William Vickrey, 1996 Memorial Nobel Awards in Economics
October 5, 1996

If deficits continue, the debt service would eventually swamp the fisc.

Real prospect: While viewers with alarm are fond of horror-story projections in which per capita debt would become intolerably burdensome, debt service would absorb the entire income tax revenue, or confidence is lost in the ability or willingness of the government to levy the required taxes so that bonds cannot be marketed on reasonable terms, reasonable scenarios protect a negligible or even favorable effect on the fisc. If full employment is maintained so that the nominal GDP continues to grow at say 6%, consisting of about 3% inflation and 3% real growth, the equilibrating debt would have to grow at 6% or perhaps at a slightly higher rate; if the nominal interest rate were 8%, 6% of this would be financed out of the needed growth in the debt, leaving only 2% to be met out of the current budget. Income tax on the increased interest payments would offset much of this, and savings from reduced unemployment, insurance benefits and welfare costs would more than cover the remainder, even aside from substantial increases in tax revenues from the more prosperous economy. Though much of these gains would accrue to state and local governments rather than to the Federal government, this could be adjusted to through changes in intergovernmental grants. A fifteen trillion debt will be far easier to deal with out of a full employment economy with greatly reduced needs for unemployment benefits and welfare payments than a five trillion debt from an economy in the doldrums with its equipment in disrepair. There is simply no problem.