Macro Research: Will Math Ever Matter in the US?

[i] The longest endnote ever: so here we are transitioning from the use of “net interest expense” to “gross interest expense.”  The CBO does a remarkable job explaining all this.  Yet we felt the CBO’s, and KCR’s, decision to move to a discussion of “gross interest expense” makes sense.   Here are some examples of why gross interest expense makes sense to KCR.

• So, the “gross amount” is simply the total payments on the stock of debt outstanding. For the net figure the CBO and other agencies have to add back myriad and sundry receipts received from a wide array of sources.
• FIRST: One primary example is the interest paid on the $5.9 trillion in Treasury securities held by trust funds. These include things like Social Security and the pensions for military and other government workers.  As the CBO notes “However, the interest paid on those securities has no net effect on interest outlays because both the payments and the receipts are recorded in the same category of spending in the Federal budget.  The payments are part of gross interest paid on Treasury securities, and receipts appear separately in the net interest category.”  That sounds, to macro lay people like us, a bit like paying interest on an asset in a pension account, recording that payment to the pension account but then deducting it right back out due to technical accounting reasons of the affiliation of the payor and the payee.
• SECOND: We find similar language later on when they explain that our government also gets money back from a category dubbed “other interest.” This add back is from interest received on “specialized financing accounts.”  The “…largest of those accounts finances the federal student loan programs.”   If you’re wondering if that might be an “add back” that’s about to go away, so are we.
• THIRD: Another area that helps reduce “gross interest expense” to “net interest expense” is the government’s business in loan guarantees. As the CBO explains, “With [loan guarantees] the government agrees to repay, in the event of a default, loans made by nongovernmental institutions.  Financing accounts for guaranteed loan programs usually receive cash inflows when a loan is made, and the inflows often include guarantee fees from lenders and subsidy payment from the budget account for the loan program.  Any defaults on loans that would require a payment from the account typically occur later.  As a result, a financing account for a guarantee program generally runs a surplus, and it loans that surplus to the Treasury, which credits the financing account with interest payments.” (Emphasis ours).  That sounds a bit like “we get to clip coupons and reduce the appearance of interest expense until things go bump in the night, in which case, suddenly we are on the hook.”   
• FOURTH: The final example we will give, is the most important. Specifically, that the payments from the trust funds (Social Security, pensions etc.) will decline even in a rising rate environment.  Why?  Because “…payments to beneficiaries are projected to outweigh revenue collections in several of the largest funds, causing balances to decline faster than interest rates rise.  … balances in three trust funds are projected to be exhausted during [the forecast] period.”  (Emphasis ours).  Which trust funds exactly will run out of money?  The Highway Trust Fund, Medicare’s Hospital Insurance Trust Fund and Social Security’s Disability Insurance Trust Fund.

[ii] What is the National Debt, US Treasury

[iii] Gross Domestic Product and Corporate Profits, Q2 2022, BEA

[iv] US Treasury as of August 2022

[v] US Treasury as of August 2022

[vi] The government’s fiscal year is from October 1st – September 30th, so the most recent bar excludes the month of September 2022.

[vii] https://www.usaspending.gov/explorer/budget_function

[viii] Office of Debt Management, FY 2022 Q3, page 23

[ix] Office of Debt Management, FY 2022 Q3, page 26

[x] US Government Accountability Office, Report to Congress, May 2022.

[xi] From the fiscal data website provided by treasury.gov on “What is the national debt”