Debt: Dubious or Desirable
In Defense of Public Debt and the Public Perception of Debt
Authors Barry Eichengreen, Asmaa El-Ganainy, Rui Esteves, and Kris James Mitchener go into a history of public debt and put it in the context of modern politics, with an emphasis on American politics. It also brings to light many aspects of the debt that allows for growth and change that are often ignored in politics. The authors show this by connecting past instances of debt management with the future. The history helps strengthen the author’s argument that debt can help economic growth and recovery and that modern rhetoric over exaggerates the dangers of debt.
COVID-19 saw an increase in government spending, in debt to GDP ratio, across many nations to a degree unparalleled in peacetime. The US federal government deficit is currently thirteen percent of GDP. Debt in the hands of the public exceeds 100% of GDP. The situation is similar across Europe. This has sparked many conversations, especially in the US about the role of government spending and the right that the government must drive the country into further future debt. In, In Defense of Public Debt the authors write a response to the US government’s response to post COVID spending through the lens of public debt and how it helps the economy grow. In a strong economy like the US, the national debt is not only necessary but it should also be utilized as a regulatory tool for the growth, stability, and wellbeing of its citizens. Critics of common manipulations of national debt worry that spending habits could result in default and a myriad of problems.
The authors start the book with a few statements trying to get the reader to understand debt in a different way. Because though the authors have an assumption that the average reader of their book agrees that high government spending is important and COVID essentially proved their point for them because without the issuance of debt the crisis could have been so much worse. Businesses were able to make payroll, some people could keep homes and provide for their families. The authors also assume that the reader agrees with many policies that they consider to be public goods and social transfers such as welfare, unemployment relief, pension, health, and housing. So, it is clear that the authors lean left when compared to the opposition just when it comes to what the nation should be spending money on.
They also attempt to get the reader to understand that they should not look at debt as people often do. Personal debt is not the same as sovereign debt and it should not be viewed in the same way. The negative connotation and consequences that extreme debt can have for the individual do not apply to a country like the US. Indeed, because the US economy is so large, that is what keeps the country from going bankrupt. The US is always betting against its future because it, and the rest of the world, believes that it will keep growing, and it is worth being invested in.
In the US, the national debt is a subject of debate that is rife with misunderstanding and miscommunication. Republicans like Rand Paul are saying that the exorbitant amount of spending is making the debt too high, and the consequences are that our progeny are going to have to pay off this practically infinitely. It is a common criticism of debt that a large deficit will hang over the county’s head.
A group of economists from the National Bureau of Economic Research also state that it is not responsible to spend so frivolously. “Seemingly free deficits may, on careful inspection, be far more costly than they appear. Indeed, government intergenerational redistribution can lower the government borrowing rate, encouraging yet more inefficient deficit finance” (Brumm). Even in times of crisis like the COVID-19 pandemic they argue that we should not look at spending as a bottomless pit. Debt does not equal free money. “In all such cases, take-go policy, a.k.a, deficit finance, is not free. It redistributes across generations, across nations, or within generations. And if take-go does Pareto improve, it may reflect the second-best policy that leaves young and future generations worse off relative to enacting first-best policy — a policy that addresses the root cause of low safe rates. Moreover, uncertainty about the resolution of government debt policies can, itself, lower the government’s borrowing rate, making deficits look cheaper precisely when they are becoming economically more expensive” (Brumm). The possibility of default is not the only thing that the governments would have to fear. The borrowing rate is a concern that governments also have to abide by.
Stephanie Keaton takes the exact opposite perspective when in her book The Deficit Myth. In it, she explains her view of modern monetary theory and how, to her, it dispels the myth “One way or another it we are all on the hook.” In response, she says, “The reality is national debt poses no financial burden” (Keaton, 23). This is a view that is far more extreme than the authors of In Defense of Public Debt.
The authors still acknowledge that emergencies occur and there are some problems that only the government can respond to. “In this pandemic-induced surge of debt insurance is the most recent instance of a pattern that has recurred throughout history. Time, and time again governments have borrowed to meet wars, natural disasters, financial disasters, and economic downturns when the public-policy response requires more resources that can be mobilized using current revenues alone. But borrowers need willing lenders. Those lenders in turn demand protections in order to make a market in public debt” (211, Eichengreen…). Eichengreen and the other others claim that the extraordinary circumstances of, such as those of a global pandemic justify extraordinary action. A government that does not respond to this kind of emergency by mobilizing all available resources, including resources mobilized by issuing debt will not retain legitimacy.
The authors of In Defense of Public Debt take a more prudent approach to the topic of when the government should spend and in a temperate setting than Keaton and Brumm. It is reasonable to raise spending when necessary but not in cases of whims and frivolousness. But they argue it would be irresponsible to be unwilling to go into debt when there is a crisis. “Enduring states are those that cultivate and, when necessary, restore their capacity to use debt finance, and that have the foresight to do so in advance of when it is needed. They will need to do some restoring now” (223, Eichengreen…). When debt is correctly managed by governments it becomes a tool that should be utilized.
This becomes apparent because there are some functions only the government can perform and in order to keep their legitimacy, they have a responsibility to carry out those practices and infrastructure. “The government used the resources so mobilized to foster economic and financial development, succeed on the battlefield, and lend legitimacy to the state. Holding public debt paid also for investors with well-diversified portfolios of foreign and colonial government bonds. But there were also cases when funds were devoted to less rewarding uses, governments stopped playing and investors incurred losses.” (76, Eichengreen). After the Great Recession, and even before there was a shift in attitudes among economists. There was a growing recognition of the need for the government to provide public goods such as education, health care, basic research, transport infrastructure, and climate-change that the markets do not adequately supply. The attitudes now are reminiscent of the New Deal rather than Neoliberal ideals. The book clearly takes this New Deal opinion and so it may be difficult for someone who does not agree with that manner of public spending to be on board with the arguments in this book.
In Defense of Public Debt has a strong case for the benefits of a deficit rooted in history and backed up by COVID 19 government responses. Their case may however rely too heavily on a general willingness of the reader to let the government issue large amounts of debt for the public good. There is no doubt that debt has been integral to modern government and economic growth, but the reader may not be inclined to believe that government programs for the greater good are worth borrowing such large sums for. And that may be the greatest challenge the book faces because debt will still be a majorly contentious topic for the foreseeable future. But the book still takes logical steps to every argument it makes.
Bibliography
Brumm, Johannes and Feng, Xiangyu and Kotlikoff, Laurence J. and Kubler, Felix, “Deficit Follies” June 2021. Available at SSRN: https://ssrn.com/abstract=3875119
Cochrane, J., 2021. ‘The Deficit Myth’ Review: Years of Magical Thinking. [online] WSJ. Available at: https://www.wsj.com/articles/the-deficit-myth-review-years-of-magical-thinking-11591396579
Eichengreen, B., El-Ganainy, A., Esteves, R. and Mitchener, K., n.d. In Defense of Public Debt. Oxford University Press.
Kelton, S., 2020. The Deficit Myth. New York.
