James Galbraith Makes It Simple

Q: “Now why do you believe the US government will never, ever have a problem funding its public expenditures and deficits?”

A: “Because the electricity supply to the computers that send those signals will never be cut off.”

Q: “It’s that simple?”

A: “Simple as that.”

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If you want the more complicated version, Galbraith wrote a policy note a couple years back that explains why the long-term budget projections that elicit so much bipartisan anxiety are unjustifiably pessimistic with regard to the question of whether the US public debt is “sustainable” over the long term, which is to say, whether the public debt-to-GDP ratio will stabilize or continue to grow without limit.

On this question, as he explains, it’s all about the relationship between the rate of economic growth and the rate of interest on government debt. If the real growth rate is greater than the real interest rate on debt, then even a small primary deficit is consistent with a debt-to-GDP ratio that stabilizes over the long term.

(Paul Krugman also danced on the edge of this idea a few weeks back, as part of his meditations on “secular stagnation” and the possibility of real interest rates staying low (or negative) for the foreseeable future: “I don’t want to push this too hard, but I just want to make it clear that if we really believe in low or even negative normal real interest rates, conventional views of fiscal prudence make even less sense than people like me have been saying.”)