Commentary: Easy debt and undisciplined spending

The Kansas City StarFebruary 4, 2013 

I get it: The national debt of the United States is different from the debt used by the likes of you and me.

Unlike households, businesses, cities and states, the feds can count on a rising stream of tax revenues for interest and principal payments.

The government also guarantees the national debt. So far that’s been ironclad.

And we can — if we have to — print money to pay back our lenders.

As such, our currency has become more vital than any other country’s money. To investors worldwide who need the liquidity of a strong, universal currency, the U.S. is the safest country to lend to and store money.

The U.S. can refinance its debt by just borrowing what’s needed from lenders only too willing to give us their money and not charge too high an interest rate. It’s an eternal line of credit.

I also get that should shape how we think about the debt ceiling.

Not raising it — defaulting and thus ending the debt guarantee — would destroy the special nature of U.S. debt. It would damage the economy and raise borrowing costs for the government and the rest of us.

That’s why the ceiling is always raised, no matter which political party is in power.

Our ever-increasing debt, however, still demands justification. And that burden falls on debt defenders, led intellectually by liberal and left-leaning economists.

To them, the debt is not a moral failing or something to be feared. It just needs to be managed and kept from growing too fast. Combined with the ability to print money, it’s a monetary tool.

Being able to borrow a lot, they point out, allows us to invest more in whatever will make the U.S. better and boost the economy — infrastructure, education, research, agriculture, or social programs.

In depressions and recessions, debt defenders have argued since Keynes, we should pile on even more debt to stimulate the economy and help the jobless. More and more economists even urge that we should print money and use it to outright give jobs to the out of work.

They also point out that we can print money to lower the value of the dollar slightly — making our products cheaper to sell overseas. This would also make other countries’ products more expensive here, but on balance the export boost would help our economy.

For debt defenders, the recession justified a surge in the national debt — up $5 trillion from 2009 to 2012 — as well as the Fed’s printing of money through quantitative easing — now at $2.7 trillion and counting.

They’re only mildly worried about the amount of the debt. At $16.4 trillion, the public debt-to-GDP ratio is 72 percent. Mainstream economists say a country can borrow 100 percent of GDP without disruption. After World War II, the U.S. public debt-to-GDP ratio reached 113 percent.

(Ironically for those on the left, the U.S. debt capacity is built on the prosperity of a capitalist, free market economy.)

Debt defenders are also not much worried about inflation — the cruelest tax — which can be caused by too much money floating around and people bidding up the price of goods and business bidding up labor.

As long as we’re in a slack economy, they say, inflation will remain nowhere in sight.

So for debt defenders, the time to ease back the current debt-to-GDP ratio is later. Controlling spending a little, raising taxes a little and getting back to stronger economic growth could make the ratio tolerable relatively quickly.

I get all that.

Still I think debt defenders are downplaying or overlooking potential problems.

Columnist David Wessel of The Wall Street Journal last week wondered whether our economy is like the 1970s, when easy money policies did ignite an inflationary spiral that led to a recession and steep interest rates.

And remember, easy money policies did spark the tech stock and housing bubbles.

Where is the next asset bubble, and will Fed Chairman Ben Bernanke have the courage to jerk the reins on the money supply when he has to?

Also, printing money to cheapen the dollar against other currencies and boost exports will spur other countries to do the same, and at the worst risk the outbreak of trade wars.

For the U.S., this “beggar thy neighbor” strategy amounts to economic imperialism.

We also shouldn’t just print money to inflate away the debt. Given the role of the U.S. currency in the world economy, we should play fair.

Manipulating the dollar is a banana republic move.

Finally, here’s my real issue with debt, putting me on the edge of the deficit hawk camp.

Too much debt — we’re now using debt to fund a third of the federal budget — leads to an indiscipline in our affairs.

Former FDIC chief Sheila Bair wrote last spring in Fortune:

“The biggest beneficiaries of loose money are our profligate elected officials who refuse to come to grips with budget deficits and an exemption-laden tax code. As long as Treasury can borrow cheaply to paper over the real problems, politicians can demagogue about overspending (GOP) or undertaxing (Democrats) while dodging their responsibility to work together to fix our problems.”

Debt makes it easier for politicians to approve programs willy-nilly in response to the issues of the day and without regard to their effectiveness.

Is government inefficient? Are the rich and powerful getting too many tax breaks? Do we really need the latest military gadget?

Don’t want to ask people for more tax revenue?

Don’t worry, we can just borrow the money.

On the flip side of that coin, people demand services, benefits and entitlements knowing full well they won’t have to cough up higher taxes for them.

A lot of debt defenders view this indiscipline as benign — the trade-offs made in a democracy and in a prosperous country with the borrowing power and currency the U.S. has.

But it also has a deadly manifestation, one for debt defenders to take more seriously. Our last two wars were funded by debt. Just as it’s easier to expand government domestically using debt, it’s easier to take the country to war.

I get that, too.

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