Some fellow with more money than insight has a National Debt Clock on a building in New York City. It announces that your family’s share is $74,090. The Associated Press story says, “The mountain of debt could become the next full-fledged economic crisis without firm action from Washington.” The firm action they have in mind is a reduction in the Federal budget. The real problem is not the size of the Federal budget. We will actually need more spending to put all of our labor to work. The problem is the way we finance government.
There is no reason to borrow and incur an interest payment obligation. The government could borrow from its own bank (the Federal Reserve) rather than sell bonds. Remember, there is no opportunity cost when resources are unemployed. No one needs to save or divert their private spending to taxes. To understand this, think what a primitive economy without money would do if it had unused resources. The chief or shaman would just order the unemployed to work making useful things. The missing ingredient is simply the signal to work, not a scarcity of resources. In a modern economy, the signal to work is a newly created dollar. When the private sector does not want to borrow to create dollars and jobs, the government must do it.
We are mired in the past with obsolete institutions. It would be a shame if we don’t spend enough to get out of this recession because of a reliance on the outmoded belief that government spending in a recession must be financed with government bonds.