Those of us who want to see more temporary government spending on jobs programs right now (I’d call it “stimulus” but that’s a dog whistle these days) often cite the very low interest rates of government bonds as yet another good reason—along with the high unemployment rate—to do this. Last month, the interest rate on a 10-year government bond averaged 1.5%, the lowest level on record going back to the early 1950s, so the cost to the government of borrowing right now is very low.
But as I’ve pointed out before, the reality of this is more complicated. I stumbled on some data from the Office of Management and Budget the other day that helps make the point (h/t: RK). It is still the case that the government should be taking advantage of low borrowing rates but the advantage may be less than many who write about this think it is.
The reason is because the government doesn’t pay off such debts after a year or two. It rolls them over and thus, under the plausible assumption that interest rates go up in the future, it pays that debt off at higher rates down the road.
The figure below presents two ten year trends in what the Treasury expected to have to pay in interest rates looking out from 2002 and 2013 (these are weighted average rates representing Treasury’s overall mix of financing, with maturities ranging from 3 months to 30 years). The key point is that the administration assumes—as does CBO—that the average interest rates faced by Treasury are expected to rise from less than 1% now to about 4% by the end of the 10-year budget window.
Source: Calucations based on OMB data.
Of course, these forecasts could be wrong, as you can see. Back in the early 2000s, OMB thought Treasury would pay a rate of over 5% in 2011, as opposed to the far lower rate that actually prevailed that year.
That said, how would the stream of debt payments for a stimulus package differ under these two rate regimes?
Imagine Congress came to its senses and passed $300 billion in stimulus spending, $200 billion next year followed by $100 billion in 2014. According to OMB rate estimates shown in the blue line above, interest payments would amount to about $100 billion over ten years. Applying the other set of interest rates from the figure above—think of those as the set that would prevail in less unusual economic times—interest costs would be about $150 billion.
So, the savings from taking advantage of today’s low rates would be $50 billion. That’s by no means chump change, but it ain’t a free lunch either.