Daniel W. Drezner

The pessimism bias on U.S. debt

Let’s face it, Americans do not understand the current state of either macroeconomic policy or foreign policy terribly well. According to Bloomberg, only six percent of Americans know that the federal budget deficit is actually shrinking. According to Gallup, just a bare majority of Americans believe that the United States military remains "number one in ...

Let’s face it, Americans do not understand the current state of either macroeconomic policy or foreign policy terribly well. According to Bloomberg, only six percent of Americans know that the federal budget deficit is actually shrinking. According to Gallup, just a bare majority of Americans believe that the United States military remains "number one in the world militarily." In a world of these kind of epic media fails, where significant numbers of GOP legislators seem "more concerned about 2% inflation than 8% employment," it’s important to to have recognized experts try to clear the air. 

Nobel Prize-winning economist and unusually-pithy-writer-for-an-economist Robert Solow has an op-ed in today’s New York Times to offer a primer on the implications of U.S. debt. Here, in brief, are the "six facts about the debt that many Americans may not be aware of," in Solow’s words. Let me number them here:

1) Roughly half of outstanding debt owed to the public, now $11.7 trillion, is owned by foreigners. This part of the debt is a direct burden on ourselves and future generations….

2) The Treasury owes dollars, America’s own currency (unlike Greece or Italy, whose debt is denominated in euros)…

3) One way to effectively repudiate our debt is to encourage inflation…

4) Treasury bonds owned by Americans are different from debt owed to foreigners. Debt owed to American households, businesses and banks is not a direct burden on the future….

5) The real burden of domestically owned Treasury debt is that it soaks up savings that might go into useful private investment.

6) But in bad times like now, Treasury bonds are not squeezing finance for investment out of the market. On the contrary, debt-financed government spending adds to the demand for privately produced goods and services, and the bonds provide a home for the excess savings. When employment returns to normal, we can return to debt reduction.

Some foreign pollicy experts think that Solow is being too sunny.  Take Council on Foreign Relations president Richard Haass:

 

With respect, I think Solow is actually being too pesssimistic, and Haass is being way too pessimistic. 

The problem is that, contra Solow, I suspect Americans are keenly aware of his points 1-5.  The United States owes a lot of money to China, but I’d wager that any poll of U.S. citizens would reveal that the public thinks we owe even more to China than we actually do. Similarly, much of the policy rhetoric coming from Washington focuses on fears of incipient inflation that have yet to pan out. 

It’s Solow’s last point that is the one Americans need to hear more: in an era of slack demand, bulging coporate cash coffers, and recovering personal savings rates, it’s actually pretty stupid to have U.S. government spending and employment contract so quickly. I fear, however, that excessive concern about Solow’s first, third, fourth and fifth points will swamp out the rest of his op-ed. 

As for Haass, I’m not exactly sure what "rising rates" he’s talking about, as just about any chart you can throw up shows historically low borrowing rates for the United States government. Indeed, the U.S. Treasury is exploiting this fact by locking in U.S. long-term debt at these rates. As for foreign governments pressuring the United States, the fear of foreign financial statecraft has been somewhat hyped by the foreign policy community. And by "somewhat hyped," I mean "wildly, massively overblown." 

The bias in foreign policy circles and DC punditry is to bemoan staggering levels of U.S. debt. This bias does percolate down into the perceptions of ordinary Americans, which leads to wild misperceptions about the actual state of the U.S. economy and U.S. economic power. I’d like to see a lot more op-eds by Solow et al. that puncture these myths more effectively. 

Am I missing anything? 

 Twitter: @dandrezner

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