Paul Krugman says we should learn to love debt. Is he right?
Mostly, but not completely, as follows:
- He is correct that at the current microscopic interest rates, there is little danger in incurring more debt. Virtually any government expenditure that isn’t laughably stupid will pay for itself under those conditions.
- Furthermore, investments in green technology should be financed through borrowing, as most of the benefits will inure to future generations, and costs will be incurred whether we make the investments or not.
- Finally, there are plenty of reasons, both here and elsewhere, to expect that interest rates will remain low in the future.
But what if conditions change? Increases in rates would be a disaster. They would sink both the stock and the bond market and would make financing the deficit much more expensive. A period of savage austerity would follow. It’s a contingency which needs to be considered.
Interest rates are a function of a variety of factors, including the overall health of the economy, the level of savings on both a national and international level, and confidence in the government’s ability and willingness to pay its creditors. The last is a particular concern. Just to cite one example, it isn’t hard to imagine Mitch and his cronies engineering another debt ceiling crisis during the next four years to crash the economy and reap the presumed electoral benefits. The ripple effects of that kind of government failure would last for years.