Talking Points on “America’s Imminent Budget Crisis”: Focus

Right now, the financial markets are telling us that for the next 20 years at least they expect not a surplus but rather a shortage of federal debt.

The interest rates at which investors are willing to hold federal debt now and expect to hold federal debt in the future tell us that it is an extraordinary valuable asset

Those interest rates tell us that investors at least think the world economy would be better off with more federal debt than with less.

The arguments against having a larger federal debt now are essentially four: that it would be unfair to future generations, that is a source of uncertainty that drags on the economy, that it is a point of vulnerability, and that we cannot trust future congresses to do the right thing to finance it should circumstances change.

• A larger debt right now would enrich the present at the expense of the future, but (unless there is some global warming catastrophe coming) the future will be richer than the present, so this is not a big worry.

• When debt is a source of uncertainty and a drag on the economy, its value is low in the interest rates people required to hold it is high. Professional economists look at both quantities and prices. Those who claim that a high debt is a source of uncertainty and drag do not distinguish between a high debt that comes with high interest rates, which is such a source of uncertainty and drag, and a high debt that comes with low interest rates, which is not.

• The future is unpredictable, and interest rates could spike, and the burden of amortizing the government debt could rise substantially from its current near-zero level. But of all the points of vulnerability and all the drags on the economy this is a very minor one. If it were a major one, people would be demanding much higher interest rates in order to hold our long-term 30 year bonds than they are.

• The past hundred years have demonstrated that the United States government is very good at paying down the debt as a share of annual GDP whenever you can argue that it makes economic sense to do so.

  • We see this from Democratic and Republican-led governments alike in the 1920s, the 1940s, the 1950s, the 1960s, and the 1970s. * We see this from the Democratic-led Clinton administration and its 1993 Reconciliation bill.
  • We see this in the very sharp reduction in the deficit and the stabilization of the debt-to-annual GDP ratio under Obama.
  • Only twice in the last 100 years have U.S. governments destabilized the debt when deficit spending was economically inappropriate: under Ronald Reagan and under George W. Bush—politicians who would say, in Dick Cheney’s words, that “deficits simply don’t matter”.
  • Making sure that people like Dick Cheney don’t have influence within the Republican Party would be a good plan to guard against bad government in the future.
  • It would be a much better plan than doing things that make no technocratic economic sense now.

Any government that was run like a business and that could borrow at the terms the U.S. government can borrow now would, right now, be running up its debt and putting the money it borrowed to work, productively.

The big question right now is not “should we fear a debt crisis?” but “how can we use the borrowing capacity of the U.S. government and the extraordinary terms on which investors are willing to lend money to the U.S. to benefit America?”