Prof. Bernstein gets several things right in this article. First, that debt is not necessarily bad and can be used appropriately for growth. Secondly, that in downturns government must step and stimulate the economy with increased deficits. Thirdly, that Minsky's financial instability hypothesis must be taken into account in considering debt.
All good. But this he goes on to repeat the common shibboleths. First, he fails to distinguish between the currency issuer and currency user and falls into the government is the same a households and firms, only bigger. Secondly, while he rejects crowding out in recent circumstances (but not outright), he is a deficit dove and accepts the intertemporal budget constraint, believing that government budgets should be balanced over the cycle. Worse, he gives credence to the belief that surpluses are superior to deficits even in the short run.
Bernstein was one of President Obama's more economically enlightened advisors, and he is considered a leading progressive economist. Yikes!
It’s always important to remember that one person’s debt is another person’s asset. When it comes to the budget deficit, while we owe about half of it to foreign holders of Treasuries (China and Japan being the most prominent lenders), we owe the other half to ourselves. That doesn’t mean we can afford to ignore unsustainable borrowing. But from a macroeconomic perspective, it doesn’t necessarily hurt the economy to borrow from ourselves to invest in productivity-enhancing initiatives that increase the future wealth of our progeny.....
What impact do federal budget deficits have on the economy? Was Dick Cheney right to argue that “Reagan proved deficits don’t matter”?
For economists, the issue comes down to “crowding out.” Under certain conditions, by running large deficits, the government can be in competition with private firms for capital, and the extra demand for loans pushes up interest rates. Higher interest rates mean less investment and slower private-sector growth than would otherwise occur. Crowding out makes sense in theory, and research has found some evidence of it. But the whole story is not so simple. In fact, neither interest rates nor investment have responded during this crisis the way the crude view predicts (interest rates haven’t risen with deficits, and neither investment nor capital stock consistently fell). The reason is that there is no competition for scarce funds right now—to the contrary, firms are sitting on trillions in cash reserves, and capital is flowing freely to the United States as a safe haven in uncertain times.
Economists’ focus on crowding out, given the lack of compelling evidence, is doing more harm than good. None of this is meant to signal indifference to budget deficits. I was as elated by the surpluses of the latter 1990s as I was discouraged by the growing deficits of the 2000s....Read the whole article at Democracy — A Journal of Ideas
by Jared Bernstein
(h/t Mark Thoma)