The Beatings Will Continue…

This may be the answer to this.

Shorter DeLong:

It is perfectly obvious that the cause of the Great Recession was an insufficient supply of government debt. And it is perfectly obvious that we need to reduce the supply of government debt.

Let me spoil the joke by explaining it.

The argument that the collapse in demand for currently produced goods and services in 2007-2009 was due to an excess demand for AAA assets, i.e. government debt, is a useful one, as far as it goes. But the strange thing is that the New Keynesians making it don’t seem to think it conveys any information about the long-term fiscal position. Presumably, if we’d known about the coming excess demand for government debt, we’d have wanted higher deficits throughout the 2000s, instead of having to ramp them up suddenly at the end of the decade. And presumably, the circumstances that led to higher demand for government debt in 2007-2009 can be expected to recur. So maybe we want to prepare for them going forward? But no, we still need the debt-GDP ratio to be “sustainable” — a term which is never defined, except it’s always lower than where we are now. The fact that the ratio was too low, rather than too high, in the recent past somehow fails to imply that it could be too low, rather than too high, in the future.

Let me come at this another way. Check out the entrants in the Peterson Institute budget beauty contest. All of them are considered by the judges to have rocked the swimsuit competition “put the federal debt on a sustainable trajectory through 2035.” But what does this mean? The fiscal positions at the end date range from a surplus of 0.8% of GDP to a deficit of 3.7%. Debt-GDP ratios range from 30% to 81.7%. The highest-deficit entrant (EPI’s, for what it’s worth) is near the very high end of the historical range, and essentially identical to the CBO’s current-policy baseline. If current policy is sustainable, why are we having this conversation? But of course, Peterson gives no indication how “sustainable” is being defined (or for that matter what they’re assuming about GDP growth and the interest rate on government debt, quite important for these exercises).

Mainstream discourse on budget deficits (as with inflation) combines an absolute conviction that the current debt-GDP ratio is too high, with a complete lack of principles for telling us what the optimal ratio might be.