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There's always a lot of voodoo in economics; doubly so when partisan politics are involved. But to believe that there is a ceiling beyond which more debt should not be accumulated requires a special type of magical thinking.

Businesses evaluate decisions based on whether the rate of return is greater than the rate of finance. Eg., if you can borrow at 5% and use that money to make an investment that will provide risk-adjusted returns of 15%, then it always makes sense to borrow that money and make that investment. Doing so will always make your financial position better, regardless of the level of debt you are carrying.

Of course opportunity costs must also be taken into account: if you have cash in hand which you are are servicing debt at 15%, and have an opportunity to make an investment that returns 10%, then making that investment will worsen your financial situation; you should pay down the debt instead. Once again, this is true no matter how much debt you are carrying.

All public spending is an investment of sorts. Infrastructure, education, R&D, public health -- all of these produce measurable returns. Where those returns are greater than the cost of debt, your society will be better off for financing them by debt. Where those returns are lower than the cost of debt, it won't be. This sounds like an over-simplification, but isn't: accurately measuring those returns is no easy task even after the fact, much less predicting them beforehand. But that is what the public debate and decision-making process needs to be about, because that's what really matters. All this handwringing over imaginary debt ceilings and such has been nothing more than an incredibly destructive canard.

>if you can borrow at 5% and use that money to make an investment that will provide risk-adjusted returns of 15%, then it always makes sense to borrow...

No, I think if we have learned one thing in the recent crisis it is that highly leveraged entities carry cumulative risk that is more than the sum of the parts. Also, the government is not one company of many. It is a monopoly that must be in a position to act countercyclically even when everyone else decides based on risk adjusted returns that it is best to sell everything, fire everyone and hide in a hole in the ground.

If the government is levered up like everyone else and therefore exposed to the same self reenforcing global dynamics when things go wrong, it will not be able to do its job in a crisis. The government must invest when no one else does and that means it has to invest less when everyone else does.

>All public spending is an investment of sorts

Not all of it, but even for the part that is, you have to ask whether that investment has a higher return than if the private sector made those investment decisions. That's obviously a highly ideological question. My own opinion is that it depends on the type of investment. I think we have good examples either way.

> risk-adjusted returns of 15%

The voodoo thinking here is the assumption that you can actually calculate "risk-adjusted returns" outside of a casino.

The point is that appropriate action can always be taken when needed, and unemployment is never necessary.

To elaborate a little bit: A monetarily sovereign government really only needs higher tax revenue to stave off demand-driven inflation. But in the case of demand-driven inflation, something has to be done anyway due to real constraints.

Now you might ask whether austerity now could help future real constraints in any way. The answer is typically no: austerity means that less is consumed today, but at the cost of less production today. Austerity does not cause stockpiles of real resources to be built for the future.

If you actually wanted to build real resources for the future (and such a plan would be dubious at best, because predicting future needs is tricky, especially in the face of changing technology), you would actually want to do the opposite of austerity: you would want to spend more now, in order to buy the real resources that are stored away in the stockpile.

It is only these real considerations that matter for a monetarily sovereign country. Monetary constraints only matter for countries that are not sovereign, e.g. the various members of the Euro area.

"Monetary constraints only matter for countries that are not sovereign, e.g. the various members of the Euro area."

The members of the Eurozone taken together have the same sovereignty over monetary policy as any other country. But that's beside the point.

The point is that a sovereign country with a central bank can print its own money, but that doesn't mean it can borrow in its own currency. If that country keeps printing tons of money inflating away the value of its debt and running a current account deficit on top of it will not be able to borrow in its own currency under its own laws for long.

That's where monetary constraints become very real constraints, because the country loses its ability to import stuff it doesn't produce.

> The members of the Eurozone taken together have the same sovereignty over monetary policy as any other country. But that's beside the point.

You are right of course, but they can't get their shit together.

> The point is that a sovereign country with a central bank can print its own money, but that doesn't mean it can borrow in its own currency.

