Krugman Definitively Takes Down the Deficit Scolds of the Right-wing
To economic simpletons like Rand Paul, it makes sense to say all debt is just plain old bad. On his Twitter account, Paul Krugman points out in his Friday column, Paul recently nonsensically declared, “The last time the United States was debt free was 1835.”
Paul's point was rather undercut by the fact that one could hardly say the American economy has not been one of the larger success stories in the last 180 years, an irony that no doubt escaped him. But Paul's tweet offers a launching point for Krugman's dissection of the question, "can government debt actually be a good thing?" He writes:
Believe it or not, many economists 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.
Deficit scolds are just one more example of how, especially in conservative circles, ideology is trumping evidence. Krugman then introduces us to an actual serious person, Narayana Kocherlakota, the departing president of the Minneapolis Fed — who is making a rather compelling case that what we need right now is more, not less, debt.
So, why is that? Krugman explains:
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.
No one creates safe assets quite like the government does. Not Wall Street, contrary to some arguments. The "con jobs" of subprime mortgages and derivatives that led to the housing bubble and ultimately to the crash of 2008 and Great Recession is an indicator of how safe that is.
All in all, Kocherlakota and Krugman make the case that more debt (as opposed to raising interest rates) is a good play. Governments, here and in Europe, need to stop listening to the fiscal scolds in the name of real fiscal responsibility.