Must-Read: Paul Krugman: Debt Is Good

Must-Read: Paul Krugman: Debt Is Good: “Rand Paul said something funny… of course it wasn’t intentional…

…He decried… fiscal policy, declaring, “The last time the United States was debt free was 1835.” Wags quickly noted that the U.S. economy has… done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing…. But is the point simply that public debt isn’t as bad as legend has it?… Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well…. The power of the deficit scolds was always a triumph of ideology over evidence…. Debt is a way to pay for useful things, and we should do more of that when the price is right…. This is a very good time to be borrowing and investing in the future, and a very bad time for what has actually happened: an unprecedented decline in public construction spending adjusted for population growth and inflation. Beyond that, those very low interest rates are telling us something about what markets want…. The debt of stable, reliable governments provides “safe assets” that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.

Now, in principle the private sector can also create safe assets…. But [in 2008] all of that supposedly brilliant financial engineering turned out to be a con job…. So investors scurried back into the haven provided by the debt of the United States and a few other major economies… [and] drove interest rates on that debt way down…. When interest rates on government debt are very low… there’s not much room to cut them when the economy is weak, making it much harder to fight recessions…. Simply raising interest rates, as some financial types keep demanding (with an eye on their own bottom lines), would undermine our still-fragile recovery. What we need are policies that would permit higher rates in good times without causing a slump. And one such policy… would be… a higher level of debt.