Debt is good

The Pak Banker - - OPINION - Paul Krug­man

Rand Paul said some­thing funny the other day. No, re­ally - although of course it wasn't in­ten­tional. On his Twit­ter ac­count he de­cried the ir­re­spon­si­bil­ity of Amer­i­can fis­cal pol­icy, declar­ing, "The last time the United States was debt free was 1835."

Wags quickly noted that the U.S. econ­omy has, on the whole, 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. The Bri­tish gov­ern­ment, by the way, has been in debt for more than three cen­turies, an era span­ning the In­dus­trial Revo­lu­tion, vic­tory over Napoleon, and more.

But is the point sim­ply that public debt isn't as bad as leg­end has it? Or can gov­ern­ment debt ac­tu­ally be a good thing?

Be­lieve it or not, many econo- mists ar­gue that the econ­omy needs a suf­fi­cient amount of public debt out there to func­tion well. And how much is suf­fi­cient? Maybe more than we cur­rently have. That is, there's a rea­son­able ar­gu­ment to be made that part of what ails the world econ­omy right now is that gov­ern­ments aren't deep enough in debt. I know that may sound crazy. Af­ter all, we've spent much of the past five or six years in a state of fis­cal panic, with all the Very Se­ri­ous Peo­ple declar­ing that we must slash deficits and re­duce debt now now now or we'll turn into Greece, Greece I tell you.

But the power of the deficit scolds was al­ways a tri­umph of ide- ol­ogy over ev­i­dence, and a grow­ing num­ber of gen­uinely se­ri­ous peo­ple - most re­cently Narayana Kocher­lakota, the de­part­ing pres­i­dent of the Min­neapo­lis Fed - are mak­ing the case that we need more, not less, gov­ern­ment debt.

Why? One an­swer is that is­su­ing debt is a way to pay for use­ful things, and we should do more of that when the price is right. The United States suf­fers from ob­vi­ous de­fi­cien­cies in roads, rails, wa­ter sys­tems and more; mean­while, the fed­eral gov­ern­ment can bor­row at his­tor­i­cally low in­ter­est rates. So 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. I've al­ready men­tioned that hav­ing at least some gov­ern­ment debt out­stand­ing helps the econ­omy func­tion bet­ter. How so? The an­swer, ac­cord­ing to M.I.T.'s Ri­cardo Ca­ballero and oth­ers, is that 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, such as de­posits in banks that are uni­ver­sally per­ceived as sound. In the years be­fore the 2008 fi­nan­cial cri­sis Wall Street claimed to have in­vented whole new classes of safe as­sets by slic­ing and dic­ing cash flows from sub­prime mort­gages and other sources.

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