By John Stang
With the debt ceiling fight this summer and the sudden itch that comes from the rash of austerity fever, it should be noted that most people have a terrible conception of what constitutes federal debt. For the longest time, the federal deficit has been talked about like a culture war (i.e. “leaving this debt on to our children and grandchildren is immoral”). Cry me a river I say. It would be helpful to round up some opinions on this subject and take on this issue once and for all. First, Paul Krugman takes on the analogy of comparing families tightening their belts during a recession with the federal government:
First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation. Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.
This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.
Matt Yglesias at Slate argues that it’s wrong to see debt and tax payers taking the load like a tangible benefit, such as natural resources:
A government borrowing money from its own citizens doesn’t gain access to any resources that wouldn’t have been available by conscripting them or raising taxes, and by the same token a country doesn’t enrich itself by refusing to make promised interest payments to its own citizens. It’s only when borrowing from or repayingforeigners that the country as a whole is gaining or losing access to real resources. None of which is to say that debt dynamics are a matter of indifference. Obviously people care quite a lot about which specific people possess the real resources, and how you arrange them can have profound implications for human welfare and long-term growth. But it’s bad growth policy or natural resource depletion that can immiserate the next generation, not the prospect of the next generation’s taxpayers transferring money to the next generation’s bondholders.
Former Joe Biden economic adviser Jared Bernstein finds the government crowds out business idea to not always be useful:
For economists, the issue comes down to “crowding out.” Under certain conditions, by running large deficits, the government can be in competition with private firms for capital, and the extra demand for loans pushes up interest rates. Higher interest rates mean less investment and slower private-sector growth than would otherwise occur. Crowding out makes sense in theory, and research has found some evidence of it. But the whole story is not so simple. In fact, neither interest rates nor investment have responded during this crisis the way the crude view predicts (interest rates haven’t risen with deficits, and neither investment nor capital stock consistently fell). The reason is that there is no competition for scarce funds right now—to the contrary, firms are sitting on trillions in cash reserves, and capital is flowing freely to the United States as a safe haven in uncertain times.
Ezra Klein at the Washington Post says that there are clear cases when debt is necessary:
Bernstein doesn’t put it quite like this, but the basic problem with Washington’s conversation over debt is we’ve taken a fiscal tool and recast it as a moral sin. Head over to Mitt Romney’s Web site and look at what it says across the top: “We have a moral responsibility not to spend more than we take in.” Really? Why? And over what time frame? If you pressed Romney on this, I think he would say something like, “it’s irresponsible to pass a massive load of debt onto our children.” But as good as that sounds, no one really believes it. World War II left America with one of the highest debt burdens in the country’s history. But it would have been much more irresponsible to pass on a world in which the Nazis controlled Europe to our children.
From my vantage point, it seems immoral to not make investments necessary for the future, which can have lots of long-term benefits versus worrying about deficits. Certainly, deficits need to be monitored, but the whole is issue is blown up more than it needs to be.