New York Times columnist Paul Krugman took time in his Friday column to argue against the notion that public debt has a negative impact on national economies.
Responding to an unintentionally funny statement by Rand Paul -- "The last time the United States was debt-free was 1835" -- Krugman wondered how it's possible that Paul believes America's economy has been sputtering for the past 180 years. "Is the point simply that public debt isn't as bad as legend has it?" he asked. "Or can government debt actually be a good thing?"
He answers that question by noting that public debt typically pays for "useful things," like infrastructure, which is something that the United States should be investing in given historically low interest rates.
The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future, and a very bad time for what has actually happened: an unprecedented decline in public construction spending adjusted for population growth and inflation.
Beyond that, those very low interest rates are telling us something about what markets want. I’ve already mentioned that having at least some government debt outstanding helps the economy function better. How so? The answer, according to M.I.T.’s Ricardo Caballero and others, is that the debt of stable, reliable governments provides “safe assets” that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.
Now, in principle the private sector can also create safe assets, such as deposits in banks that are universally perceived as sound. In the years before the 2008 financial crisis Wall Street claimed to have invented whole new classes of safe assets by slicing and dicing cash flows from subprime mortgages and other sources.
But all of that supposedly brilliant financial engineering turned out to be a con job: When the housing bubble burst, all that AAA-rated paper turned into sludge. So investors scurried back into the haven provided by the debt of the United States and a few other major economies. In the process they drove interest rates on that debt way down.
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