Welfare For Coupon Clippers

By Michael Kinsley

In a decade's worth of arguments about who has won and who has lost from changes in federal taxes and spending, one item has tended to get overlooked. It's one of the fastest-growing items on the federal books: interest on the national debt. It has more than tripled, from $52 billion in 1980 to $179 billion in 1990. It is closing in on Social Security ($222 billion) as the Government's largest transfer program.

Some people like to take comfort in the fact that the national debt, although swelling, is a smaller share of gross national product than it was during the years after World War II. That's true. But interest on the debt is far larger. As late as the early 1960s, when the national debt was still more than half of GNP, though heading downward, interest payments were barely 1% of ! GNP. Today the publicly held debt of $2.3 trillion is "only" 43% of GNP (up from 27% in 1981), but interest is 3.3%.

In fact, interest on the national debt is now larger than the deficit, which the Congressional Budget Office estimates at $138 billion or $158 billion for 1990 (depending on whether you count this year's down payment on the savings and loan bailout). In other words, this year's taxpayers are actually paying more than enough to cover this year's Government operations: defense, social welfare, exhibits of Robert Mapplethorpe photographs, everything. It's only the interest -- and interest on interest -- on past excesses that we can't cover. Most of those excesses occurred in the decade since Ronald Reagan, in his first Inaugural Address, warned of "tremendous social, cultural, political and economic upheavals" from the national debt, then under $800 billion.

Besides its real interest payments, the Government is also paying a fictional $16 billion of interest into the fictional Social Security trust fund, from which it is "borrowing" the annual surplus -- $66 billion this year. Without use of that surplus, the deficit would be well over $200 billion, and this year's interest payments would be slightly under $200 billion.

Mammoth federal interest payments may help explain the strange politics of the federal deficit. Why have so many conservatives made their peace with it? The standard conspiracy theory is that they see the deficit as a way to hold down spending. But here is an alternative conspiracy theory: interest on the debt is a $179 billion social-welfare program for owners of capital, who tend to be conservatives. Or, at least, all those interest payments make the thought of the Government's going deeply into debt more acceptable to certain people than the alternative: that the Government might pay its way through progressive taxation.

Of course, interest payments aren't handouts; they're the reward for lending money. Lenders to the Government could just as easily lend elsewhere. But most economists agree that the U.S. Government's huge demands for credit have raised interest rates generally. More and more of those interest payments go to foreigners, now that the U.S. is a net debtor to the rest of the world. But most interest payments are still to Americans. The national debt is around $10,000 a person, or $40,000 for a family of four. If your bond portfolio is bigger than that, you may be a beneficiary of this social-welfare program for - coupon clippers.

The 1980s were an orgy of borrowing, as we know. But for every borrower there is a lender. The share of all personal income that comes from interest payments has risen a quarter in the past decade -- from 12% to 15% (an estimated $688 billion in 1990). Dividends as well make up a slightly larger share than in 1980, wages a slightly smaller share. This helps explain all the figures showing that income inequality increased dramatically during the 1980s.

By itself, that proves nothing. Who cares about the size of the slices if the pie is larger? But Government interest payments do nothing to make the pie any larger -- except to the extent that the borrowed money was invested productively. And the share of Government spending going to productive investment has declined over the decade, as our crumbling infrastructure can attest. So interest payments on the national debt have made at least a small contribution to income inequality without any growth payoff. If traditional welfare is paying people not to work (a common gripe), this is the capitalist equivalent: paying money not to work.

Is there any way out? The U.S. is not the only government going bankrupt from interest payments. Much of the Third World also owes billions to rich Americans, among others. Many Third World governments have defaulted on their debts in one way or another. Outright renunciation is uncommon, but forced renegotiation and freezes on interest payments are not. Perhaps we should try something similar.

Horrified? Actually, the U.S. has already renounced a huge chunk of its national debt. The real value of the national debt in 1984 was exactly the same as it had been in 1946, despite regular annual deficits between those years. The trick was inflation, which eroded the real value of the debt as fast as we accumulated it. We could pull this off because, unlike other world- class debtors, we can raise money in our own currency.

But the trick works only as long as lenders are willing to charge less interest than the inflation rate, which they won't do once they catch on. Since 1984, thanks to larger deficits and higher interest rates, we've been adding to the debt faster than it's been eroding away. This year inflation will slice about $116 billion off the real value of the debt, but interest payments averaging almost 8% will add $179 billion to it. Next year we'll pay interest on that interest.

So unless we are prepared to trash our currency, we are stuck with this bizarre and expensive welfare program. At least the beneficiaries aren't the undeserving poor.