The Washington Post on the "Debt Crisis"

Part 1 of a series

In my previous post on this Substack blog, I critically evaluated a July 5 New York Times editorial on the alleged U.S. national debt crisis. Among other comments I noted:

"Deficit hawks and doves always claim that the growing federal "borrowing" is "unsustainable" -- but they never say exactly why it is "unsustainable." Their mode of argument rests on the assumption that the reader will instinctively agree that growing "deficit spending" is "unsustainable" and not question the specifics."

I also noted that the Times was resorting to the rhetorical trick of meganumerophobia: the fear of very large numbers. I further noted that the Times was not calling for a single-payer health care system -- and that calls into question its understanding of what it will take to cut health care costs.

An alert reader noted in the Comments that the other leading national centrist newspaper, the Washington Post, had, over a period of several months, also been running a series of editorials on the national debt. It so happened that, while traveling last week, I caught the final article in that WaPo series. I've since had time to skim all articles in the series and would like to comment on the way that the Post's editorial board frames their thinking.

This week's post will focus on the first article in that series wherein the Post frames the political-economic problem from its perspective. In upcoming weeks I will touch upon the proposals the Post makes for specific areas as well as the way it summarizes the problem in the final post in that series. Share your thinking in the comments.

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The Post's framework for thinking about the national debt was made quite clear in the first post in the series back in March. Accuse legislators in both parties of a "willful blindness to reality" in allowing the accumulated federal debt to rise to the Very Scary Number of $31 trillion. Claim that this places the United States in

"... an uncharted scenario that weakens its national security, imperils its ability to invest in the future, unfairly burdens generations to come, and will require cuts to critical programs such as Social Security and Medicare."

The Post further claims that, "As debt gets bigger than the economy, the interest costs become so onerous that there is little money left for anything else." It repeats the point:

"Growing annual interest costs — which are on track to triple in the next 10 years — reduce funding for other programs and choke off investment in other parts of the economy."

Here we should note two implicit assumptions that the Post editorial board is making. First, that a rise in federal interest payments necessarily comes at the expense of funding for other programs. Second, that spending on federal interest payments will come at the expense of private sector investment spending.

As to the first assumption: The U.S. federal government is the currency-issuing level of a monetarily sovereign government. The federal government does not need to get the money it spends "from someplace else." It creates that money in the act of spending it. It can never run out of money. It does have to always be aware of the resource burden it places on the non-government ("private") sector of the economy, but creating dollars to make interest payments is conceptually no different from creating dollars to make Social Security payments.

As to the second assumption: Here the Post appears to have a lingering attachment to what is known in economics as the "crowding out" theory. Put very simply, this theory argues that at any point in time, there is a relatively fixed supply of loanable funds available in a capitalist economy. If the federal government spends in excess of its revenues, then it must "borrow" and in doing so "crowds out" private sector investment and causes interest rates to climb. (I don't have space to go into a refutation of the crowding-out theory here. Suffice it to say that it is a remnant of pre-Keynesian economic thinking and that private sector investment decisions are made on the basis of expected profitability rather than merely on the cost of borrowing.)

The Post acknowledges that achieving an annual balanced budget is unrealistic. Instead it recommends we aim to "stabilize the national debt" by halting the growth in the debt-to-GDP ratio or, in a somewhat more sophisticated argument, the growth in the ratio of net interest costs to GDP.

"A decade ago, this editorial page called a 70 percent debt-to-GDP ratio a “troubling level,” yet the nation has been able to exceed that without triggering a crisis. The economy has continued to thrive and investors — at home and abroad — still buy U.S. debt. But while it turns out the danger point was further away than many initially thought, it is getting closer."

What this amounts to is: Our economic theory teaches us that there is a "fiscal cliff" ahead of us. Granted, we haven't reached that cliff yet, so it must be farther out than we thought ten years ago. But it still must be out there somewhere and it must be getting closer -- even though we don't know where it is.

Well, that's a bit of a cheat, I concede. The Post does claim to have a good idea as to where the fiscal cliff is. It has to be at a debt-to-GDP ratio of greater than 100% -- because that's where the ratio is right now (approximately). In their view it's probably somewhere around the 200% level. Why?

"Japan with its 200 percent debt-to-GDP ratio has had years of sluggish growth. Greece and Italy have also had crises and near-crises."

Let's take the second case mentioned first. Yes, Greece and Italy have had "crises and near-crises" in the past twenty years. But neither of those countries is monetarily sovereign. They both are in the Eurozone, which means they do not issue or control the currency in which their governments spend to pursue the public purpose. Their crises in the 2010s showed that they're at the mercy of the European Central Bank, whose policies are largely shaped by Germany, the Netherlands and France.

Now, as to Japan. Has Japan had sluggish growth in gross domestic product in the past two decades? Relative to the United States, yes. But Japan has also had significantly less inflation and unemployment than the U.S. in that period and it suffers much less than the U.S. from extremes in the distribution of income and wealth. Moreover, if the economic growth the U.S. has had is exacerbating global warming and threatening the survival of humans and other species on this planet, is that the kind of economic growth we should be aiming to have, be proud of or be worried that the federal debt will keep us from having in the future?

So the essential criterion by which the Post editorialists evaluate the impact of federal spending and taxation on our society comes down to: Does it impede growth in GDP or not?

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In the next post we'll propose different criteria by which to evaluate federal spending and taxation, look at the areas identified by the Post for reform and then look at the Post's argument overall. Spoiler: We'll actually agree with some of the Post's specific proposals for change -- but not for the reason the Post provides.