March 7, 1995
"Deeper in Debt"
San Jose Mercury News
By Timothy Taylor
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THE DEFICIT spending of the 1980s wasn't a free lunch, but it was lunch on a credit card that didn't have to paid off very soon. Now the bills are starting to come due. Interest payments are headed through the roof.

For 1994, net federal interest payments were $203 billion. This amount was roughly equal to the combined total of federal spending on international affairs, science, space and technology, energy, natural resources, the environment, agriculture, transportation, community and regional development, education, training, and employment services. Or if you prefer, federal interest payments in 1994 were about 50 percent larger than the Medicare program.

The trend is ominous. By 1997, according to the projections in President Clinton's most recent budget proposal, interest payments will hit $270 billion, which would be $13 billion larger than projected defense spending for that year.

By 2000, federal interest payments are scheduled to reach $310 billion. At that point, one out of every six dollars of federal spending will be going to interest payments.

To me, the most intriguing implication of the rising interest payments is that in a certain sense, the federal government already has a balanced budget, right now, this year. The total tax payments received by the federal government in 1995 will more than cover all federal spending on goods and services and payments to individuals. If the federal government didn't have to make such enormous interest payments, its budget would be balanced.

This marks a significant change. Over the last 15 years, the deficit has generally exceeded interest payments. Thus, one could imagine that the federal government was borrowing some money to pay back interest, and then borrowing additional money to spend. In 1992, for example, the deficit peaked at $290 billion, and interest payments were $199 billion. This left $91 billion in borrowed money for the government to spend on goods, services, and payments to individuals.

But for the rest of this decade, interest payments are expected to exceed the deficit. In 1998, for example, interest payments will be $283 billion while the deficit is $197 billion.

According to Clinton's budget projections, America will run deficits of $200 billion per year through the rest of the 1990s. The awkward, unpleasant truth is that all of that money will immediately be needed to make interest payments on what America has borrowed in the last 15 years. In fact, even borrowing $200 billion a year won't be enough to cover the interest payments, so current tax dollars will have to be used to help pay the interest on past borrowing.

These bills are unavoidable. Over the last 15 years, the federal government spent $15.6 trillion, and 20 percent of that was borrowed money. That's why the federal debt held by the public was $700 billion in 1980, but is slated for $3.7 trillion this year.

This explosion of interest payments, and the fact that interest payments now exceed the deficit, helps to explain why Clinton no longer talks about a balanced budget as even a rhetorical goal. To his credit, Clinton has shown some willingness to hold down government spending. Total federal outlays in 1994 and 1995 will be 22 percent of gross domestic product, which is their lowest level since 1979.

But for the rest of the 1990s, it's fair to say that the budget deficit is caused by one factor -- the high interest payments generated by the government borrowing of the last 15 years, largely under budgets submitted by Republican presidents Reagan and Bush. Clinton is clearly unwilling to slash spending or hike taxes on the middle class to fix what he probably sees as their deficits. I think he's wrong. As interest payments pass $200 billion and head for $300 billion, and with the economy healthy, the time is as ripe as it will ever be for a serious assault on federal borrowing. The balanced budget amendment just defeated in the Senate was more of a sledgehammer than a solution. But I understand why the idea tempts so many people.

For a few years now, it has been popular in some circles to argue that the budget deficits of the 1980s weren't a real problem. After all, deficits haven't collapsed the economy; in fact, it grew quite well during most of the 1980s and in the last year or so.

This argument used to be difficult to answer, because the long-term economic harm of the budget deficit is invisible. Those trillions of dollars soaked up by federal borrowing would instead have been available to private industry for investment. But it's hard to visualize factories not built, innovations not discovered, productivity gains not made, and higher wages that never happened. But now, the short-term costs of the outsized budget deficits of the last 15 years are crystal clear.

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