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The Jehoshua Novels


Does A Big Debt Really Matter?

Steve Benen says not.

I realize the political establishment is uncomfortable with large deficits and a massive debt — though oddly the discomfort only seems to emerge when there’s a Democratic president — but it’s worth remembering a few truths from time to time.

…when there’s a global economic crash, and the government needs to invest to rescue the economy, large deficits are good, not bad, especially when borrowing is cheap and easy. Had the president focused on reducing the $1.3 trillion deficit he inherited from Bush/Cheney, instead of job creation and economic growth, the recession would have intensified, and yet, too many reports simply accept it as a given that higher deficits are worthy of condemnation.

…economic growth and job creation are the problem, Obama’s making things better, and with negative yields on Treasuries, we should be borrowing more, investing more, and leaving deficit reduction for a later, healthier time.

That’s exactly what Paul Krugman says too. And Joseph Stiglitz. Both are Nobel-winning economists. From the Krugman link:

nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe. Britain, in particular, has had debt exceeding 100 percent of G.D.P. for 81 of the last 170 years. When Keynes was writing about the need to spend your way out of a depression, Britain was deeper in debt than any advanced nation today, with the exception of Japan.

Of course, America, with its rabidly antitax conservative movement, may not have a government that is responsible in this sense. But in that case the fault lies not in our debt, but in ourselves.

So yes, debt matters. But right now, other things matter more. We need more, not less, government spending to get us out of our unemployment trap. And the wrongheaded, ill-informed obsession with debt is standing in the way.

So why are we talking about the debt instead of the economy? Krugman again.

Ominous warnings about the danger of excessive deficits became a staple of political posturing; they were used by people who considered themselves serious to proclaim their seriousness. … Obama himself got into this game; his first State of the Union address, in early 2010, proposed spending cuts rather than new stimulus. And by 2011 blood-curdling warnings of disaster unless we dealt with deficits immediately (as opposed to taking longer-term measures that wouldn’t depress the economy further) were heard across the land.

…the market itself doesn’t seem to agree; if anything, it’s saying thatAmerica should borrow more, since at the moment U.S. borrowing costs are very low. In fact, adjusted for inflation, they’re actually negative, so that investors are in effect paying the U.S.government a fee to keep their wealth safe. Oh, and these are long-term interest rates, so the market isn’t just saying that things are OK now; it’s saying that investors don’t see any major problems for years to come.

Never mind, say the deficit hawks, borrowing costs will shoot up soon if we don’t slash spending right now. This amounts to saying that the market is wrong—which is something you’re allowed to do. But it’s strange, to say the least, to base your demands on the claim that policy must be changed to satisfy the market, then dismiss the clear evidence that the market itself doesn’t share your concerns.

And finally Ezra Klein from way back in 2010:

Deficit fear-mongering was a core part of the Democrats’ strategy against Bush, too. It just didn’t work very well. The reason is that the public didn’t care very much about deficits. Why? Well, they weren’t very worried about the economy. But now they’re terrified about the economy. And deficits — which signify irresponsible money management to voters who think of things in terms of household finances rather than Keynesian counter-cyclical spending — are evidence, to them, that the government isn’t handling the economy correctly. The fact that deficits rise sharply during recessions simply confirms to voters that there’s a connection.

Republicans are taking advantage of this misguided analysis, just as Democrats would happily have latched onto the sentiment if it had presented itself in the Bush years. But the driver here isn’t Republican messaging but, on the one hand, anger over the economy, and on the other hand, the fact that the troubled economy needed a vast expansion in the short-term deficit. A bad economy isn’t popular and big deficits aren’t popular, and combining the two is seriously unpopular, even if it’s necessary.

Both parties have fearmongered about the national deficit as a vote-grabbing strategy over the last decade, and that fear has entered the national consciousness. They’ve painted themselves into a corner and now have to act as if the believe thir own crap. We’d be far better placed, as Stiglitz advocates, in borrowing and spending more, in order to regenerate the national infrastructure and create jobs, thus stimulating the economy. The time to pay back debt that no-one is asking you to pay back is when you’re making money.

5 comments to Does A Big Debt Really Matter?

  • hvd

    Debt isn’t as much the problem as what occasions it. I would not be at all troubled by our debt if it were being used to increase productivity and efficient use of our resources through infrastructure investment and investment in our people’s security in the form of medical care, social security and the like. That money gets recycled and employed in productive ways many times over.

    However, when the debt is used primarily to feed the casino by propping up banks that have made bad gambles and by feeding wall street in all of its many forms as well as being poured down the bottomless pit of endless war, then it is a danger to the republic. Not least because it undermines the idea and value of productive work and replaces it with speculation.

  • John Zimmerman

    Notice what the debt worries are always used to attack? SS, the Meds, and other parts of the safety net, never the military or corporate welfare. It is all about killing all the advances made since the 1920s and taking us back to era for freedom and justice (for rich white men), circa 1890. The debt is just a tool and excuse.

  • Thomas Lord

    What hvd said and also:

    I think that debates about how bad the debt is or isn’t at the moment are politically inoperative. In other words, nobody (other than maybe some part of the unwashed masses) really disagrees about the macro-economic nature of US gov’t debt. All sides agree that the status of $USD in global trade means that demand for US debt is unlikely to collapse soon (and that it might collapse in the future). All sides agree that permanent deficits are no problem at all if real GDP grows fast enough relative to the size of the deficit. All sides agree that gov’t spending is private sector income and can have stimulative effect. In short I’m saying that the sound-bite landscape of deficit hawks vs. Keynsian’s isn’t where the debate really is — that’s all just bad reporting. Highly placed news sources invoke those soundbites not because they are central to their own policy thinking, not quite — but rather because they believe the media can digest them and that underinformed voters will be led by those soundbites to correct conclusions even if by not quite correct reasoning.

    The real debate seems to me to center on three issues: (1) Whether the government is competent to spend stimulus money well for a public purpose. Dems tend to just assume that gov’t can easily be competent in this area; Reps tend to be extremely skeptical of the idea. People’s day to day experience (e.g., at the DMV or with corruption at city hall) works strongly to the Reps advantage here. (2) Some faction fights among elites over the US military budget, over control of regulatory offices, over gov’t contract processes, etc. (3) A push by some elites to pauperize the US work force in order to increase the ownership value of US industrial and natural resource assets.

    So that’s a populist political challenge: rather than buying into the fake debate about deficits, to (a) make a convincing case that the gov’t can competently spend stimulus money; (b) make a convincing case against the dominant players in the security/military-industrial-complex in the context of a scary, scary world; (c) make a convincing case that the fat cats really do want your children to be dumb and poor and you should want the gov’t to adopt policies that hurt those fat cats.

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