Low Interest Rates and Fiscal Policy

Brief

Low Interest Rates and Fiscal Policy

January 26, 2017

Abstract

Ultralow interest rates have made running deficits virtually costless. That is a major reason that policy makers have lost interest in pursuing major deficit reductions. That is in contrast to the 1980s and 1990s when several major deficit reduction packages were enacted. Nevertheless the nation is still on an unsustainable fiscal path as aging baby boomers flood into Social Security, Medicare, and Medicaid. That is not to deny the hugely beneficial impact falling interest rates have had on the budget. The interest bill has fallen from a post-World War II high of 3.2 percent of GDP in 1991 to 1.3 percent in 2015 despite a two thirds rise in the debt-to-GDP ratio.

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