The government’s interest bill has fallen in recent decades as a share of the economy, thanks to lower borrowing costs over the period. Net interest as a percentage of GDP, without adjusting for inflation, has averaged about 1.5%, though it climbed to 1.9% in 2022 after the pandemic borrowing surge.
Factor in inflation, and interest-to-GDP has frequently been negative, even before the burst of post-COVID price increases. Looking ahead, the White House Office of Management and Budget expects Yellen’s measure to rise back above zero in 2024, as inflation ebbs, and then
to top out at 1.1% in 2032-33. That’s a level the Treasury secretary says is “quite reasonable.”
‘Inflated Away’
Jason Furman, a professor at Harvard University and former economic adviser to President Barack Obama, agrees. In a
2020 paper, he and former Treasury Secretary Lawrence Summers argued that policymakers should aim to keep real net interest from rising above 2% of GDP.
The metric favored by Yellen is the right one to use, Furman says, because it’s important to factor in the opposite effects that interest costs and inflation have on the debt burden.
When rates and prices are both going up, Furman says that “in one sense, next year’s debt is even bigger than this year’s debt, because it goes up with interest. But in another sense, next year’s debt is smaller, because part of it is inflated away and so you don’t need to pay back as much.”
Yellen embraces an alternative method for measuring the sustainability of the nation’s debt.
time.com