Debt And Taxes: This Time It’s Personal

It seems that many people have concerns about Larry Summers’s concerns about overdoing the COVID 19 Relief bill. My first reaction to his op-ed is here, but I realize that I had more nearly relevant things to say in the Debt and Taxes series and, in particular in debt and taxes I and debt and taxes II. (the one with plain ascii algebra and only 2 comments but I promise it is relevant).

I’m going to try to focus. First, Summers really criticizes giving an additional $1400 to most US citizens. He discussed the bill in general, but his concerns are about the wisdom of that (huge) provision and not the money for supplementary unemployment insurance, unemployment insurance for people not eligible for regular unemployment insurance, money for vaccine distribution, money for schools, or general aid to state and local governments (indeed he could have been clearer in his op-ed).

On this, he has two concerns

  1. The huge deficits might overstimulate the economy
  2. There are other better uses of the money so the bill is a waste of economic and political resources.

This time, I am going to address them in reverse order. Concern 2 really regards the $1400 checks only. On economic resources, I question the absolutely standard argument that one must decide if some spending is the best use of limited available funds. The key issue (as in the debt and taxes series) is that the US Federal Government can borrow at extremely low-interest rates — the 30-year real interest rate is currently negative. Since it will change, I am going to screen cap.

Investors are glad to pay the Treasury to keep their wealth safe. Now consider the US Federal Government intertemporal budget constraint — the present value of spending must be less than or equal to the present value of revenue. What is the present value of revenue? It is calculated by discounting revenues which grow approximately proportional to GDP by the inflation rate which hmm carry the one, round off a bit works out to roughly INFINITY.

If the Treasury can borrow at an interest rate lower than the trend rate of GDP growth (r<n), then the US Federal Government does not have a binding intertemporal budget constraint. This is the point of debt and taxes I, which turns out to be highly relevant to the Washington Post opinion page printed the day before yesterday. A totally standard calculation implies that there is not now a limit to “economic space” now. This is the normal pattern post-WWII except for the period 1980-2000 — indeed the US managed the huge WWII debt with no noticeable trouble. Another way of putting this is that if r<n then debt never has to be repaid. It can be rolled over forever and will shrink as a fraction of GDP until it is negligible. This is not a heterodox position — the link is to an AEA Presidential Address which is the epitome of orthodoxy.

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