This is getting into a bit wonky details, but the bottom line is that your concerns are misplaced. First of all, a monetarily sovereign government doesn't have to borrow in the first place. The only reason that they "borrow" is to provide a safe interest earning asset for the financial sector to play with, and so that the central bank can effectively raise the interest rate without paying interest itself - and wouldn't that cause interesting questions by the public, if suddenly raising interest rates would cost the central bank money!

Second, at the end of the day when the government runs a deficit, banks have a choice between keeping surplus reserves at the central bank or buying government bonds. As long as the interest rate paid on government bonds is higher than that on reserves, banks will buy government bonds.

So there are no monetary constraints.

What you should be concerned about, if anything at all, is the exchange rate to other currencies. Clearly, most normal countries see their exchange rate fall if they run a current account deficit for too long (the US is an interesting but explainable exception to that rule).

This makes imports more expensive. On the other hand, it makes your exports cheaper for foreigners, which is a boost for domestic industry. So in the end, the economy actually benefits.

The problem with EZ countries is precisely that you can't "take them together" because there is no centralized fiscal agent. You need this because there has to be fiscal transfers between weaker and stronger nations or else face growing imbalance of payments, and with the right catalyst, financial crisis. That's why the U.S. works as a monetary union.

There are fiscal transfers within the EU and there are other ways to rebalance like freedom of movement for workers. But you are right that it doesn't go far enough. Deeper integration is undoubtedly needed.

I wish you were right but there is a big difference between research not being able to show that large debts slow growth and banishing unemployment forever.

For starters there will always be some unemployment due to natural turnover: companies sometimes have to reduce their workforce and not every hire is a success for either the company or the employee. People need time to find the next job and companies need time to fill the position. This is often called the natural rate of unemployment.

However it is much more than that. Suppose the government could just spend lots more. What does it spend on? Or does it just hire every unemployed person? Are these permanent government jobs? What do they do? What are the long term effects?

Sadly I am not aware of any country that has managed to solve unemployment (except perhaps some totalitarian regimes like the former USSR and these were not sustainable solutions). You would think that is it was just a matter of spending as much as you want that this solution wold have been found long ago.

http://en.wikipedia.org/wiki/Natural_rate_of_unemployment

I am sure that it was not your intention, but please do not spread misinformation about the concept of natural rate of unemployment.

You are right that there will always be some unemployed as people need to find the next job after a surprising layoff. However, this is known as frictional unemployment, and can basically not be more than 2%. In practice, you'd expect it to be well below 1% in an otherwise well-functioning labor market, though I will admit that it depends on the exact institutions and laws surrounding labor.

What economists mean when they say "natural" unemployment is something else entirely. It refers to the (contested) idea that there is some "natural" rate of unemployment that the economy "wants" to achieve, in the sense that you will supposedly see some unintended negative side-effects if you use policy (such as classical demand policies) to push unemployment below that level. This unintended negative side-effect is typically said to be inflation.

There is some truth to this idea; the criticism is mostly in how one responds to it. There is truth to this idea because low unemployment increases the wage bargaining power of labor, which may result in higher inflation via the wage-price cycle.

However, the standard reaction to this is disappointing: Central banks purposefully generate unemployment to keep inflation low, making unemployment a macro-level problem, while the rest of policy (and public opinion) acts as if unemployment were the fault of the individual. This is clearly schizophrenic behavior.

The more intelligent response is to say that infinite demand for labor should be created at a fixed wage. This eliminates unemployment without enabling the wage-price cycle. This idea isn't exactly new, but it is not yet widely known, even though its supporters come from a surprisingly wide range of the political spectrum (the supporters disagree on the how of the implementation details; the main search keyword is "Job Guarantee", though I have also seen some superficially quite different proposals such as this one: http://www.morganwarstler.com/post/44789487956/guaranteed-in...).

Why is it not widely known? I believe it is a combination of (a) efforts to make this idea known outside of small academic circles are relatively recent, and (b) while individuals clearly benefit, there are no truly powerful individuals or social institutions that clearly benefit, hence the advocacy is not as well-organized as e.g. Austrian propaganda.

