On first read, I thought Jared Bernstein’s essay rethinking debt was a bit simplistic. There’s nothing really new there. Which, on further reflection, is exactly the point. We don’t need a new understanding of debt. We just need an understanding of debt.
Bernstein doesn’t put it quite like this, but the basic problem with Washington’s conversation over debt is we’ve taken a fiscal tool and recast it as a moral sin. Head over to Mitt Romney’s Web site and look at what it says across the top: “We have a moral responsibility not to spend more than we take in.” Really? Why? And over what time frame?
If you pressed Romney on this, I think he would say something like, “it’s irresponsible to pass a massive load of debt onto our children.” But as good as that sounds, no one really believes it. World War II left America with one of the highest debt burdens in the country’s history. But it would have been much more irresponsible to pass on a world in which the Nazis controlled Europe to our children.
The right way to think about debt is as a trade-off: Is it better to pay for something now or later? Is it better to borrow to finance a purchase or forego the purchase altogether? Faced with specific choices rather than abstract slogans, even the most stringent deficit hawk will occasionally opt to borrow. A few examples:
— America clearly needs to buy something it can’t afford to pay for immediately. World War II is one example of this. Thomas Jefferson’s decisions to sell government bonds to finance the Louisiana Purchase is another.
— The American government needs to step in and increase spending to support the economy during the crisis. Put aside your feelings about the Obama administration’s stimulus bill. Both parties proposed deficit-financed stimulus in 2008 and 2009 for exactly this reason.
— There is an opportunity to borrow at rate X in order to finance an investment that will return more than X. Right now, for instance, America can borrow at a negative real interest rate and use that money to make infrastructure investments that a) need to be made eventually and b) are likely to produce a better-than-negative return.
As those examples suggest, however, there are times when borrowing makes little sense:
— When the economy is expanding, too much government borrowing can “crowd out” businesses and households. Interest rates rise and so it becomes hard for a corporation to afford a loan to expand their factory.
— When policies are permanent, rather than temporary. An example of this is President Bush’s Medicare Prescription Drug Benefit. That wasn’t deficit-financed because we didn’t have the money to pay for it, or because we were taking advantage of a temporary difference between the cost of borrowing and the likely returns from the program. It was deficit-financed because the Bush administration and the Republicans in Congress didn’t want to pay for it.
— When the return is negative — or, to put it differently, the underlying policy is a bad idea. Most Americans now believe we should never have invaded Iraq. We paid for that war by borrowing the money to finance it.
Our approach to deficits should, in other words, be based on some consistent, underlying theory, or at least a set of obvious principles. But it’s not. And we have a worrying tendency to get moralistic about debt during recessions, which is exactly when it makes sense for the government to borrow, even as we ignore it during expansions, which is exactly when it doesn’t make sense for the government to borrow.