If we are ever again to achieve progressive governance in this country, we must boldly challenge a number of insidious myths promulgated by Republicans and in many cases moderate Democrats as well. One example is the myth that federal debt and deficit spending is a threat to us as a nation and will place a burden on future generations. I would argue rather that our failure to borrow heavily now and spend on worthwhile projects such as renewable energy, innovation, education, and infrastructure improvements is a far greater threat to our future and our children’s.
The federal debt is often compared to household debt. That’s a poor analogy. Business debt offers a clearer analogy—though certainly not a flawless one. Suppose you have a business. You have plenty of demand for your product. But your equipment needs maintenance, and you need to invest in updated equipment and worker training. Unfortunately, you do not have ready cash, and you owe debts estimated at 20% of the value of your assets. You know that not to invest in maintenance, updated equipment, and worker training would preclude growth and possibly lead to a decline in business.
Your banker is quite willing to lend you all you need. He points out that businesses sometimes borrow at rates far exceeding the total value of assets. For example, depository banks can have a debt to equity ratio of 10 to 1 while investment banks often have ratios as high as 40 to 1. That is, their debts amount to 4000% of their assets. Moreover, because he sees your business as exceedingly low risk, your banker offers very favorable terms—effectively, a negative interest rate. That is, since the interest rate he offers is lower than the rate of inflation, the value of the money you pay back is lower, adjusted for inflation, than the value of the money he lent you. He would be essentially paying you to use his money.
So your choice is this. You can refuse to borrow the money. As a result, your equipment may well continue to deteriorate. Because of inferior equipment, failure to update equipment, and lack of training for your workers, productivity is very likely to decline. You can produce fewer and fewer products. Competitive businesses would grow while yours continued to decline. Finally, you could be forced to begin selling assets. Unable to pay your debts, you could be forced to file for bankruptcy.
Or, you can borrow the money you need at a negative interest rate. You invest in maintenance, in updated equipment, and in worker training. As a result, productivity increases, sales increase, eventually you can pay off your debts, and your business grows and thrives. Which choice would you make? Borrow the money, or try to make the most of what you have? Would it not be foolish under such circumstances to refuse to borrow?
The analogy to the federal government should be obvious. The federal government owes debts of nearly $18 trillion, an enormous and seemingly alarming amount. But the government also has assets such as vast tracts of land, roads, parks, military installations, buildings, laboratories, equipment, and much more, surely valued at far more than its debt, probably many times as much. However, the assets need maintenance. Moreover, in order to keep up with a rapidly changing world, the government must invest in innovation, in new technologies, in worker training and education. Without taxing more or borrowing, it lacks the cash to make those investments.
Like the hypothetical business mentioned above, for several years the government has been able to borrow at rates close to or even below the inflation rate. The inflation rate for the twelve months ending October 31, 2014 was 1.7%. The interest rate on five year treasury bills as of last week was 1.64%. All other treasury bills offered lower interest rates ranging from .025 to .54 except the ten year bill, which offered 2.36%.
So the government can borrow at interest lower than the inflation rate. That’s like getting money free! Nor have the low rates discouraged buyers of treasury bills. As of the last auction of three and six month treasury bills on September 29, the bid-cover ratio for the year was 4.81. That means that the total value of bids offered for the bonds was 4.81 times the selling price of the auctioned bonds. Investors generally regard treasury bills as risk-free investments, the safest investments in the world, safer than bank deposits.
With demand remaining high and interest rates so low that the money borrowed is free, we would be fools not to borrow substantial amounts of money now to invest in innovation, education, infrastructure improvements, and sustainable energy. When the government spends money on hiring workers, on improving infrastructure or even on providing assistance to needy people, that money does not disappear into a black hole. Most of the recipients spend nearly all of what they receive. What they spend finds its way into the economy, providing businesses with income and thereby creating additional jobs that result in still more spending. The ultimate effect is to increase revenues.
Debt itself is not a problem. It has been the norm since at least
the beginning of World War II for the federal government to run a deficit and thereby to accrue increasing debt. Only during Clinton’s last few years as President did the US government not run a deficit.Yet Republicans remain reluctant to raise the debt ceiling even to allow for paying current bills, let alone to allow for investments. We must demonstrate boldly and convincingly how downright stupid and costly this policy is.