Thanks for the definition but I was not trying to get into a political discussion. Yes Austrian propoganda sucks but Eritrean propoganda sucks balls!

I wish nobody was unemployed. Well not really - I don't want an employer - a boss. You should be able to do what you want.

Milton Friedman was a very productive guy. Besides coining "natural rate of unemployment" he also invented the "basic income" (aka"negative income tax") many years ago. Great idea!

True, there is a minimal rate of unemployment due to people switching jobs. But that's different from "natural rate of unemployment", which is more an argument used to prop up unemployment.

Once everyone has a sufficiently decent job, workers will have have enormous bargaining power, because they do not fear losing their jobs. Imagine how negotiations between bosses and workers would go. The ability to openly disrespect the boss, and the clearer possibility to transcend boss rule.

Absent other methods of control (like the USSR used, as you point out), capitalism would risk overthrow; that is, replaced by another system, with different defining institutions.

Needless to say, this poses a problem for policymakers, whose success depends on their ability to serve the wealthy elites who finance their campaigns and dominate government. So they must pursue economic policies which lead to sufficiently high unemployment (often sacrificing growth too; obviously less people are making stuff); or at least fragile employment, like in the service industry.

"we don't need empirical evidence to know that at some point interest payments will require highter tax revenues which will reduce disposable income and hence consumption."

We always need empirical evidence. For your example, no, we don't know that, e.g. when the debt is monetized by the central bank. A bias towards sovereign debt elimination may be more dangerous than a bias towards sovereign debt accumulation - empirical evidence, not intuition, is how we validate the models that guide our trade-offs.

We will never have empirical evidence (with any predictive power) for what really happens if the biggest economy in the world, the one that provides the reserve currency, the preeminent military power, goes bust, because the sample size is 1.

[Edit] And about your counter example: We do know that sovereign debt accumulation will eventually become impossible, so it's not relevant whether or not it would be beneficial. Once domestic lenders (who can be forced to lend) are exhausted, the government will have to borrow from foreigners in foreign currency under foreign law. So debt accumulation is only possible as long as foreigners are willing to lend.

A nit-pick, but also maybe a useful FYI, "sovereign debt" is different than public/national debt.

The US doesn't issue sovereign debt AFAIK, and you cannot just print more money to repay sovereign debt, that's the whole point of it. (Sovereign debt by definition is issued in a foreign currency.)

Monetizing debt would not change the fact that more debt would mean higher nominal payments, inflation would reduce real income and real consumption.

Correction: 74% of the American population carries net debt, even if it's "good debt". Inflation would act as a mini-jubilee to rebalance the economy between producers and financiers.

In the long-term, sure, it may have some wealth transfer effects.

But in the short term it's tragic for most people. Interest rates through the roof. Inadequate incomes. Etc.

Or to borrow a meme, "periods of high inflation have been great for the middle class" said nobody ever.

That assumes America has much of a middle class left.

There's obviously some point where having too much debt is bad, but if we go back to the classical "country as household" oversimplistic analogy, I doubt you'd find evidence that people who have mortgages over some magic value relative to their income suddenly start getting smaller annual raises.

I prefer we not go back to any oversimplistic analogies. That's part of what makes these debates so insufferable. A nation's economy isn't a household budget. A company isn't a person. A nation isn't a person.

I don't really see much value in someone's axiomatic understanding of all of economics premised on the belief that they are smarter than people who study economics (even if they are; probably they are!). I'd much prefer to hear from someone who is less smart, but who admits the subject is too complex for them to fully understand and who can be bothered to go out and actually attempt to measure something (rather than telling me what it must be).

I guess I'm saying I think I can learn more from an honest person than a smart one. Now I'm questioning why I am wasting my time reading hacker news again.

You don't read HN for nuanced and broadly-informed economics perspectives.

Indeed. I often find myself wishing there were an "Economist Hacker News" of sorts.

EJMR is the closest thing to HN for economists, and it's trash.

