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Quick Lesson on Silliness of Concerns Over Government Debt

In Washington, there are two sure ways to get rich: you can work as a corporate lobbyist or you can work with a Peter Peterson-funded organization and whine about government debt. The Peterson Foundation, along with its allies at the Washington Post and other media outlets, have long worked to fan irrational fears about government debt just as Donald Trump and other demagogues have fanned racism and xenophobia. One small positive of a Donald Trump presidency is that it may provide a teachable moment on the meaninglessness of such fears.

The NYT gives us an excellent lead in with this piece on the need to repair locks and dams on inland waterways. The piece tells us of Trump's plan to spend $1 trillion improving the country's infrastructure, then adds:

"To avoid raising taxes or increasing debt, his plan calls for much of the money to come from the private sector, with a proposed tax credit offered in return. ...

"Even with a tax credit, though, companies building roads or locks would want a return on their investment — most likely in the form of toll collection, said Mike Toohey, president of the Waterways Council, an advocacy group for the river shipping industry."

So let's look at how we are avoiding raising the debt in this story. First, the infrastructure is supported through a tax credit rather than direct spending. If we spent $1 trillion directly then this would add $1 trillion to the debt. We will then have to pay the interest on this debt as long as it is outstanding. (Currently, the real interest rate on government debt is nearly zero, since the inflation rate is almost as high as the long-term interest rate.)

CEPR / November 27, 2016