There are few policy questions more important for Democrats than how they’re going to handle the debate about deficits and the national debt. This is because every time Democrats come up with some good new programs that would actually help people and make the country better and more productive over the long haul, the standard response is: we can’t afford it, that would run up the debt, we’ll become like Greece, etc. That is, unless you want to raise taxes to cover every nickel of that spending–and good luck with that.
But the conventional economic wisdom on deficits and the debt is shifting–finally–and that should help Democrats keep their heads on straight about this stuff. It’ll still be a struggle to hold off the conservative attack dogs and their pals in the deficit hawk community. But there is hope that the ideological tide on government spending is turning.
“[T]here are…two big questions [about the debt]. First, how much should we care about debt? Second, will a double standard continue to prevail? That is, will the deficit scolds suddenly get vocal again if and when Democrats regain power?
On the first question: One surprising thing about the debt obsession that peaked around 2011 is that it never had much basis in economic analysis. On the contrary, everything we know about fiscal policy says that it’s a mistake to focus on deficit reduction when unemployment is high and interest rates are low, as they were when the fiscal scolds were at their loudest.
The case for worrying about debt is stronger now, given low unemployment. But interest rates are still very low by historical standards — less than 1 percent after adjusting for inflation. This is so low that we needn’t fear that debt will snowball, with interest payments blowing up the deficit. It also suggests that we’re suffering from chronic weakness in private investment demand (which, by the way, the 2017 tax cut doesn’t seem to have boosted at all).
So in the past few months a number of prominent economists — including the former chief economist of the International Monetary Fund and top economists from the Obama administration — have published analyses saying that even now, with unemployment quite low, debt is much less of a problem than previously thought…..[B]orrowing at ultralow interest rates to pay for investments in the future — infrastructure, of course, but also things like nutrition and health care for the young, who are the workers of tomorrow — is very defensible.
Which brings us to the question of double standards.
You don’t have to agree with everything in proposals for a “Green New Deal” to acknowledge that it’s very much an investment program, not a mere giveaway. So it has been very dismaying to see how much commentary on these proposals either demands an immediate, detailed explanation of how Democrats would pay for their ideas, or dismisses the whole thing as impractical.”
“[E]conomists’ views on the subject of debt are changing. Economist Kenneth Rogoff, who once ran into criticism for a dubious claim that debt reduces growth, now advocates more deficit spending for the U.K. The IMF has softened its tone on debt, and is beginning to embrace the idea of fiscal stimulus for distressed economies. And Olivier Blanchard, a respected macroeconomist and former IMF chief economist, has a new paper questioning the idea that higher deficits would impose any real cost on the U.S. economy.
Blanchard begins with a simple observation: If the interest rate paid by the government is lower than the rate of economic growth, government debt doesn’t have to be paid down. Instead it can be infinitely rolled over, and as the economy grows, the debt burden will have a tendency to shrink all on its own. Blanchard notes that interest rates on short-term government debt have generally been lower than the rate of nominal GDP growth during the past few decades:…
Blanchard notes that effective borrowing costs may be even lower for the government, since some portion of the interest paid to bond holders gets taxed, ending up back in the government’s coffers. Taking this into account, he finds that during the past half-century, the U.S. almost always could have afforded to take on more government debt than it did.”
Sometimes you just gotta borrow the money. And quite frequently, and especially now, that’s fine.