Tilted Forum Project Discussion Community - View Single Post - "In Defense of Deficits"

dippin · 03-22-2010, 09:40 AM

Let me finesse the "deficits don't matter" point a bit, since that is implicit but not explicit in the text:

The biggest difference between people and governments is that governments don't die. That is, you and I will try to repay our debt and not refinance it forever because one day you and I will retire, see no further increases to our income, and eventually die. That would mean that if we kept refinancing eventually the interest payments would overwhelm us, and we'd leave a lot of debt behind for our children.

Governments don't die. So they can actually just keep refinancing debt forever and ever. The only problems with government debt are that:
- If debt increases very fast for a long time, interest payments could eventually overwhelm the federal budget, and then because people would be skeptical of the government's ability to repay that debt, they'd require higher interest payments to offset the additional risk.
- Government borrowing can "overcrowd" private investment. That is, savings that would usually go into financing private sector investment would be going to finance the government.

So this makes it so deficits matter in one situation:
- when interest rates are so high that payments on public debt become very significant, and public borrowing significantly reduces the amount of savings out there to be borrowed by private investors, in practice raising the cost of borrowing for everyone and leading to less private investment. This is why generally it is a bad idea to run deficits during an expansion (like Bush did).

But this makes it so that deficits don't matter during a recession. During a recession interest rates are at or near 0, because people are simply not willing to borrow. This means that there is a lot of savings out there that could be lent but are not because people are uncertain about the future and don't want to borrow money even with minimal interest payments. When this happens, governments can borrow a lot, because the impact on government interest payments is minimal, and the impact on private borrowing is negligible. In that sense, deficits during recessions have minimal to no negative impact.

03-22-2010, 09:40 AM	#2 (permalink)
dippin Crazy, indeed Location: the ether	Let me finesse the "deficits don't matter" point a bit, since that is implicit but not explicit in the text: The biggest difference between people and governments is that governments don't die. That is, you and I will try to repay our debt and not refinance it forever because one day you and I will retire, see no further increases to our income, and eventually die. That would mean that if we kept refinancing eventually the interest payments would overwhelm us, and we'd leave a lot of debt behind for our children. Governments don't die. So they can actually just keep refinancing debt forever and ever. The only problems with government debt are that: - If debt increases very fast for a long time, interest payments could eventually overwhelm the federal budget, and then because people would be skeptical of the government's ability to repay that debt, they'd require higher interest payments to offset the additional risk. - Government borrowing can "overcrowd" private investment. That is, savings that would usually go into financing private sector investment would be going to finance the government. So this makes it so deficits matter in one situation: - when interest rates are so high that payments on public debt become very significant, and public borrowing significantly reduces the amount of savings out there to be borrowed by private investors, in practice raising the cost of borrowing for everyone and leading to less private investment. This is why generally it is a bad idea to run deficits during an expansion (like Bush did). But this makes it so that deficits don't matter during a recession. During a recession interest rates are at or near 0, because people are simply not willing to borrow. This means that there is a lot of savings out there that could be lent but are not because people are uncertain about the future and don't want to borrow money even with minimal interest payments. When this happens, governments can borrow a lot, because the impact on government interest payments is minimal, and the impact on private borrowing is negligible. In that sense, deficits during recessions have minimal to no negative impact.