Public Debt and National Income, by Evsey D. Domar, Division of Research and Statistics, Board of Governors: On November 30, 1945 the Federal debt reached 265 billion dollars, a magnitude without precedent in the history of this country. With the present interest rate structure, it involves an annual service charge of more than 5 billion dollars, an amount exceeded by only two peacetime Federal budgets until 1934. It is quite understandable that a debt of this magnitude should cause considerable apprehension, and that a policy of repaying at least a part of it should be advocated so often.
DEBT AS AN INSTRUMENT OF FISCAL POLICY
It is true that our economy would be better off without so large a debt. But this does not mean that our position can be always improved by reducing the debt. The difficulty lies in the fact that the various components of our economy are interdependent, so that it is impossible to change one without affecting the others. In particular, the debt problem is more complex and difficult than it appears on the surface because changes in the debt exercise a powerful effect on the size of the national income. ...
Debt and Fiscal Policy. ...Now that the war is over, our economic policy should be directed toward achieving a high and stable level of employment and a growing national income. But there is increasing agreement among economists and others that stability will not maintain itself automatically, and that active Government intervention will be needed to eliminate the swings between prosperity and depression which characterized our economy in the past..., a deficit will probably be required to prevent a slump. Similarly when inflation threatens, a budget surplus should be accumulated and a part of the debt repaid. But trying to repay the debt ... when considerable unemployment already exists ... makes little sense: income will suffer a greater proportional decline than the debt, and debt "burden" of the economy will actually rise.
If times of low business activity are sufficiently compensated by years of high private expenditures, Government deficits incurred during the former periods-will be balanced by surpluses created during the latter. Roughly speaking, the debt will then fluctuate around the same average level; over a period of time (without wars) its magnitude will not rise. But what if this will not be the case? What if in spite of all our efforts it will be impossible to accumulate sufficient surpluses to offset the deficits -- what kind of a debt problem shall we have to face then?
Secular Expansion of the Debt. ...Government borrowing ... is not synonymous with "make-work projects." There are many fields, such as urban redevelopment, public health and education, development of our resources, scientific research, and many others, in which Government expenditures are extremely useful, aside from employment aspects. That they create jobs and raise national income is so much the better. I believe that our actual experience during this war has well demonstrated that with sufficient Government expenditures national income can be raised to the highest level permitted by our productive capacity. This is now recognized by many competent authorities, including some opponents of Government borrowing. The latter object to the pursuit of such a policy on other grounds. From a political point of view, they argue, continuous Government borrowing will involve increasing regimentation and eventually destroy our democratic institutions; and from an economic point of view, it will lead to an ever mounting debt which, among other things, will necessitate higher and higher taxes with their well-known depressive effects.
The political aspects of Government borrowing are not discussed in this paper. In passing one can briefly remark that even in our most prosperous years, such as 1929, our cities were blighted by slums; that large areas of our country, particularly in the Southeast, have never had anything even approaching a satisfactory minimum standard of health and education, and that finally private business has-not been able to prevent the waste of our natural resources. Democracy will hardly be endangered by projects such as the TVA which, moreover, create numerous opportunities for private investment; or by healthier cities and better schools. As we can learn from the experience of other countries, it is chronic depression and unemployment that endanger democracy. ...
Dr. Krugman has been saying this over and over again.
So has Robert Reich.
Mark Thoma is not sanguine, either.