As another debt-limit crisis draws nigh, it's timely to consider an aspect of national debt that is almost always overlooked in this perennial battle: The United States should remain a debtor nation, perhaps permanently.
Who says so? Merely those raging liberals at the International Monetary Fund.
Just kidding--about the IMF being liberals, that is, though not about their prescription. The fund is one of the most fiscally conservative institutions on Earth, to the point where its advocacy of austerity often gets blamed for driving underdeveloped nations deeper into poverty.
But in a report this summer, IMF economists Jonathan Ostry, Atish Ghosh, and Raphael Espinoza argued that for countries like the U.S., paying down the national debt would be more costly in economic terms than just letting it ride. Such countries have ready access to markets at extremely low interest rates and plenty of headroom before their debt load could interfere with growth.
For them, "there is little purpose in paying [the debt] down by raising taxes or cutting otherwise-productive expenditure," the IMF economists say. "Living with the debt in such circumstances represents the best cost-benefit tradeoff."
Deliberate steps to pay down debt, such as raising taxes or cutting government spending, would hurt those economies, not help. In the current environment of post-recessionary slow growth, those measures are exactly what aren't needed.
The IMF report is an effective counter-argument to the old chestnut about the U.S. carrying so much debt it risks ending up like Greece. Repeat after me: America is not Greece. The U.S. controls its own currency, has unassailable access to markets, and immense potential for output growth. A survey by Moody's Analytics cited by the IMF team estimates that the U.S. could increase its borrowing by 165 percentage points of GDP and still remain in the "safe zone," about the same as Germany. For Greece, that figure is zero.
The IMF concludes that the best course for countries like the U.S. is to allow their ratio of debt-to-gross domestic product to decline "organically" through growth. Economist Mike Konczal of the Roosevelt Institute reinforces that point by noting that that's exactly what happened in the U.S. after it reached an all-time peak in debt-to-GDP at the end of the World War II.
"Chilling and letting the debt shrink is what we did in the aftermath of the Great Depression and World War II," he writes. "Back then, we ran a deficit, but the debt declined significantly because of higher growth and inflation."
He's right. American government debt held by the public topped out at 106% of GDP in 1946. Ten years later, the ratio was down to 50.6%. What happened? Among other things, the U.S. economy nearly doubled in size from $222.6 billion in 1946 to $427 billion in 1956 (in contemporary figures). The actual debt declined by only a bit more than 5%, from $235 billion to $222 billion.
Konczal adds that U.S. treasuries also provide a "safe asset" for the financial markets, "dependable debt that can be used for collateral in other economic transactions." Only the government can provide such risk-free capital. (Of course, it's risk-free only until the U.S. defaults, as Treasury Secretary Jacob Lew warns might happen if Congress keeps dithering on raising the debt ceiling. "There are already worries," Konczal says, "that U.S. debt will be too low, not too high, to provide enough safe collateral in the next financial crisis."
The IMF acknowledges that, in general terms, a high debt-to-GDP ratio can hamper growth. But whether that's true in any individual case depends on each country's situation--not on "some mechanical rule or threshold," such as those cited by deficit and debt hawks in the U.S. "There is no one-size-fits-all message," they write. For now, the U.S. is safe.
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