It's OK to Add to Debt to Grow Jobs

By Josh Bivens 
June 13, 2012
http://www.epi.org/publication/add-debt-grow-jobs/

This piece originally appeared on CNN.com

Casual observers of budget politics (that is, most
voters) may know that the experts in such things are
very concerned about rising public debt. They have also
probably heard much talk about the "fiscal cliff" the
nation is headed for in 2013.

What they might not know is the real danger is that
public debt will stop rising quickly. That cutting
spending and raising taxes to slow the growth of debt
will cause spending to fall across the economy and bring
about a new recession.

Conventional wisdom says simply that we need fiscal
stimulus now, and long-term debt reduction later.

It sounds reasonable enough, and I may have even
believed it myself a couple of years ago. But it turns
out to be wrong.

The two imperatives of immediate stimulus and long-run
debt reduction are deeply asymmetric. Every day we don't
act to bring down the unemployment rate quickly is
another day of human misery and pure economic waste.
Since the Great Recession began, the nation has foregone
more than $3 trillion in potential income because of
idled resources (people and factories). In 2011 this
"output gap" exceeded $800 billion again, and the first
quarter of 2012 saw us move nowhere toward closing it.

But the surest way to lower unemployment quickly is to
add to public debt to finance job-creating measures like
aid to distressed households and states and
infrastructure investment. And so long as the economy is
operating below potential, the additional debt does no
harm to the economy.

This is textbook macroeconomics. The danger that budget
deficits theoretically pose to economies is that in
order to borrow, government must find lenders, which
means competing for the scarce savings of households and
businesses with private firms looking to borrow money to
invest in plants and equipment. This competition can bid
up the price of borrowing (interest rates) and private
firms will hence forgo some of these productive
investments.

So why doesn't this story apply to the United States
today? Because there is no discernible upward pressure
on interest rates. And that's not a fluke-remember that
it was the scarcity of savings relative to desired
investment that drove interest rates up in this
scenario. But, savings today aren't scarce-households
continue to save and pay off debt (that "de-leveraging"
that you may have heard about) and businesses have
accumulated record amounts of unspent liquid assets.
This glut of savings relative to desired investment has
put relentless downward pressure on interest rates.

So, if today's deficits are doing no damage (and in fact
are supporting job creation), why the frequent
insistence that further stimulus is allowed only if it
is matched by long-run deficit reduction?

I don't know.

What makes it especially puzzling is that the current
law of the land is completely sustainable from a fiscal
perspective-the long-term budget outlook released by the
Congressional Budget Office this week shows falling debt
to GDP ratios for most of the next 75 years.

Fiscal hawks will cry "foul" on this. I'm referring to
the "current law" baseline. But, everybody knows that
this current law will not be followed-most of the Bush
tax cuts, for example, set to expire at the end of 2012
will surely not. These hawks point instead to the
"alternative fiscal scenario" baseline, which shows the
scary-looking long-run debt trends that people are
familiar with.

But step back a second-the hawks insist that we
legislate changes to make the long-run debt path look
less scary. But we've done that-that's the "current law"
baseline. Yet this doesn't count as "doing something"
about long-run deficits because nobody believes this law
will be adhered to.

Fair enough-I don't believe it either. But just what is
the budget law that we will pass this year that will
convince everybody it will hold 75 years from now (the
projection period of the long-term budget outlook)?
After all, doesn't the entire long-run budget problem
today stem from people thinking that current policies
instead of current law will continue; that is, isn't the
whole problem that people think Congress can't help but
change the law in ways counter to long-run budget
balance?

Surely we can't hold stimulus hostage to the requirement
that Congress promises to stop ever again acting like,
well, Congress?

We've lived with high unemployment long enough that it
may not seem like a crisis, but today's unemployment
rate of 8.2 percent is just that. It may be a marked
improvement from the recession's 10 percent peak, but it
remains higher than at any point in the quarter-century
before the Great Recession. Growth forecast over the
next couple of years will not be sufficient to move it
down quickly.

Maybe a dumb analogy will help: Your house has drafty
windows and doors that may cost you money in higher
utility bills, but it's also on fire. Somehow, though,
you decide to douse the flames only after a contractor
is lined up do some caulking. Does this make any sense
at all?

___________________________________________

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