The Costs of Our Debt

Tonight I would like to focus on the arguments made by those who believe the amount of government debt doesn’t matter. For years, economists have been debating the best way to reduce the debt to GDP ratio. The fear is that we may soon cross over to a point of no return which inevitably leads to some form of debt crisis. However, in recent years, a growing number of economists and commentators have come to believe that the debt doesn’t matter. If we just ignore the 70s, then, thanks to permanent low interest rates and low inflationary risks, we will be able to disregard the debt and achieve low unemployment and high output.

There are problems with this position. First, the fact that interest rates have stayed low in recent years does not mean that they will never significantly rise. It might take a while, but the prospects are strong that they’ll eventually go up. Second, and maybe more importantly, even if interest rates never increase and inflation never materializes, there is a significant cost to high debt which is best avoided, especially if one values smaller government. Debt is only the symptom of overspending, i.e. an expansion of the size of government with all the distortions that comes with such a growth.

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