View this post on the web at [link removed]

Treasury Bond Vault, from Wikimedia Commons
In a recent New York Times editorial [ [link removed] ], Jared Bernstein, a former chair of President Biden’s Council of Economic Advisers and a long-time self-declared fiscal dove advocating for higher deficits, joined many, including myself, in expressing concern about the nation’s large and rapidly increasing Federal debt. The political story, hardly new, is that Republicans become fiscal hawks when Democrats are in power, and Democrats when Republicans are in control.
But Bernstein is a smart person and committed to the public interest, so the economic story also deserves attention. He refers to an argument that gained significant attention a few years ago from another well-known economist, Olivier Blanchard [ [link removed] ], about the conditions under which debt growth becomes unsustainable. The simple version goes like this: Whenever real interest rates—rates adjusted for inflation—are low or even negative, borrowing can be beneficial because the cost of increased debt levels will be sustainable. This is especially true in a growing economy when debt incurs zero or nearly zero cost. In that case, the cost of borrowing is free or almost so.
The Government We Deserve is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
The technical argument is a bit more complex, and I won’t go into all the details. Still, it focuses on favorable conditions when the economic growth rate, g, exceeds the interest rate, r, or “g > r.” The household analogy is that your household debt isn’t necessarily exploding if your wages grow faster than your interest costs, even if you never pay any interest and let the debt compound.
When it comes to the political debate, those using that technical, essentially mathematical, argument often overlook assumptions that Blanchard recognizes, though discounts, regarding: (1) potential added costs when the Treasury rolls over old debt; ; (2) the principal or outstanding debt; (3) how Congress uses the money; (4) other opportunity costs.
Rollover of the Debt
Bernstein argues that “the nation’s budget math *just* [emphasis mine] got much worse”—meaning that “r” has become close to or greater than “g,” or “r > g.” His use of “just,” however, almost implies that only new debt is essential. Yet, when the government borrows at nearly zero interest rates, that additional debt is almost always rolled over as bills, notes, and bonds mature. While the inflation-adjusted interest rate hovered around zero for many years this century, it has recently risen to about 2 percent. That higher new rate, closer to its long-term average, doesn’t just affect the deficits caused by Congress’s latest budget legislation. It also affects the debt that rolls over from previous years.
The Principal on the Debt
For much of the nation’s history, the federal government would reduce its debt during good times, making it easier to increase debt during bad times. The fact that the principal or outstanding debt level matters is evident to anyone with substantial student, farm, or other debt, even when heavily subsidized by government programs. One reason that Republicans and Democrats like to borrow today, of course, is that they then shift those debt burdens to future taxpayers, some of whom are not yet old enough to vote.
Congressional Uses of the Additional Borrowing
Indeed, borrowing makes sense if I can invest my borrowed funds into assets that yield a higher return than the cost of borrowing. However, I don’t know what kind of Congress supporters for higher deficits believe they are dealing with. Most federal spending goes toward consumption rather than investment in financial, real, or human capital. Sure, during recessions, some additional consumption can stimulate economic growth and lead to more private investment. But the idea that we are constantly entering, in, or emerging from a recession is not convincing. Congress also frequently uses temporary borrowing to create permanent increases in spending and tax breaks, which then require even higher levels of future debt in both good and bad times.
Opportunity Cost
All choices involve opportunity cost. Even if some investments yield a decent return, they can still be poor choices if better options are available elsewhere.
Decisions to borrow today assume that today’s elected officials need the borrowing more than tomorrow’s officials. Our current debt levels have become so high that they have made borrowing to deal with future recessions more difficult and economically risky.
Decisions to spend today assume that it is better than spending that could be more easily financed tomorrow. I provide several examples of what past Congresses have squeezed out in my recently published book, Abandoned: How Republicans and Democrats Deserted the Working Class, the Young, and the American Dream [ [link removed] ].
The bottom line: Beware of economists bearing simple mathematical formulas.
The Government We Deserve is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Unsubscribe [link removed]?