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This is a special edition of Future: A consequential debate has erupted over how to fund the enormous investment needed in crumbling U.S. infrastructure and upgrading cities and public technology. The new zeitgeist is that debt doesn't matter. We investigated whether that is correct.
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Illustration: Aïda Amer/Axios
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.
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.
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.
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.
Checking the inventory of marks in the Weimar devaluation, 1923. Photo: Albert Harlingue/Getty
In the great debt debate, the main assertion of those advocating free spending is that there is no evidence of economic harm from high debt — and that there possibly may never have been.
On this point, they are mistaken:
“It’s true that the U.S. has never had a fiscal crisis. On the other hand, the U.S. has never had debt where it’s headed, except right after WWII, and there was a plan in place for bringing it down quickly,” said Marc Goldwein, senior vice president of the Committee for a Responsible Federal Budget.
The debate has been miscast:
The bottom line: “The general idea is you want deficit spending not only as fiscal policy to compensate for a slump, but to change the direction of the economy,” says Jonathan Levy, a professor at the University of Chicago.
Young baby boomers, 1953, when the national debt was $6 billion. Photo: Kirn Vintage/Corbis/Getty
As we have discussed previously, a future danger is a conflict between generations over a constrained budgetary pie.
What's happening: A key gripe with the rise of deficits and debt is that they “crowd out” spending for other priorities.
Already, the tension is there: In a poll we conducted last April, millennials blamed baby boomers for their financial plight. It's clear why they would. “In most cases, ordinary people suffer while rich people, who typically made the decisions that enlarge the debt, do not,” says Peter Temin, a prominent economic historian at MIT.
The bottom line: Simon Johnson, a former IMF chief economist and a professor at MIT, said the Trump tax cuts run contrary to how fiscal deficits should be deployed. “It is hard to avoid thinking that the administration’s strategy will ultimately prove self-destructive (for the country). To run this kind of deficit when the economy is doing well (i.e., in this part of the business cycle) is irresponsible and creates real risks for the future.”
Illustration: Lazaro Gamio/Axios
California throws down the pay-for-data gauntlet (Rana Foroohar — FT)
The global crisis of men (Jim VandeHei, Kim Hart — Axios)
The new economics revolution (Suresh Naidu, Dani Rodrik, Gabriel Zucman — Boston Review) (h/t Azeem Azhar)
Labor shortage: FBI special agent (Aruna Viswanatha, Byron Tau — WSJ)
The quest for a new model of physics (Natalie Wolchover — New Yorker)
From the 1940s. Photo: Found Image Holdings/Corbis/Getty
With the national debt climbing higher and higher, one man named Ian Hammond proposes a creative fix: Sell Montana to Canada. The price? Just $1 trillion.
Erica writes: His pitch — “We have too much debt and Montana is useless. Just tell them it has beavers or something.”
Hammond’s petition to offer up the Treasure State to Canada, launched two weeks ago, is starting to get traction, with more than 16,000 signatures and counting.