Must-read: Paul Krugman: “In Hamilton’s Debt”

Must-Read: Paul Krugman: In Hamilton’s Debt: “Hamilton’s pathbreaking economic policy manifestoes…

…his 1790 ‘First Report on the Public Credit’… remains amazingly relevant today…. Why did Hamilton want to take on those state debts? Partly to establish a national reputation as a reliable borrower… give wealthy, influential investors a stake in the new federal government…. Beyond that, however, Hamilton argued that the existence of a significant, indeed fairly large national debt would be good for business. Why? Because:

in countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money.

That is, bonds issued by the U.S. government would provide a safe, easily traded asset that the private sector could use as a store of value, as collateral for deals, and in general as a lubricant for business activity. As a result, the debt would become a ‘national blessing’…. This argument anticipates, to a remarkable degree, one of the hottest ideas in modern macroeconomics: the notion that we are suffering from a global ‘safe asset shortage.’ The private sector, according to this argument, can’t function well without a sufficient pool of assets whose value isn’t in question–and for a variety of reasons, there just aren’t enough such assets these days. As a result, investors have been bidding up the prices of government debt, leading to incredibly low interest rates. But it would be better for almost everyone, the story goes, if governments were to issue more debt, investing the proceeds in much-needed infrastructure even while providing the private sector with the collateral it needs to function. And it’s a very persuasive story to just about everyone who has looked hard at the evidence.

Unfortunately, policy makers won’t do the right thing, largely because they keep listening to fiscal scolds…. Alexander Hamilton knew better. Unfortunately, Hamilton isn’t around to help counter foolish debt phobia. But maybe reminding policy makers of his wisdom is one way to chip away at the wall of folly that still constrains policy. And having his face out there every time someone pulls out a ten can’t hurt, either.