I usually have a policy of not using this blog to comment on pieces that cite me or someone else at CEPR, but I will make a brief exception in the case of this Heather Long piece on deficits and debt in the Washington Post. The point I had hoped to make, which is a view shared by left-Keynesians, is that debt or deficits are a problem when they generate too much demand in the economy. In that situation, we either have a problem with inflation or alternatively, the Federal Reserve Board has to jack up interest rates to head off inflation. The latter leads to the classic crowding out story, where we see less public and private investment, as well as a rising trade deficit due to a higher valued dollar.

This is clearly not a problem today, as inflation remains below the Fed’s 2.0 percent target by its measure of the core personal consumption expenditure deflator. While it could get to be a problem in the future, inflation had consistently run well below its projected rates. Until we start to see inflationary pressures in the economy, it is hard to see how deficits can be a problem.