STILL STUCK IN THE WRONG CONVERSATION…. As this progresses, I’m likely to be drawn into the discussion as it exists, not as it should be. In response to the House Republicans’ long-term debt reduction plan, President Obama will unveil his own vision, and I’ll have plenty of items about its relative merit, and his effectiveness in refuting the GOP’s radicalism.
But before all of that talk overwhelms the discourse, let’s make one thing perfectly clear: we’re having the wrong debate.
Matt Yglesias had a good item on this earlier, explaining “how crazy it is for this topic to be taking center stage on the Washington agenda.”
The main problem with high levels of government debt is that in order to generate demand for bonds it might be necessary to offer investors very high interest rates. And if investors can obtain high interest rates by lending to the government, they’ll demand even higher interest rates to lend to the private sector. This “crowding out” effect means that private sector investment will be lower than optimal, and enterprise that could be profitable in a lower-debt scenario are now unprofitable.
That’s bad, but it’s not happening today.
Another potential problem with high levels of government debt is that it’s possible that central bank operations to keep interest rates low could be leading to dangerous levels of inflation. But that’s not what’s happening now. Expectations of future inflation are anchored slightly below the Fed’s target level. The price level is well below the long-term trend and shows no sign of catching up. There’s no crowding out problem and there’s no inflation problem.
This should seem like common sense, but it’s generally wise to match solutions to problems. If our current economic conditions featured high interest rates, high inflation, and a noticeable “crowding out” effect, we’d be having a very different conversation. Indeed, under those circumstances, the general vision touted by conservatives would at least be worthy of conversation.
But that’s why we’re still stuck in the wrong conversation. Inflation and interest rates are already incredibly low, and we can borrow money on the cheap. We’re in the midst of a jobs crisis and need increased demand to solidify the recovery.
It’s against this backdrop that the political establishment is obsessed, not with unemployment, but with … deficit reduction? The disconnect between the establishment’s conventional wisdom and legitimate public needs is breathtaking.