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Friday, April 22, 2016

Paul Krugman: In Hamilton’s Debt

 "Alexander Hamilton knew better":

In Hamilton’s Debt, by Paul Krugman, NY Times: The Treasury Department picked an interesting moment to announce a revision in its plans to change the faces on America’s money. Plans to boot Alexander Hamilton off the $10 bill in favor of a woman have been shelved. Instead, Harriet Tubman ... will move onto the face of the $20 bill. ...
But let me leave the $20 bill alone and talk about how glad I am to see Hamilton retain his well-deserved honor. ... Hamilton proposed that the federal government assume and honor all of the debts individual states had run up during the Revolutionary War, imposing new tariffs on imported goods to raise the needed revenue. ...
But why did Hamilton want to take on those state debts? Partly to establish a national reputation as a reliable borrower, so that funds could be raised cheaply in the future. Partly, also, to give wealthy, influential investors a stake in the new federal government, thereby creating a powerful pro-federal constituency.
Beyond that, however, Hamilton argued that the existence of a significant, indeed fairly large national debt would be good for business. Why? Because ... bonds issued by the U.S. government would provide a safe, easily traded asset that the private sector could use as a store of value, as collateral for deals, and in general as a lubricant for business activity. As a result, the debt would become a “national blessing,” making the economy more productive.
This argument anticipates ... one of the hottest ideas in modern macroeconomics: the notion that we are suffering from a global “safe asset shortage.”...
As a result, investors have been bidding up the prices of government debt, leading to incredibly low interest rates. But it would be better for almost everyone, the story goes, if governments were to issue more debt, investing the proceeds in much-needed infrastructure even while providing the private sector with the collateral it needs to function. ...
Unfortunately, policy makers won’t do the right thing, largely because they keep listening to fiscal scolds — people who insist that public debt is a terrible thing even when borrowing costs almost nothing. ... Alexander Hamilton knew better.
Unfortunately, Hamilton isn’t around to help counter foolish debt phobia. But maybe reminding policy makers of his wisdom is one way to chip away at the wall of folly that still constrains policy. And having his face out there every time someone pulls out a ten can’t hurt, either.

    Posted by on Friday, April 22, 2016 at 06:47 AM in Economics | Permalink  Comments (44)


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