Debt-Derangement Syndrome: No Longer Fresh at Project Syndicate—Long Version
Debt-Derangement Syndrome: Standard policy economics dictates that the public sector needs to fill the gap in aggregate demand when the private sector is not spending enough. After a decade of denial, the Global North may finally be returning to economic basics.
For the past decade the public sphere of the Global North has been in a fit of high madness with respect to its excessive fear of government debts and deficits. But this affliction may be breaking. In the past two weeks I have noted two straws in the wind.
Earlier this month I read in the London Times a Brexit-related column from the eminent and highly knowledgeable Ken Rogoff—perhaps best known to many for his declarations early in this decade that governments simply should not let their debt-to-annual-GDP ratios rise above 90%—musing that it had "never been remotely obvious to [him] why the UK should be worrying about reducing its debt–GDP burden, given modest growth, high inequality and the... decline in... interest rates..."
Late last month Brandon Greeley of the Financial Times wrote about what he called a "panicked email" he had received from the Committee for a Responsible Federal Budget—perhaps best known to many for giving a fiscal responsibility award to now-ex House Speaker Paul Ryan, the then-chair of the US House of Representatives Budget Committee. In its email, the CRFB warned against—warning against “mischaracterizations” of my old teacher Olivier Blanchard's American Economic Association Presidential Address on debts and deficits, in which Blanchard argued that public debt is not an ever-present menace but rather a tool governments should use when it makes sense for them to do so, and that the interest rate at which the government can borrow is the sensible yardstick to use to assess the costs of using that tool.
What Rogoff and Blanchard are saying—and what the CRFB is asking people to close their ears against—today is standard policy economics. In fact, I always found and still find it hard to believe anybody can take exception to it. Whenever the private sector sits down—stops spending enough to keep unemployment low and jobs easy to find—then it is time for the public sector to stand up and fill in the gap in aggregate demand.
The standard way of doing this is to have the central bank buy bonds for cash, inducing those who would then have extra cash to boost their spending. But when and if interest rates would approach rock bottom, the private sector’s desire to spend rather than hold extra cash would ebb. Then it would be appropriate for monetary stimulus to be aided by fiscal stimulus: the government directly buying stuff.
What about fears that the debt would rise "too high" and make issuing more government debt to finance more government purchases a bad deal, even with its employment-boosting effects? The deal would be bad only were the interest rate at which the government would have to borrow was high–as it had been at the start of the 1990s—and the deal would be risky only to the extent that the interest rate at which the government would have to roll over its debt might become high. Thus the bond market would signal when the deficit needed to be cut and the debt-to-GDP ratio placed on a downward trajectory.
The principle that the cost of debt is measured by the interest rate charged would seem simple. It would seem obvious. And yet for the past decade—until now—it has been a fringe belief in the public sphere of the Global North: called "ulta-Keynesian" by the polite among the great and good of the public sphere.
I date the full flowering of this affliction to January 27, 2010. That evening, in his State of the Union Address, then-American President Barack Obama claimed that it was time for the government to tighten its belt, that he was going to freeze government spending, and that he was going veto bills passed by the then majority-Democratic Congress that overstepped his red line. He did this in his State of the Union message. At the time, my first reaction was that issuing a veto threat against his two chief lieutenants Nancy Pelosi and Harry Reid was a unique way of building intra-party comity, and not a way I had heard of before of maintaining a functioning governing coalition.
Obama economic policy staffers say, rightly, that Obama was the most-rational and best-behaved of the ruling politicians of the Global North in the early half of this decade. They are correct. But it is a powerful marker of the times that Obama's communications and political staff—and Obama—thought the principle that, as John Maynard Keynes put it in 1937, "the boom, not the slump, is the right time for austerity at the Treasury" should be rhetorically denied when the unemployment rate was still 9.7%.
Now Barack Obama and his political staff had been briefed by some of the finest policy economists in the world. They had been told over and over again that ""the boom, not the slump, is the right time for austerity at the Treasury". None of the Obama economic policy staffers I talked to in the ensuing week, or since, have ever admitted endorsing this line in the 2010 State of the Union. Some say they opposed it. Some say they let it pass because they needed to keep their powder dry But no one thought its inclusion worth threatening to resign over—they either thought it was not a big deal, or that their resignation would be viewed not as a loss but as a benefit by the collective mind of the White House and so greeted with a sigh of relief, and reality-based policymaking would move out of the administration's gasp.
Blame for this line was typically placed on the administration’s Cossacks: “that was f———ing Rahm [Emmanuel]...” But always remember: the Cossacks work for the Czar, for if the Czar did not approve of what his Cossacks were doing he would find new ones. And these briefings by some of the best policy economists in the world had remarkably little influence on the thinking of the non-economists in the Obama administration and no discernible influence on the thinking of the Obama White House political and communication staff.
It is still not clear to me why the Global North public sphere fell into this fit of denial of the basic economic principles that the interest rate is a yardstick to the cost of debt and deficits and that austerity is inappropriate when unemployment is high. But I hvae hopes that economists in the future will remember this sorry history of the past decade, and so keep the future from being doomed to repeat it.
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