Talking About Debt At a Time of Low Interest Rates, Low Inflation, And High Unemployment Is Crazy

[WillyT]

Talking About Debt At a Time of Low Interest Rates, Low Inflation, And High Unemployment Is Crazy
ThinkProgress
Apr 11th, 2011 at 10:00 am

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The news that the President is planning to release a plan for long-term debt reduction this week will attract a lot of commentary on the political wisdom of the approach and the policy merits of his ideas, but it’s worth pointing out yet again how crazy it is for this topic to be taking center stage on the Washington agenda. The main problem with high levels of government debt is that in order to generate demand for bonds it might be necessary to offer investors very high interest rates. And if investors can obtain high interest rates by lending to the government, they’ll demand even higher interest rates to lend to the private sector. This “crowding out” effect means that private sector investment will be lower than optimal, and enterprise that could be profitable in a lower-debt scenario are now unprofitable.

That’s bad, but it’s not happening today.

Another potential problem with high levels of government debt is that it’s possible that central bank operations to keep interest rates low could be leading to dangerous levels of inflation. But that’s not what’s happening now. Expectations of future inflation are anchored slightly below the Fed’s target level. The price level is well below the long-term trend and shows no sign of catching up. There’s no crowding out problem and there’s no inflation problem.

There is, however, a serious problem of idleness.

In human terms, that’s first and foremost a problem of people actively looking for work who aren’t doing any work. Secondarily, it’s people who’d ideally be working longer hours who are working part-time instead. And third it’s people who once upon a time were in the labor force but have now given up and aren’t doing market labor. But the idleness has other manifestations. It’s vacant storefronts in cities and malls across America. It’s vacant office space in almost all of our metropolitan areas. It’s factories who’ve canceled shifts, and trucks plying the highways only half full. These people and these machines could be doing something. The people haven’t fallen ill. The offices haven’t been destroyed by an earthquake...

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More: http://yglesias.thinkprogress.org/2011/04/talking-about-debt-at-a-time-of-low-interest-rates-low-inflation-and-high-unemployment-is-crazy

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