How Large a Debt Level Is "Worrisome?"

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Tuesday, 21 September 2010 04:44

Most newspapers make an effort to separate their news reporting from their editorial pages: not the Washington Post. It routinely uses its news pages to push the economic agenda favored by its editors.

Today it told readers that "the national debt is soaring to worrisome levels." It is not clear why anyone who understands economics would find current debt levels "worrisome." Since the debt is being incurred in a context where the economy has vast amounts of idle resources, current deficits pose no real burden on the economy. If the deficit were smaller, the economy would be smaller and the unemployment rate would be higher.

In contrast to the Washington Post, financial markets do not find the government debt the least bit worrisome. They are willing to buy long-term government debt at interest rates below 3.0 percent.

The debt also need pose no burden in future years. There is no reason why the Federal Reserve Board cannot simply buy and hold the bonds issued to finance the debt. In this situation, the debt accrued in these years will impose no additional future tax burden. The interest on the debt will be paid to the Fed, which will then rebate it to the Treasury.

In ordinary times, this approach would lead to inflation, however this is not a problem in the current situation. In fact, most economists agree that a somewhat higher inflation rate would be desirable at the moment. (The Fed is currently buying large amounts of government debt, although it is expected to resell these bonds at some future point.) If the Fed were to continue to hold the bonds it would eliminate most of the deficit problem discussed in this article.

This article relies on no sources who disagree with the Post's editorial position. In fact, the first "expert" cited is Robert Bixby, the executive director of the Peter Peterson funded Concord Coalition.