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Wednesday, February 29, 2012

DeLong: A Larger National Debt Would be a National Blessing.

Brad DeLong:

The Usual Suspect, by J. Bradford DeLong, Commentary, Project Syndicate: Across the Euro-Atlantic world, recovery from the recession of 2008-2009 remains sluggish and halting, turning what was readily curable cyclical unemployment into structural unemployment. And ... a brief hiccup in the process of capital accumulation has turned into a prolonged investment shortfall, which means a lower capital stock and a lower level of real GDP ... possibly for decades.
One legacy of Western Europe’s experience in the 1980’s is a rule of thumb: each year that lower labor-force attachment and reduced capital stock ... depresses production $100 billion below normal implies that productive potential ... in future years will be $10 billion below what would otherwise have been forecast.
The fiscal implications of this are striking. Suppose that the United States or the Western European core economies boost their government purchases for next year by $100 billion. Suppose further that their central banks ... are ... unwilling to stymie elected governments’ policies by offsetting their efforts... In that case,... we can expect roughly $150 billion of extra GDP. That boost, in turn, generates $50 billion of extra tax revenue, implying a net addition to the national debt of only $50 billion. ...
Now this is, to say the least, a highly unusual situation. Normally, the multipliers ... are much less than 1.5... But the situation today is not usual at all. Today the global economy is, as Ricardo Cabellero ... stresses, still desperately short of safe assets. Investors worldwide are willing to pay extraordinarily high prices for, and accept extraordinarily low interest rates on, core-economy debt, for they value as an extraordinary benefit having a safe asset that they can use as collateral.
Right now, investors’ preference for safety makes financing additional government debt abnormally cheap... Given the need to mobilize idle resources in the short run in order to maintain productive potential in the long run, a larger national debt would be, as Alexander Hamilton, the first US treasury secretary, put it, a national blessing.

No disagreement here.

    Posted by on Wednesday, February 29, 2012 at 11:00 AM in Budget Deficit, Economics, Fiscal Policy | Permalink  Comments (59)


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