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High Debt Ratio Not a Big Deal

In his article of Jan. 19, professor Micha Gisser discusses some solid economic points about our economy that would mostly be true if we were still on a gold standard. Fortunately, since 1971 we have had a fiat currency with a floating exchange rate.

Consequently, we can always service our debt and have no chance of becoming another Greece, and the Fed, not the external market, establishes the interest rates on the Treasury securities that constitute our public debt (and net private savings).

Further, there is no reason to believe that a 100 percent debt-to-GDP ratio or more is a matter of great concern. There would be concern for a household, but not for a government that issues its own sovereign currency.

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The Fed might decide to raise interest rates in anticipation of inflation. But, inflation is a very distant threat when there is excess productive capacity, which we have with millions unemployed. The production lost from those unemployed resources is gone forever.

Gisser cites some past administrations to bolster the idea that tax decreases increase federal revenue. But, he doesn’t tell the whole story. Sometimes tax decreases work the other way.

Not mentioned by Gisser were the rapid rises in deficit after both the Reagan tax cut of 1981 and the Bush II tax cut of 2001. Not noticed by most critics of public debt is that private debt soared to 300 percent of GDP at the height of the crisis.

It was the private sector that couldn’t pay its bills.

The non-intuitive fact is that the economy cannot be managed effectively by looking at tax revenues and deficits. By simple accounting identity, high government deficits correspond to high private saving and net foreign imports.

The government has no control over the private sector’s desire to save or to import.

Consequently, the deficit is largely beyond government control. Better metrics would be unemployment, use of productive capacity and inflation.

Contrary to media and political hype, our large deficits are not due to profligate government spending but to high unemployment. Austerity, which passes for responsible fiscal policy, is actually irresponsible as it tends to increase unemployment.

A country that issues its own currency has both the ability and responsibility to spend counter-cyclically to economic cycles to maintain a healthy economy.


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