January 03, 2024
In the NYT’s Morning Newsletter, German Lopez told readers that “the debt matters again.” The story is that the economy has changed so now we have to get seriously worried about the size of the government debt. He gives us three reasons:
- “First, interest rates have risen. A decade ago, the interest rate that the U.S. paid on inflation-protected bonds, which are used to finance debt, was near zero. Today, that rate is almost 2 percent.”
- The unemployment rate is low, which means that we probably don’t need large deficits to sustain low rates of unemployment.
- Third, inflation is a bigger problem than it used to be, and higher deficits could make it worse. When Congress spends more or cuts taxes, Americans have more money to spend. As they spend that extra cash, prices tend to increase. The reverse is true as well: A smaller deficit can ease inflation.
While these claims have some basis in reality, they don’t make the case for the immediate action he urges in the piece.
On the first point, higher interest rates do mean higher interest payments, but the rise is not as sharp as he claims and even with higher rates we are still looking at much lower interest rates than we saw in the late 1990s, when the government was running budget surpluses.
The current real interest rate is around 1.7 percent. That is about a percentage point higher than it was in the years just before the pandemic, but almost two percentage points below where it was in the late 1990s. This hardly seems like a cause for great concern.
The second and third points should really be taken together. The point is that the economy is now operating near its capacity, it does not need the boost from large deficits to sustain high levels of employment, and in fact, this boost may now spur inflation.
While the first part is true, it is not clear how much we could reduce the deficit without seeing an impact on employment and output. For example, if we had a $270 billion dollar annual increase in taxes (or cut in spending), approximately 1.0 percent of GDP, it is likely that it would substantially slow growth and lead to some increase in unemployment.
As we saw with the Fed’s recent rate hikes, the economy is far less sensitive to interest rates than many of us had believed. This means that even if the Fed responded to the prospect of smaller deficits by aggressively lowering rates, it may not be able to offset the hit to demand. We may still see the economy slow and unemployment rise.
This brings us to the inflation side of the equation. The most recent inflation reports indicate that inflation is coming down to a pace consistent with the Fed’s 2.0 percent target. This means that current levels of deficit spending are not leading to inflation. Therefore, there should be little urgency in reducing them.
What About Implicit Debt Created by Government-Granted Patent and Copyright Monopolies?
In keeping with its quasi-religious commitment to ignore the implicit debt created by government-granted patent and copyright monopolies, Lopez makes no mention of them in this piece. The point here is straightforward. The government can pay for innovation and creative work through direct spending, as it already does to a substantial extent, for example, by spending over $50 billion a year on biomedical research through the National Institutes of Health.
Alternatively, it can pay for innovation and creative work by granting patent and copyright monopolies, threatening to arrest people who sell items that compete with new innovations or creative work. I previously compared granting patent and copyright monopolies to the practice of tax farming, selling off the right to collect taxes, which was a common practice in pre-revolutionary France and elsewhere.
The German Lopezes of the world, who yell about the debt, would presumably be fine with tax farming, since it doesn’t increase the debt by a dime. In fact, it reduces the debt, since the payments the government collects for selling off the right to collect future taxes means lower deficits, and therefore a lower debt.
In the same vein, these people insist on ignoring the implications of granting patent and copyright monopolies, which likely now lead to patent rents in excess of $1 trillion a year. In fact, since the government pays part of these rents, most notably with prescription drugs through Medicare, Medicaid, and other government programs, the parceling out of these monopolies directly raises the government debt.
Nonetheless, the deficit hawks somehow can’t see them. This is hard to understand since they are not obviously stupid people. Perhaps it is because they like the people who receive these rents, people like Bill Gates and the folks who own and work at the drug companies, more than they like the people who benefit from most government spending. But that would just be speculation.
Anyhow, if we want to have a serious discussion of the impact of the government debt on the economy it has to include a discussion of the impact of government-granted patent and copyright monopolies. Otherwise, it is just about pushing an agenda.
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