There’s a lot of talk about how the US has too much debt. But what if the problem is not too much debt, but too little?
After WWII the US had run up a mountain of debt - more, in proportion to the economy, than we have now. Economists expected the economy to shrink. After all, the country had been in a depression before the war, and now it would have to lug the weight of the debt, as well. But the economy didn’t shrink; it expanded.
In the early eighties the US went into what was then the worst recession since WWII. Ronald Reagan was president, and he pushed through a combination of tax cuts and spending increases that resulted in the largest increase in the debt since WWII. Again, the economy expanded.
We’re told deficits are bad, and that they stifle the economy. They steal capital away from the private sector and force interest rates to go up. They impoverish later generations, who will have to pay for our extravagance.
But what if that’s all nonsense? What if it’s all based on misconceptions about the nature of debt and money, and the relationship between them?
Consider:
[ul]
[li]The debt does not need to be paid back. [/li][li]The debt is a liability to the government, but an asset to the private sector.[/li][li]Increasing the debt increases private sector wealth.[/li][li]The US cannot default on the debt. (Putting aside Congressional theatrics, for the moment). The Fed has purchased around $2 trillion in debt in the last few years. It could purchase far more than that - in fact, it could purchase all of it, if it wanted.[/li][/ul]
The problem (well, one of them) is that the U.S. economy doesn’t have the low-hanging fruit any more. After the war, expansion was helped along by the conversion of the country from agricultural to industrial, and in Reagan’s time by the vast increase in personal computing power. Now, though, rapid expansion is more for the BRIC countries than the U.S.
Great analogy. Now, just destroy all the other industrial economies in the world, and the US economy will grow wildly, too, as we’ll be the only country that can make anything for maybe a decade or so.
I don’t think the holders of King Louis XVI debts, or Russian debt (default 1998), or Argentina debt (default 2002), and countless others agree with you.
I’ve never seen anyone propose that the Euro crisis might make us rich. Do you have a mechanism in mind for this action? None is obvious to me.
To your main point, though, with interest on debt at the rate of inflation (or even lower than the rate of inflation), debt makes more sense as a way to fund the government today than at any other time. Particularly, it makes more sense now as a way to fund the government than it did in 1993, or for that matter in 2004. Investors are looking for safe investments and flocking into debt issued by countries with their own currency such as the US, the UK and Japan, among a few others. It would be completely rational to respond to this demand and increase supply of debt, using the surplus cash (mostly by distributing to the states) to rehire teachers and police, perform road maintenance and other sorely needed infrastructure projects.
Debt is desirable as long as the funds made available by that debt produce at least enough economic surplus to pay for it. In this regard, government debt is no different than private sector debt.
This isn’t true indefinitely, though. The marginal cost of debt increases as more debt is acquired–on the scale that the US buys it, increased demand to borrow raises the cost of borrowing. At some point, it becomes cost-ineffective to borrow.
Whether we’ve already reached that point is a subject for further debate.
The US won’t default on its debts, so that debt is indeed an asset to people holding it. Given that people are basically paying the gov’t to get Treasury bills at this point, its pretty clear the markets agree.
Meh, its not that hard to grow out of debt. Plenty of other countries have grown out of debts without having a WWII destroy their competitors.
Consider, nominal growth 2004-2009 was 4%. If you held the deficit to 1% GDP with the same level of growth you could cut the deficit in half in 20 years. Burning Europe to the ground isn’t necessary.
Of course they have. But when someone comes along and remarks about how easy it was for us to do so after WWII, then it’s appropriate to point out the specific conditions that prevailed in the aftermath of WWII and note that it isn’t a good analogy for today. Sure, the US economy boomed after WWII. We accounted for 50% of world GDP since every other industrial nation was in ruins. It tell us nothing about how to grow out of debt in today’s world.
Your theory predicts that when the US borrows, interest rates go up. But the US has borrowed trillions, and interest rates have only gone down. What is the explanation for that?
I’m not sure what you mean by economic surplus, but the US is not a private company, and it doesn’t work the same way. It’s not in business to make profits, and it can always pay its bills because it can’t run out of money.
It still has to be serviced. With interests. In 2011 the interests on the US debt was nearly half a billion dollars. You could probably have used those money some place else. And currently the interest is very low. In ten or twenty years it most likely will not be, and when you roll over the debt you’ll have to take accept higher interests. How big a percentage of the budget are you ready to set aside for debt interest payments?
Also an additional key difference between 1945/1980 and 2012 is that in 2012 much of the debt is held by non-American citizens. So the debt and interest servicing is going to stimulate economies outside the USA.
And my point is that it doesn’t matter. The math is the essentially the same. Because the rate is compounding, the difference between post-war growth and growth in the relatively crappy “oughts” makes a surprisingly small difference in how fast the debt shrinks. It takes about 17 years at the average nominal growth rate over '04-'09 to halve the deficit, it takes about ten years to do the same at the rate for '45-'52.
Also, not really essential to my point, but post-war growth wasn’t due to Europe being bombed out. The US economy was essentially focused on domestic production and consumption before the war, and the same was true afterwords. And to the extent that trade was important, having your trading partners blown to pieces is bad for the economy, not good.
The US did shoot up to a larger portion of global GDP due to the war, but that was because the rest of the world shrank, not because we grew.