Mike Konczal in The Nation:
In a 1937 radio address, the economist John Maynard Keynes said that “the boom, not the slump, is the right time for austerity at the Treasury.” The time to pay down debt isn’t when the economy is weak, since the necessary spending cuts and tax increases would exacerbate a recession, but instead when times are good.
But what if good times aren’t right for austerity either? What if we should just service our debt—i.e., pay the minimum—and chill? This piece of advice is coming from an institution that, for many on the left, is synonymous with austerity: the International Monetary Fund. The IMF’s retiring research chief, Olivier Blanchard, is an MIT-trained New Keynesian, and the research team he oversaw during the Great Recession pushed the discussion into brand-new territory. A recent paper by IMF economists Jonathan Ostry, Atish Ghosh, and Raphael Espinoza is titled “When Should Public Debt Be Reduced?”, and their surprising answer is, for a country like the United States, not in the near future.
As background, the national debt did increase as a result of the Great Recession. As the economy weakened, the government took in less in taxes and paid out more in support. These “automatic stabilizers” put a floor under demand and helped keep the Great Recession from turning into the next Great Depression.
The government deficit increased throughout the worst of the recession, before falling and leveling off at a low rate. Now the deficit is just 2.4 percent of the GDP—lower than the average over the past 50 years. But the total amount of government debt has plateaued at a higher level. In 2007, the ratio of debt held by the public to GDP was about 35 percent; now it’s 74 percent.
To understand the IMF’s analysis, we must remember that the debt is what economists call a “sunk cost,” since the money has already been spent. We are left to consider the benefits and costs of this spending decision: Would our economy benefit most from throwing money at the debt, or investing it in something else?