When a federal credit program funds a loan during a budget deficit (i.e., always now), the process will ultimately involve a marginal increase in federal Treasury debt equal to the full amount of the loan. The federal budget impact per se will be much smaller (only the FCRA credit subsidy), especially for large-scale infrastructure loans, e.g., about 1-2% of loan amount for WIFIA. But that doesn’t matter if the concern is the size of the national debt in relation to GDP — a $1 billion infrastructure loan will have the same impact as a $1 billion infrastructure grant.

There is one important difference of course. The federal loan will be repaid over time with interest (only the minor credit subsidy amount is intended as a permanent transfer) whereas the grant is out the door forever. In effect, the Treasury debt issued to fund the loan is largely self-liquidating since it is matched with an interest-earning and amortizing asset.

That’s probably not too important with respect to the size of the national debt at any point — after all, a lot of federal discretionary spending is meant to have a positive economic impact over time, so in theory debt issued for that is self-liquidating, too. Maybe even multiple times over. Yes, the ‘in theory’ qualification is quite an understatement, but the point is that there’s not necessarily a bright-line distinction between a federal credit financial asset and other federally created economic ‘assets’ in terms of the federal balance sheet.

But when the concern over US federal debt is focused on the inexorable need to pay interest on the issued Treasuries, the picture changes. Arguably, that’s the real problem with federal debt — ultimate impact and future repayment are tomorrow’s somewhat hypothetical and politically spinnable problem once the debt is issued. But paying scheduled interest requires writing checks that cut into other discretionary spending, which is very much a real-time problem.

And it’s beginning to look like that that problem has arrived and is expected to get much worse. Here’s a recent analysis by the Committee for a Responsible Federal Budget: Interest Costs Will Grow the Fastest Over the Next 30 Years. The graphic tells the story — net interest cost lurked in the shadows when interest rates were suppressed even as federal debt rapidly grew. Now it’s back with a vengeance:

This gloomy picture provides some context for considering the expansion of federal infrastructure loan programs in anticipation of even harder times ahead. Unlike the economic returns from other federal ‘assets’, the interest paid on federal loans should provide a solid and precisely predictable offset to the interest cost of the Treasury debt issued to fund them. I think this is actually imbedded in FCRA accounting mechanics whereby the interest that the loan programs collect from borrowers gets credited to their intragovernmental liabilities with Treasury (that’s how it works for the infrastructure loan programs I’m familiar with anyway). So even if a $1 billion loan has the same balance sheet impact as a $1 billion grant, the impact on Treasury’s net interest cost should be very different. For infrastructure loan programs offering interest rates based on UST yields at closing, the offset should be almost complete [1]. So, unlike other federal spending, expanding federal infrastructure loan programs shouldn’t add much to that steep red line.

There is a huge caveat, however: New or significantly expanded loan programs need to be well-designed and carefully implemented. Solyndra-like disasters vaporize the interest offset and in effect convert loans into unintended and demonstrably bad grants. But overly risk-averse or bureaucratic programs will fail to have any real impact. Not easy to get it right. Since the need appears to be predictable and increasingly imminent, why not start now?

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Notes

[1] Well, that was the legislative intent. For infrastructure loan programs that offer rate locks for long construction periods, the story is more complex: WIFIA’s FCRA Re-Estimate Elephant