Question

Why might economists be quite concerned if the annual interest payments on the U.S. public debt sharply increased as a percentage of GDP?

I would appreciate it if it was typed and if the answer is lengthy. Thank you!(4-5 paragraphs)

Answer 1

The debt's weight is not its absolute size. Indeed, if there were no interest payable on the debt and there was automatic refinancing, there would be no debt burden at all. But interest must be paid. Lenders expect that, and the government must either use tax revenue or go deeper into debt in order to pay the interest. Therefore, interest on the debt is essential and its weight can best be evaluated by noting the size of interest payments relative to GDP, as the size of GDP is a measure of complete domestic revenue or how much the state can increase taxes to pay interest

It can also be thought of in terms of opportunity cost. Every dollar spent on interest payments on the debt is a dollar that could have been used toward education, public health, national defense, tax reduction, or some other priority.

Gradually rising interest rates would have made borrowing more expensive even without additional debt. But the tax cuts passed late last year have created a deeper hole, with the deficit increasing faster than expected. During recessions, government borrowing extended in the past and declined in recoveries. Since the Great Depression, this countercyclical strategy has been component of the conventional Keynesian toolbox to fight downturns.
As the economy booms, the deficit is now rising, meaning the stimulus is pro-cyclical. The danger is that if the economy slows down, the state will have less space to maneuver.
Debt as a proportion of gross national product tends to raise and drop during recessions. But now the debt is growing, even as the economy is growing, due to tax cuts and increased expenditure.