Myth #9: The money spent paying interest on the national debt could be spent elsewhere.
Reality: Interest rates can easily be brought to zero and are not an obstacle to federal spending.
Reality: Interest rates can easily be brought to zero and are not an obstacle to federal spending.
Government spending is not operationally constrained by revenues (as outlined above). So interest payments are not an obstacle to any other payments. Further, the Fed (a branch of government) sets the overnight rate-thus, it is a policy variable and can be set wherever policy wants to set it. Right now short term rates are set near 0%, and the Fed could leave them there permanently, which would bring down interest on Treasury securities to near 0%. Finally, Treasury can elect to issue only 3 month bills, which would bring government interest payments towards 0 over time.
Conclusion: Interest on the debt is not currently an obstacle to increased federal spending and/or tax cuts. And it's a very simple matter to bring interest payments down to 0 in any case.
~Randall Wray, Professor of Economics, University of Missouri-Kansas City, Missouri
