Monday, August 8, 2011

The unanswered austerity question: What level of debt is ideal?

Right now, a big chunk of the political class in the US, including the President, is in the mood for a little austerity.  The public debt is just too high, so sayeth the punditocracy. Some go far as to propose various flavors of "balanced budget amendment", though many such proposals contain other terms (such as requiring supermajorities to raise taxes) that many consider objectionable.  Ignoring salient issues such as the seriousness of deficit hawks (do they really want to lower the public debt, or simply oppose the spending desires of the other party, but don't mind at all spending public funds on their own priorities) and how do we get there, there's a significant question that hasn't really been discussed with regard to the deficit:

Where should it be, anyway?

Should it be zero, forever? 

Should it be zero over a long-term time window (several decades), but permit fluctuations as necessary to deal with short-term economic cycles?

Should a long-term deficit be maintained, albeit at a lower fraction of GDP than we currently have?

Should the permitted deficit be dependent on inflation-adjusted interest rates--in other words, if the bond market thinks the debt is too high, then its too high?  (And given that despite Friday's S&P downgrade, interest rates on Treasuries remain absurdly low--does the market really conclude that the US poses an unacceptable credit risk)?

Should the US government actually attempt to have a surplus?  (And if one assumes that the dollar remains a fiat currency which the US can create or destroy at will; what would the point be of the US having a surplus in its own currency?)

Should Congress be required to use PAYGO accounting--appropriations and taxes need to be balanced, albeit not in the same fiscal year? 

In other words, what is the endgame of austerity?  And what is the justification--economic, political, moral, whatever--for that position?

Simply assuming that it's good for you, without discussing why or in what dose, strikes me as a major opportunity for mischief.