Two cheers for government debt

17 November 2011

If the Occupy Wall Street movement has done nothing else, it has pushed the mainstream media to actually talk about income inequality. Of course, now that the encampments have been rousted in New York, Oakland, and elsewhere, the punditocracy is free to return to its previous obsession, Teh Deficit. Better still, the Congressional deficit-busting “supercommittee” is approaching its deadline, with no deal in sight, so we can expect to see lots of hand-wringing about Congress’s bipartisan failure to reduce Teh Deficit.¹

Allow me, then to speak up for Teh Deficit.

Most of the rhetoric on this subject employs the metaphor of a household budget: just as your family must trim its spending to match its income, so too, a prudent government should keep its expenditures in line with its receipts. The problem with this metaphor can be summarized in three words: Countries are immortal.

Adults of working age can expect, at some point in their lives, to drop dead. Worse, before we drop dead, we expect to spend some years in retirement, either from choice or from medical necessity. In other words, at some point in the future, we will be spending more than we earn. Therefore, as long as we are hale and hearty, we should earn more than we spend.

None of this applies to countries. The last time the US Federal government was debt-free was in 1835. In other words, some component of the national debt has been rolled over, from one bond to another, for the past 175 years. Sovereigns that owe money to foreign investors can dismember themselves (passing on their obligations to their successor states), swallow one another up, or choose to default, but they don’t die of old age.

Instead, the fortunes of modern governments are tied to the boom-and-bust cycles of capitalism. When times are good, the country is flush with taxable income and profits, investors are eager to support new or expanding business, and fewer people depend on government aid. During recessions, the reverse is true. For reasons like this, Keynes argued that when economic conditions are poor, deficit spending is not a moral failure or a concession to political pandering, but a positive good. The budget-balancing² can come during the boom times.

Unfortunately, for the last decade, the US has been doing the reverse. We had an economic boom in which budget surpluses were actually in sight, and then instead of milking the boom to balance the budget, we got tax cuts. When the worst recession in 80 years struck, the elite obsession with budget-balancing, and the attitude that we deserve to suffer for the excesses of the past, has inhibited efforts (both in the US and Europe) to provide meaningful economic stimulus. Indeed, in the US, “stimulus” has practically become a dirty word.

To its credit, the President’s economic growth proposal recognizes Keynesian priorities by front-loading the tax cuts and benefits that reduce unemployment, and scheduling tax increases for later, by which point (we hope) the economy will be stronger. But as a political strategy, the Democrats concede too much to their opponents, because they do not push back against the attitude that Teh Deficit, always and everywhere, must be a Bad Thing.

¹ Alternatively, we may see hand-wringing about the defense cuts that will be triggered in 2012 in the absence of a deal, either because the defense budget is composed of magic pixie dollars that can be borrowed without affecting Teh Deficit, or because Keynesian economics only applies to defense spending, or because spending three times as much on defense as China and Russia combined is a national priority that is even more urgent than Teh Deficit.

² One could argue that a government run on Keynesian lines should be running surpluses during economic expansions, so that over the long run, the average deficit is zero. I personally think that would be a good idea, but I do not recall seeing this explicitly stated in Keynes’s General Theory.

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