Government Debt Is Not The Problem

Government Debt Is Not The Problem

Above Photo: Christian Schnettelker/Flickrd

Deficit fears are impoverishing our kids. The people complaining about budget deficits fundamentally misrepresent how the economy works and the problems it faces. A deficit is a problem when it creates too much demand, exceeding the economy’s ability to supply goods and services. In this situation, a deficit is likely to lead to higher interest rates and inflation, which reduce investment. Less investment means less productivity growth, which means we will be less wealthy in the future.

Ever since the 2007–09 recession, the problem has been the opposite: too little demand. Millions of workers have gone unemployed because there was not enough demand for their labor. In a weak economy, companies invest less.

In a period of weak demand, it is virtually costless for the government to spend in areas that will not only employ people but also increase long-term productivity and spending on infrastructure, research and development and such areas as quality preschool, which pays enormous long-term dividends.

Deficit fears prevented the government from spending the money needed to bring the economy back to full employment. That was costly in the short term because it meant millions of workers went unemployed, but it was also very costly in the long term.

According to the Congressional Budget Office (CBO), the economy’s potential output has been permanently stunted by this prolonged period of high unemployment. CBO’s most recent estimates of potential GDP are more than 10 percent lower than what was projected for 2017 before the recession. This gap of nearly $2 trillion a year (almost $6,000 per person) can be thought of as an “austerity tax.” This is the lost wages and profits each year due to slower post-recession growth.

Debt is meaningless as a measure of generational burdens, in spite of deficit hawks’ portrayal of it as such. They have never even tried to calculate the cost borne by the public due to government-granted patent monopolies. These raise the price of drugs and other protected items by several thousand percent above the free market price.

These are effectively privately collected taxes. Anyone honestly concerned about burdens imposed on the young would be hugely concerned about these monopolies, which cost close to $400 billion a year in prescription drugs alone. The complete lack of interest in patent monopolies shows the deficit hawks are not motivated by issues of generational fairness.

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