Ever Growing Debt! Yes, Please!

Ever-growing debt! Sounds a like tea-party sign… a warning of what faces us if we don’t soon mend our profligate ways.

I’d like to state a startling conclusion which follows from MMT: in a growing economy (an economy that continues to add more goods and services over time), the debt will need to grow to keep pace with that economic growth in order to provide enough money to purchase those goods and services. So, if you want the economy to grow more or less continuously, the debt will need to grow more or less continuously, to infinity. It should never be paid down, and attempting to do so would be at best contractionary and at worst disastrous.

How then will our proverbial grandchildren ever pay down our debt?  They won’t, hopefully. Just as our grandparents left us a federal debt, we’ll leave an even larger one to our grandchildren. But if that debt grows in a measured and proportionate way, in a growing economy, that need not concern us.

As I stated here before: you buy the debt of someone who has a future. It’s the future growth and/or earnings that you care about when you fund someone’s debt. As long as our country has a future, as long as its economy continues to grow year after year, there should be no concern on any debtor’s part or any citizen’s part about a national debt that grows without bound – as long as that growth is measured, and commensurate with the growth in goods and services.

The main policy driver should be economic growth: do whatever it takes to allow continuous growth in the production of goods and services. (Note that I haven’t said anything about making “economic equality” a driver – that’s the egalitarian goal, and one which has been shown time and again through history to be inimical to both human freedom and advances in the standard of living. An essay for another day.) The incoming Republicans, tea-partiers and otherwise, need to understand this before they take measures that may sound good on the surface, but in fact be at best counter-productive. While we need to get the rate of debt growth under control, we don’t need to reverse it.

If you want a quick explanation of why the money supply must grow to allow growth in prosperity, you could do worse than read part 1 of a six part series by the estimable Skeptical Optimist. If you want to see a nice chart showing, historically, what has happened when we’ve tried to pay down the national debt, see part 6 in that series. If you want a quick and easy explanation of fiat currency in a laboratory economy, check out Coupon Clipper’s series at ESM’s blog, here. If you want to learn how debt growth is synonymous with money growth in a fiat currency regime, you should check out the mandatory readings section at http://www.moslereconomics.com.

For those who have neither time nor patience for those other readings, here is a brief sketch of the argument I am making:

1) In a fiat currency regime, the money supply is increased by increasing the national debt
2) In order to maximize prosperity in an economy, the money supply must grow commensurately with the growth in the supply of goods and services
3) A growing economy is good for everyone, because it results in more goods and services being available, to increase our standard of living
4) Therefore, if we wish to increase our standard of living without bound we will need to increase our national debt without bound

Yes, I know it sounds weird: but that’s because as individuals, we are not in the position of a national government which issues a fiat currency. Households should not increase their debt without bound.

To check the validity of the premises in this argument, you’ll have to do additional reading.

When will the mutually beneficial curves of increased national debt and increased economic activity come to an end? Well, hopefully never, but in the real world, something will eventually occur to bring an end to the nation and/or civilization. And then we’ll have to learn all of this all over again.

Please tell your incoming congressmen to do what they can to keep the Bush tax cuts in place for all income levels – even though that will result in a temporary increase in the national debt. But please don’t encourage them to make ill-considered attempts to balance the budget, or to pay down the debt. And please don’t blame them when they eventually see the sense in what I am saying and decide to perpetuate deficits and debt – I’m thinking that although few in Congress understand MMT or macroeconomics, they have developed a feel for what happens when you enact contractionary policy. At least I hope so.


Jeffrey Miron Nails It on Prop 19

I was talking about the failure of Prop 19 at work yesterday, and (unknown to me at the time) pointed to the same employment law overreach that Miron notes here. They couldn’t be satisfied with mere legalization; no, they had to find a way to restrict employer rights as part of the deal. Idiots.

Jacob Sullum at Reason, although admitting the basic validity of this point, can’t bring himself to accept it as sufficient, and tries to defend the totality of Prop 19 anyway.

Nope… not buying it, and neither should the voters have. Try again next time, Californians, but without the overreach and violation of employers’ rights, maybe?

Krugman on Getting Mugged by Moralizers

In the NYT today, Paul Krugman, after recounting the birth of the Tea Party movement in the Rick Santelli outburst on CNBC and stating the Keynesian macro position without defense, writes:

So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.

As a student of Modern Monetary Theory, and someone with a decent respect for the implied neo-Keynesian position, I think the first recommendation is correct — although I doubt Krugman and I want to “spend” in the same way (I’d favor tax cuts, or suitcases full of money dropped in peoples’ backyards, or, if forced to go for real government programs, actual infrastructure spending, including the military infrastructure).

The second recommendation is quite problematic. Apparently, Krugman will attack those who don’t think it meets the standard of justice to ask investors to take a haircut as “moralizers.” The same “moralizers” who have always stood in the way of leftist “progress,” no doubt.

But here’s the thing: we’ve basically accepted, as a people, for decades now, that government has a role in making everyone, on average, better off, even if it means making a few worse off than they would be in a free market with a night watchman state. So, if a thorough analysis could establish that it serves “the common good” to force certain investors to forgive large portions of debt (to avoid a very ugly foreclosure wave), is that just a “sacrifice those people will have to be willing to bear?” After all, there are many scenarios in which Americans have adopted similar policies (we drafted particular men and sent them to die in two world wars to serve some abstract notion of the common good, to take but one example). It’s not like this would be breaking any really new moral ground.

What do you think?

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