Opinion
Learn to Stop Worrying and Love Debt
Why you should ignore the coming Republican deficit
rants.
Paul
Krugman
By Paul
Krugman
Opinion
Columnist
Dec. 3,
2020
Amid all
the wild swings in U.S. politics over the past decade, one thing has remained
constant: the G.O.P. position on government debt. The party considers high
levels of debt an existential threat — if a Democrat is sitting in the White
House. If a Republican president presides over big deficits, well, as Donald
Trump’s budget director reportedly told supporters last year, “nobody cares.”
So it’s a
completely safe prediction that once Joe Biden is sworn in, we will once again
hear lots of righteous Republican ranting about the evils of borrowing. What’s
less clear is whether we’ll see a repeat of what happened during the Obama
years, when many centrists — and much of the news media — both took obvious fiscal
phonies seriously and joined in the chorus of fearmongering.
Let’s hope
not. For the fact is that we’ve learned a lot about the economics of government
debt over the past few years — enough so that Olivier Blanchard, the eminent
former chief economist of the International Monetary Fund, is talking about a
“shift in fiscal paradigm.” And the new paradigm suggests both that public debt
isn’t a major problem and that government borrowing for the right purposes is
actually the responsible thing to do.
Why are
economists thinking differently about debt? Part of the answer is that we’ve
discovered some things about how the world works; the rest of the answer is
that the world has changed.
It made
some sense, nine or 10 years ago, to worry that the financial crisis in Greece
was a harbinger of potential debt crises in other countries (although I never
bought it). As it turned out, however, the full list of countries that ended up
looking like Greece is … Greece. What briefly seemed like a spread of
Greek-style problems across southern Europe turned out to be a temporary
investor panic, quickly ended by a promise from the European Central Bank that
it would lend money to cash-short governments if necessary.
In other
words, those dire warnings we used to hear (and will soon be hearing again)
that America faces imminent disaster once government debt crosses some red line
were always misguided. We weren’t and aren’t anywhere close to that kind of
crisis, and probably never will be.
But what
about the longer term? Doesn’t debt impose a burden on future generations, who
will have to spend money paying interest that could have been put to better
uses?
Here’s
where it becomes crucial to realize that the world has changed: Interest rates
are much lower than they were in the past, and all indications are that they’ll
stay low for years to come.
One key
indicator is the real interest rate on long-term government bonds — the
interest rate minus inflation, which is a better measure of true borrowing
costs than the headline rate. The real rate on 10-year bonds averaged around 4
percent in the 1990s; it has been generally less than 1 percent, and sometimes
negative, for the past decade.
Why are
interest rates so low? That’s a longish story, probably mainly involving
demography and technology. Basically, the private sector doesn’t seem to see
many opportunities for productive investment, and savers who have no place else
to go are willing to buy government debt even though it doesn’t pay much
interest. The important point for current discussion is that government
borrowing costs are now very low and likely to stay low for a long time.
As a
result, the burden of debt — which was always exaggerated and was misunderstood
in any case — isn’t what it used to be. One measure of how much things have
changed: On the eve of the pandemic, federal debt as a percentage of gross
domestic product was twice its level in 2000. But federal interest payments as
a percentage of G.D.P. were actually down.
The bottom
line is that government debt just isn’t a major problem these days. Which
brings us back to the politics.
Joe Biden
has promised to “build back better,” a slogan that translates into proposals to
spend big sums on infrastructure, climate policy, education and more, largely
with borrowed money. And that’s very much the right thing to do; business may
see only limited returns to investment, but we’re in desperate need of more
public investment, broadly defined (for example, including spending on
children).
Yet
Republicans will surely oppose these proposals. Indeed, if they hold the
Senate, they may well do what they did to Barack Obama, and try to force Biden
to cut spending. And they’ll justify their intransigence by railing against the
evils of debt.
So how
should we push back against this predictable attempt to stonewall the Biden
agenda? It will be tempting to emphasize Republican hypocrisy. But the biggest
problem with the debt-scare politics we all know is coming isn’t the hypocrisy
or the bad faith; it’s the fact that it’s wrong on the merits.
For given
what we’ve learned and where we are, it’s clear that the U.S. government should
be investing heavily in the nation’s future, and that it’s OK, indeed
desirable, to borrow the money we need to make those investments. That is, to
act responsibly, we must stop worrying and learn to love debt.
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