Must-Read: Richard Kogan et al.: Difference Between Economic Growth Rates and Treasury Interest Rates Significantly Affects Long-Term Budget Outlook

…(‘R’) that the federal government pays on its debt and the projected growth rate of the economy (‘G’) relate to one another. In a nutshell, policymakers can more easily restore the nation’s fiscal health when the economic growth rate exceeds the average interest rate than vice versa. That’s because, when economic growth rates exceed Treasury interest rates, the burden of existing debt shrinks over time. (Or, putting it technically, policymakers can more easily achieve long-run debt sustainability when R minus G, or R-G, is negative than when it’s positive.) For decades, analysts have made budget projections that extend 25, 50, or even 75 years into the future. Most generally show that debt as a percent of the economy (i.e., the ‘debt ratio’) could eventually rise to economically dangerous levels. That’s in large part because the government is running primary deficits — that is, separate and apart from interest costs, program costs exceed revenues — and these primary deficits are projected to continue at least through 2040…. Another reason why these projections show debt rising to potentially dangerous levels, however, is that they assume interest rates will exceed economic growth rates…. We analyze U.S. data for the 223 years since 1792 and find that, on average, economic growth has exceeded interest rates, helping to shrink the burden of existing debt…. If… economic growth and interest rates behave more as they have throughout U.S. history, with the former exceeding the latter on average, then — all else being equal — the long-term budget outlook may be somewhat less challenging than we, CBO, and others currently project.