Rethinking America’s Big Debt Problem

Why the recession, not the fiscal deficit, should scare us right now

Steve Breen

America’s Big Debt Problem

Although there is a general agreement in Congress about the need for a new stimulus deal, fears about the national debt have risen to the forefront. According to Senate Majority Leader Mitch McConnell,

The Deficit Myths

To help sort through the roots of our concerns about debt, it would be helpful to revisit a few myths about the government deficit that — despite its popularity — actually do more harm than good.

Myth #1: The government should budget like households

The old-fashioned view that governments — like people — must tighten our budget during tough times is misleading for a number of reasons. First, this view neglects the multiplier effect of government spending, which states that spending helps to boost income and growth by kicking off a chain of reaction throughout the economy.

National Bureau of Economic Research

Myth #2: High debt is unsustainable in the future

Perhaps an even more popular myth is that that the deficit will become unsustainable in the long run, a result of rising interest rates that lead to a higher debt burden. According to Rand Paul:

So Is Debt A Good Thing?

The answer is no, but it isn’t necessarily bad either. This is not to say that Congress should have unlimited spending power, but the decision on how much to spend should be guided by economic realities rather than premature worries about the national debt. Sadly, deficit hawks seem to have missed — or downright ignored — this conclusion.

Solution #1: Invest Effectively

Rather than shooting down any spending programs on the basis of its fiscal costs, a program should be evaluated on its ability to benefit the economy. Similar to how corporations make investment decisions, if a project can be funded cheaply and generate high returns, then we should go ahead and borrow.

  • State/Local Government Funding
  • Unemployment

Solution #2: Embrace the business cycle

Fears about the deficit always peak at precisely the wrong time: when the economy is weak and the fiscal cost of debt is lowest. This is understandable, since high unemployment and lower tax revenues will automatically shrink the budget, even without the added costs of a stimulus deal.

Writing on economic, equality, and foreign policy. Tweet me @VyNngn

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