David_N
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This is in response to a recent time magazine piece about the national debt which attempts to scare readers.
Why America's gigantic national debt is a good thing
Thoughts?
Why America's gigantic national debt is a good thing
Let's start where Grant does, with the idea that the federal budget is like a family's budget. As Grant awkwardly half admits later, this is totally wrong. Individuals, families, and businesses are all cash-constrained. To get money, they have to go out and do something: get a job, sell goods and services, or borrow. That's not true of the federal government, since the Constitution invests it with the unique power to create money. We've divided that power up between the Federal Reserve and the Treasury Department, and we usually speak of the former as "controlling the money supply." But as Grant says, the Fed is ultimately a creation of Congress.
So any government with a fiat currency system, which is what America and most advanced Western nations have now, can always just create money to pay off creditors in a pinch. That's why interest rates on U.S. debt are so low — a sign of investors' trust. It's why we've happily run a debt for almost two centuries, and why Japan's interest rates remain quite low despite a debt load far larger than ours.
It's true, as Grant says, that printing money is not wealth creation. But it can enable wealth creation. The government can hire people to build roads and bridges, to clean up public spaces and parks; to provide education and health care. All that is real economic production made possible by the government's power to borrow and create money. Similarly, while simply giving money to the poor doesn't create wealth, it does give them the initial resources they may need to re-enter the economy — and thus begin creating wealth again.
Grant mocks the idea of stimulus, saying we doubled the size of the federal debt after the Great Recession and got only a sluggish recovery for our efforts. But plenty of economists looked at the economic hole left by the 2008 financial crisis, and concluded the stimulus policies on the table weren't nearly big enough to fill it. The size of the hole is all that matters. Whatever level of deficit spending is required to fill it is the right level of deficit spending. In fact, as the government has moved away from the things Grant pines for — like balanced budgets and "sound money" — the economy has become less volatile, and periods of mass unemployment far more rare.
Historically, though, hyperinflations have been really hard to pull off, precisely because the government has to go to such an extreme. Most have been associated with war or some other similar calamity. Even our massive debt and deficit buildups in WWII only briefly rocketed inflation to 10 percent before quickly falling back to earth.
Moreover, inflation is not a universal evil. Moderate inflation, in the range of 3 to 4 percent, is one sign of a healthy economy. It means employment is plentiful, labor markets are tight, and wages are increasing — which is what puts upward pressure on prices. What's remarkable is not that the Fed is trying to increase inflation, as Grant complains. It's that inflation is rock bottom and the Fed can't seem to make it go higher.
Thoughts?