If households could print currency it would be analogous. The US Federal Government can not ever run out of money because it controls the currency. This is not to say that bad things can't happen (inflation for one); but in most cases its a balance sheet equation - Federal Debt is Private Credit.

If anything this makes Federal Debt more useful and attractive than private debt.

The problem isn't that households can't "print currency" (in a sense they can) but that their debts aren't denominated in the currency they can print. Thus, the US government is in a relatively unique position that, for example, Cyprus and Greece do not enjoy.

> If anything this makes Federal Debt more useful and attractive than private debt.

A theoretical observation borne out quite well by the observed market characteristics of federal debt (e.g., the federal governments cost of borrowing.)

Annual raises are not analogous to GDP. Spending is. If interest payments grow faster than income then spending will go down.

Also, if a household's interest payments are rising faster than its income then it will not be able to invest, say, in the education of the kids. So if you count the kids as part of that household over their lifetime, annual raises will indeed be smaller because better educated folks get bigger raises.

Spending isn't a good analogy to GDP either. We should probably just dispense with the analogy altogether...

The bigger point is that debt is often the lubricant of growth. E.g. we're FAR better off borrowing money to educate our kids than saving money and raising kids with no knowledge or skills.

> I doubt you'd find evidence that people who have mortgages over some magic value relative to their income suddenly start getting smaller annual raises.

Tell that to the people who are underwater on their mortgages and are therefore severely handicapped financially because it's punitively expensive for them to move to find a new job if they become unemployed.

When I was living in the US in 2009 I was laid off as a part of a company wide restructuring caused by the recession. Because I rented I was able to relocate to a new job in 6 weeks. Colleagues who were underwater on their mortgages and therefore had to find a new job within commuting distance of their house took much longer to find new jobs.

If you reinvested your household's profit into the company that pays your salaries, it might?

I find it a convincing argument that, of all the times for the US government to borrow, now is about as ideal as it gets by conventional measures. People will loan to the federal government for pitifully low rates.

And yet ...

I have to ask: If not now, when? If we can convince ourselves today that we can keep putting off the eventual cutbacks until tomorrow, as we have been for ages, how will next time be any different? If we can't justify cutbacks when the outlook is grim, how will we be able to when people are optimistic instead?

If not now, when? If not our generation, which? If the current state does not move us to make the hard calls, then what state would so move us?

"If there is a high debt twilight zone effect as R&R claim, then we can just buy back bonds at steep discounts and send our debt-to-GDP ratio plummeting."

http://www.cepr.net/index.php/blogs/beat-the-press/how-much-...

Greece tried that. But to buy back bonds you have to sell assets and very quickly. That turns out to be very difficult politically. Forced assets sales will also cause the price of the asset to crash.

Um Greece cannot issue currency in the way that the US can.

No, but the linked article says the government could sell assets to buy back bonds instead of getting into a money printing debt monetization sprial.

No, it said it could buy back debt by reissuing new debt at a higher rate and using the proceeds; net interest burden would remain the same, but the debt GDP-ratio would change.

> But we should not lose sight of the fact that interest rates are a highly psychological affair. Once trust in the ability to repay debt gets eroded things can get out of control very quickly. So we should be scared at least a little bit.

This is one thing an overstretched fiat currency has strikingly in common with Ponzi schemes.

Same with any paper-based security as well. Any fiscal instrument can look like a Ponzi scheme if you pick the right angle.

That's why I wrote "overstretched". I'm not opposing the idea of fiat currency in general.

At essence of any Ponzi scheme lies debt that inherently can not be repaid, and public disclosure of that acts as tipping point.

>but we don't need empirical evidence to know that at some point interest payments will require highter tax revenues

When interest rates on bonds remain at or below the rate of GDP growth, this is not an issue. For the U.S. (and other countries which issue floating-rate non-convertible currencies) interest rates on bonds are a policy variable of the central bank.

http://www.cfeps.org/pubs/wp-pdf/WP53-Fullwiler.pdf