Low borrowing rates can put people back to work
Like many others, I have made the point that the low borrowing costs are something we should take advantage of right now. As Ezra Klein the other day, we鈥檝e got an economic crisis, but it鈥檚 a crisis that creates an opportunity: the protracted downturn, along with the aggressive monetary policy in response, have pushed down interest rates so the US gov鈥檛 can cheaply borrow to do something鈥攁s in jobs programs鈥揳bout that slow growth.
I still think that鈥檚 true. In fact, it鈥檚 one of the most important economic policy insights of the moment. But there鈥檚 an important caveat that some of my deep-in-the-weeds-budget-expert friends at CBPP have impressed upon me. The dynamics of how Treasury both borrows and pays off the public debt make this still-good deal not quite as good as it sounds.
First of all, the Treasury doesn鈥檛 try to time the bond market, strategically mixing up the maturities in its portfolio to get the best deal of the moment. As the figure shows, the average of outstanding debt has been around five years since the 1990s (the dips in 2008 and 2009 were anomalous鈥攖he Treasury sold more short-term debt than usual as part of the Fed鈥檚 temporary liquidity ).
So while the yield on 30-year Treasuries is slightly above 3% now compared to 5% a couple of years ago, such bonds make up about the same share of the Treasury鈥檚 portfolio now as they did then (around 5%). Yes, the real interest rate on five-year Treasuries was a remarkable -0.8% the other day, meaning once you adjust for inflation, investors will pay you to hold their money for them. But that doesn鈥檛 lead Treasury to flood that market.
Perhaps they should, but one of their goals is to protect the budget from swings in interest rates, so they keep a pretty steady composition of maturities and have, as the figure shows, lengthened the average maturity over time. To do so is one way borrowers lower their exposure to interest rate swings, and it means you sometimes pass up bargains today to shield yourself from nasty spikes tomorrow.
Second, as former CBO director Bill Shakes often warned in testimony: 鈥淭omorrow and tomorrow and tomorrow creeps in this petty pace from day to day to the last syllable of recorded time.鈥� (hat tip, RK)
Which is to say, what we borrow today, we refinance tomorrow, and by tomorrow, I mean many tomorrows from now. We don鈥檛 know what rates we鈥檒l have to pay on the future stock of debt that we鈥檙e adding to today, but we鈥檙e pretty sure they鈥檒l be higher.
An example might help clarify this concept. Suppose we borrow $100 billion for a jobs program鈥攕ay !鈥攊n 2012. According to CBO, we could borrow that money in 2012 at an average rate of less than 2% (meaning interest costs of less than $2 billion). But by 2021, if that debt isn鈥檛 fully paid off, CBO would expect it to carry an interest rate near 5% (and remember, in DC, the answer to 鈥渉ow much does this cost?鈥� is 鈥渨hatever CBO says it costs鈥�).
Don鈥檛 get me wrong. Even while I was at the White House, I stressed the point that even large amounts of deficit spending, like the $800 billion stimulus, have almost no impact on the longer term deficit. Our out-year deficits are being driven by 鈥減ermanent鈥� policies like the Bush tax cuts while our long-term debt is largely a function of rising health costs. But it鈥檚 still the case that borrowing today does increase the size of the debt and we will pay interest on that debt for years to come, probably at rates higher than today鈥檚.
We should definitely take advantage of today鈥檚 low rates. In fact, I鈥檇 argue that helping people get back to work should be our top policy priority even if rates weren鈥檛 as low as they are. And in fact, if we actually paid off the new debt we incurred within say five years鈥攚e wouldn鈥檛 want to do so any sooner for fear of offsetting the stimulus鈥攚e could avoid the higher debt service costs CBO expects we鈥檒l face down the road.
But if we fail to do so, we should be straight about the debt service we incur.
