Why Public Debt Is Not Like Credit Card Debt<\/a> by Robert Kuttner in Reuters.<\/p>\nThe Text:<\/strong> One big part of the well-financed campaign for economic austerity is the contention that the public debt is like a national credit card. If we keep charging on it, the argument goes, we\u2019ll get overwhelmed with interest costs, suffer a reduced standard of living and, pretty soon, go bankrupt.<\/p>\nAs David Walker, a prominent budget hawk and the former head of the billion-dollar Peter G. Peterson Foundation, has contended, \u201cBoth Republicans and Democrats in Washington have charged everything to the nation\u2019s credit card, including tax cuts and spending increases, without paying for them.\u201d<\/p>\n
The Peterson Foundation is the leading sponsor of this brand of bogus economics. It is a spurious metaphor on so many levels that it\u2019s hard to know where to begin.<\/p>\n
<\/p>\n
Most important, this credit-card metaphor is a totally false analogy because, unlike a consumer on a spending spree who later has to pay the piper, government\u2019s borrowing strategy directly affects economic growth. When deficit spending helps increase growth, that, in turn, makes the debt less burdensome. The Federal Reserve also has the power to buy public debt ? a prerogative not available to consumers.<\/p>\n
The U.S. economy has vast productive potential that remains idle in a deep recession. When everyone who wants a job has one, and people use their purchasing power to buy goods and services, the economy is maximizing that potential.<\/p>\n
When the economy is in a prolonged slump, however, there are literally trillions of dollars\u2019 worth of idle people, factories, buildings and purveyors of services.<\/p>\n
The worst slumps typically occur after a financial collapse \u2013 true for both 1929 and 2008 \u2013 because so much asset value is wiped out. The whole economy goes into a self-reinforcing tailspin.<\/p>\n
Employers are then too risk-averse to hire enough workers, consumers are too traumatized to buy everything the economy is capable of producing, banks are awash in money but won\u2019t lend to any but the most blue-chip borrowers. The whole economy remains stuck in second gear.<\/p>\n
That\u2019s where government borrowing comes in. Unlike private credit-card debt, public borrowing can improve a depressed economy\u2019s performance.<\/p>\n
When government borrows, it invests in projects that cycle right back into the private economy. These are usually things the economy needs, anyway, that make it more productive or are necessary services curtailed by the recession, like schools and road repair. Superstorm Sandy, for example, made clear the need for massive public outlays to protect our coasts.<\/p>\n
But doesn\u2019t increased borrowing add to the government\u2019s long-term load? Not in a severely depressed economy.<\/p>\n
Today, the debt keeps going up because the economy is underperforming. Get unemployment rates down and growth back up, and more consumers and business pay more taxes. The ratio of the public debt to overall economic output (gross domestic product) starts coming down in a healthier economy.<\/p>\n
In World War Two the government borrowed massive sums to win the war. By the end of the war the debt ratio was about 120 percent of gross domestic product, compared with 72 percent today. But the war turned out to be the greatest unintended economic stimulus of all time: GDP increased by about 50 percent during the war.<\/p>\n
After the war, far from sandbagging the recovery, all that debt-financed prosperity propelled the postwar boom. The Fed kept interest rates low, so government could afford the interest payments. The economy grew so much faster than the debt that by 1978 the debt ratio was down to about 27 percent.<\/p>\n
But what about interest costs today? Doesn\u2019t the public debt frighten money markets and cause interest rates to rise?<\/p>\n
Not in a depressed economy. The private sector now sees so few profitable places to invest that the government can sell its bonds at record-low rates. Investors are willing to lend Washington money for 10 years at less than 2 percent, and for 30 years at less than 3 percent. If investors were worried about the debt driving rates, they would demand higher returns now.<\/p>\n
So the analogy between the government and the family fails on all levels. If our government listens to the austerity-mongers, it will tighten the national belt and make a bad situation worse.<\/p>\n
The idea that the debt inflicts a burden on our grandchildren and depresses their standard of living has it backward. What is destroying the prospects of future generations is our failure to generate a recovery with decent jobs.<\/p>\n
The clouded future of our children and grandchildren is compounded by our failure to alleviate private debts, which are the fruit of bad government policy. By failing to adequately finance public universities, we\u2019ve compelled non-wealthy kids who want college educations to take on $1 trillion of student debt.<\/p>\n
That\u2019s a real hit to living standards. Recent graduates, unlike government, do have to worry about maxing out their credit cards. So public borrowing (and taxing) to alleviate that burdensome private borrowing would be smart policy.<\/p>\n
The next time you hear someone compare the public debt to your credit cards, keep your hand on your wallet.<\/p>\n","protected":false},"excerpt":{"rendered":"
The Article: Why Public Debt Is Not Like Credit Card Debt by Robert Kuttner in Reuters. The Text: One big part of the well-financed campaign for economic austerity is the contention that the public debt is like a national credit card. If we keep charging on it, the argument goes, we\u2019ll get overwhelmed with interest […]<\/p>\n","protected":false},"author":49,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[259],"tags":[],"yoast_head":"\n
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