A decade ago, the theories and actions of America's financial elite boiled over into the Great Recession, the fallout of which is still with us. Now we are hearing a new, ultra-assured drumbeat from the same circles — spend, spend, spend, because public debt doesn’t matter.
What’s happening: According to the new gospel, big countries like the U.S. that print their own money appear able to run up debt without economic consequence. In op-eds, papers and speeches, some of the best-known economic minds seem to have given the green light to splurge with abandon on normally guilty items like unfunded tax cuts and big social programs.
Be smart: Contrary to articles in the WSJ, the NYT and Foreign Affairs, the new orthodoxy of public debt is much more caveated than many are suggesting — no serious economist I know of has given blanket permission to let loose on top of the current $22 trillion in U.S. debt.
- And many of its high priests appear to have ulterior motives. “Both sides want to feel free to spend heavily on their priorities and their base when in power,” Kenneth Rogoff, a Harvard economist and co-author of “This Time is Different,” tells Axios.
The big picture: The birth story of the new zeitgeist is innocent enough. Back in the 1930s, John Maynard Keynes proposed deficit spending in times of want in order to induce consumer demand, reignite production and get people back to work. For similar unassailable policy reasons, the U.S. ran up a historically high debt in World War II, equaling 106% of GDP.
- All along, though, the flip side has been that, in times of plenty, you pay down the debt in order to avert a spike in inflation and interest rates and to avoid crowding out economically more productive private investment.
- This is what the new orthodoxy is challenging: The economic record shows that — especially for the U.S., as the holder of the default global currency for loans, investments, commodities and more — debt creates little or no inflation, interest rate or investment penalty, debt proponents say.
Who are the debt proponents?
In a Jan. 4 speech, Olivier Blanchard, a former chief economist for the IMF, gave new cover for high deficit spending in a low-interest rate environment. And in his annual shareholder letter, Warren Buffett said, “Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold” over the last 77 years.
- But proponents have quoted selectively: Blanchard said that the motive behind his remarks was “to show that high public debt is bad, but may not be catastrophic.”
- In his letter, too, Buffett voiced no support for limitless deficit spending and debt. He merely argued against panicking when it happens, and for continuing to invest. If he had panicked over the years, he wrote, he would be worth almost nothing today.
Debt proponents have paid less attention to a Jan. 28 speech by Keith Hall, director of the Congressional Budget Office. Hall forecast that the debt will grow to 93% of GDP by 2029, and 150% by 2049, the largest in U.S. history. That’s up from 78% of GDP at the end of last year and 34% before the financial crash.
“Debt is on an unsustainable course,” Hall said.