Must-Read: Robert Skidelsky: The Scarecrow of National Debt

Must-Read: Robert Skidelsky: The Scarecrow of National Debt:

Most people are more worried by government debt than about taxation…

Borrowing strikes them as a way of taxing by stealth. “How are they going to pay it back?” my friend asked. “Think of the burden on our children and grandchildren.”… Horror of debt is particularly marked in the elderly, perhaps out of an ancient feeling that one should not meet one’s Maker with a negative balance sheet. I should also add that my friend is extremely well educated, and had, in fact, played a prominent role in public life. But public finance is a mystery to him….

One should not attribute this gut feeling to financial illiteracy. It has been receiving strong support from those supposedly well-versed in public finance, particularly since the economic collapse of 2008. Britain’s national debt currently stands at 84% of GDP. This is dangerously near the threshold of 90% identified by Harvard economist Kenneth Rogoff, beyond which economic growth stalls.

The magical properties of this number were never properly revealed, and the data supporting the conclusion were questioned, to say the least. But Rogoff has not retreated from his claim, and he now gives a reason for his alarm. With US government debt running at 82% of GDP, the danger is of a “fast upward shift in interest rates.” The “potentially massive” fiscal costs of this could well require “significant tax and spending adjustments”… the financial leg of the familiar “crowding out” argument….

But… a government that can issue debt in its own currency can easily keep interest rates low. The rates are bounded… [but] these limits are quite distant in the UK and the US…. Continuous increases in both countries’ national debt since the crash have been accompanied by a fall in the cost of government borrowing to near zero. The other leg of the argument for reducing the national debt has to do with the “burden on future generations.”… The idea that additional government spending, whether financed by taxation or borrowing, is bound to reduce private consumption by the same amount assumes that no flow of additional income results from the extra government spending – in other words, that the economy is already at full capacity. This has not been true of most countries since 2008.  
 
But in the face of such weighty, if fallacious, testimony to the contrary, who am I to persuade my elderly friend to ignore his gut when it comes to thinking about the national debt?