August 20, 2020
Top Biden adviser, and long-time personal friend, Ted Kaufman was seen in the Wall Street Journal warning that the debt run up by the Trump administration will seriously limit what Biden will be able to do as president. This is wrong big time, and it is the sort of silly thing that no one in a Biden administration should ever be saying.
The government’s ability to spend is limited by the economy’s ability to produce, not the debt. If the government spends too much, it will lead to inflation. When we have a period of high unemployment, as is the case now and almost certainly will still be the case if Biden takes office in January, we are very far from hitting the economy’s inflation barriers.
It takes some very deliberate head in the ground economics to argue that we are somehow limited by the size of the government debt. Japan provides a great model here. Its ratio of debt to GDP is more than 250 percent, more than twice the current U.S. level. Yet, the country is seeing near zero inflation and has a 0.03 percent interest rate on its long-term debt. The interest on its debt is near zero, since much of its debt carries a negative interest rate.
The idea that we would not address pressing needs, like climate change, child care, and health care because we are concerned about the debt burden is close to crazy. As long as the economy is not near its capacity, there is zero reason not to spend to address these priorities, and even when it does approach its capacity, we can impose higher taxes on the economy’s big winners over the last four decades.
I will also throw in one important item of logic that our deficit and debt hawks should be forced to deal with. When the government issues patent and copyright monopolies to pharmaceutical and software and other companies, this is a form of implicit debt. These monopolies are effectively private taxes that the government allows these companies to collect in exchange for their innovations or creative work.
The rent payments on these monopolies run into many hundreds of billions annually and quite possibly exceed $1 trillion a year. They dwarf interest payments on the debt. The debt whiners don’t get to exclude this implicit debt from their calculations just because they like the companies and individuals who benefit from these rents.
If people are having a hard time understanding the logic here, we can go back to pre-revolutionary France. To deal with its huge debt the government would sell off the right to collect specific taxes. I guess Mr. Kaufman and other deficit hawks would say this is fine since the country now had a lower debt burden, but that is not a serious position. It would be good if the economics profession could be united in explaining this simple logic to laypeople, but as is often said, economists are not very good at economics.