Washington refuses to understand that debt can be an essential tool for economic growth. Can we overcome this irrational and destructive fear?
But “Minsky insurance” can’t be the only thing we learn from the debt bubble and the great recession it caused. A key insight from the 2000s, when the debt bubble was inflating, is that in the midst of the lost decade for middle-class income growth, debt acquisition became the only way for too many families to get ahead. We can and should impose regulations to break the financial instability cycle—public policy doesn’t do people any favors when it supports unsustainable loans in place of earnings. But we must recognize that absent income growth, if channels of overleveraging are blocked, middle-class living standards will be that much more vulnerable to stagnation.
That suggests an investment and jobs agenda that would take me well beyond my scope. My point here is simply that we will be unable to support that or any other progressive agenda, in the short or long run, if we fail to understand the role that debt can and should play in our economy and society. But I’d go further. Our misunderstanding and irrational fear of debt and deficits prevents us from resolving the most important policy question we face: What should be the size and role of government? As long as Republicans want to cut deeply into government spending and Democrats’ main distinguishing feature is the desire to cut less deeply, we will never answer this question.
The debate on this foundational issue cannot begin from “How quickly do we get to primary balance?” or “At what year in the budget window does your plan have the debt-to-GDP ratio declining?” That is government by accounting, motivated more by fear than vision. And it is a debate structured to shrink government.
My analysis of future challenges—demographic, economic, and environmental—leads me to believe that in coming years we will need a stronger and larger government sector than we have had in the past. Others see the future differently. Our two sides must debate this question from the bottom up: from what we expect and need in terms of investment in public infrastructure, retirement security, health care, defense, safety net protections, education and other mobility enhancers for the disadvantaged, countercyclical policy, innovation, and so on. To begin this debate from a position of deficit reduction—no new taxes, only spending cuts—is to tilt the result against progressives from the start. It is to begin from the assumption that we can’t afford the above functions, that we’re broke, or worse: We’re Greece!
Despite what so many people say, we are neither. We are fully capable of paying for, in a sustainable manner, a government that meets the functions enumerated above. But to do so requires a rational rethinking of debt and its role in the economy and society. I recognize that rational thought on matters economic, especially this one, is in short supply these days. But while its supply is down, demand is up, and the more we’re promoting that discussion, the better.
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