Greg Ip gave us another rendition of this old scare story in a Wall Street Journal column. The argument is that the interest paid on U.S. government debt will soon impose an enormous burden on the federal government, choking off spending on important government programs.

The key part of this story is that interest rates will jump at some point in the not too distant future. While this is in fact what the Congressional Budget Office predicts, it is also what it has been predictingeven since the Great Recession, and consistently been shown wrong.

The key question is, why would interest rates rise? There are two stories where we see interest rates rise. One is that we start to see an uptick in the inflation rate. In that case, long-term rates would almost certainly rise since investors would have the option of getting a better return just by holding physical commodities. Of course, the Fed would almost certainly raise interest rates in response to higher inflation, which would more directly cause interest rates to rise. One point about higher inflation that is worth noting is that it reduces the real value of the debt.

The other reason interest rates could rise is that the Fed raises rates even in the absence of higher inflation. In that case, the Fed as a matter of policy would beincreasing our interest burden. (Selling off its assets also has the same effect, since the interest on the assets held by the Fed are refunded to the Treasury.)

Arguably, the Fed’s rate increases in the last year and a half have not been justified by higher inflation, as the inflation remains well below the Fed’s target. It is striking that none of the deficit hawks, includingthe Committee for a Responsible Federal Budget, which is cited in this piece, have ever expressed concern about the higher debt service burden resulting from these interest rate hikes.

The deficit hawks have also never raised any concerns about the burdens created by government granted patent and copyright monopolies. This is bizarre, since these monopolies are an alternative mechanism to direct funding. The government could directly pay for research on drugs, software, and other items, paying for it through taxing or borrowing, or it can tell private companies to do the research and then give them monopolies to allow them to recover their costs. 

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