public spending, think about this. The CBO is normally sacrosanct. Will the argument be that in this case they got it wrong?
Under the 2014 assumptions, the current primary deficit implies that the debt-GDP ratio reaches 150 percent in 2040 and goes on rising to infinity thereafter. You still see these numbers cited by people like Bill Gale or Stuart Butler.
But under the new interest rate assumptions, the same primary deficit brings the debt ratio to only 106 percent in 2040, and it evntually stablizes at 240, even if the deficits go on forever - about the same as Japan's current debt ratio.
I can already hear people saying, "only" 106 percent. But numbers matter. If your claim is that doubling the debt ratio over the next 30 years is something to be frightened of, then it matters that, under the CBO's current forecast, the ratio is only going to increase by a third.
And then the other question is, if the debt ratio is rising but the CBO keeps adjusting its interest rate forecasts downward, what's that tell us about the relationship between public debt and interest rates - and more broadly about the economic costs of high public debt?
Jamie Galbraith wrote a nice piece about this question some years ago: levyinstitute.org/publications/i…
The key point from the post: 
And to be clear, further revisions to the interest rate forecast will likely be down, not up. The 10-year Treasury is currently at 1.8, meaning the federal government borrows at an average rate of 1.4%. At that rate with today's deficits the debt-GDP ratio is basically flat.
More exactly, with today's interest rates and the average growth rate of the past decade, current deficits imply the debt-GDP ratio converges to 96 percent. That's about where Belgium or France are today. Claims that federal debt is a danger or problem need rates to rise, a lot.
