Not all the paranoia about fiscal deficits has been exorcized. Jim Hamilton tells us that, if interest rates rise, the interest burden on the federal debt will swallow us whole, or nearly. Where will we get the cash to service this monster?
The short answer is: from the same folks who are collecting all this interest. Lord knows, there’s plenty of room for tax increases on the wealth-holding class, and there’s no reason why we can’t have a private-to-public flow of tax transfers to offset any increase in public-to-private interest transfers. More even. If our economy ever gets back on its feet and away from the ZLB, fiscal multipliers will be small again, and smaller still at the highest income brackets.
The key is to remember that, if the increased government debt is held domestically, we are simply seeing a shifting of net credit positions between the private and public sectors. If the balance shifts too much toward private net wealth and public net obligation, we have ways to rebalance again. If interest rates rise, lean on the tax lever; if not, go a little easier.
I hear you ask, what if a significant portion of new public debt ends up in the hands of foreigners? If they are simply substituting public credit assets for private, our domestic wealth-holders have increased their portfolios of something else, and we can tax them just the same. If there is a sizeable net increase in foreign holdings of US assets, public and private, then we have a widening payments imbalance to deal with—and that’s the problem, not the fiscal deficits. (Yes, I hear some say, and fiscal deficits cause current account deficits, which sounds fine as long as you don’t look at the evidence.)
However, we are saddling future generations with difficult problems because of our political shortsightedness today. They will have more poverty and broken lives to repair because of this endless slump, a less educated society and an infrastructure shortfall because of funding cuts, and above all a climate change problem that may well be intractable. If we care about future generations, this is what we will deal with today. Deficit paranoia is not a harmless quirk if it prevents us from spending the money to do what needs to be done.