Remember my review of Bob Kuttner’s important new book, Debtors’ Prison? Then you’ll recall that I posed some questions to him. Here are his (resonant) responses.
Many thanks for your generous review of my book. Here are a few responses to your comments and questions.
In addition to distinguishing good debt from bad, or speculative debt, there is the distinction between the right policy ex ante and ex post—before and after a financial collapse.
Before the fact, we need regulation to discourage excessive leverage and pure speculation. After the fact, heavy debts become a macroeconomic problem, and debt relief is necessary even when, in normal times, it might be seen as incurring moral hazard.
On that point, contrary to Ed Chancellor’s somewhat tongue in cheek definition, there is in fact a good distinction between speculation and investment, which Keynes made better than anyone, and which I cite in the book to rebut the common mistake to view all investments a speculative. An investment, as Keynes wrote, is an expectation of return over the life of the asset, whereas a speculation is a short-term bet on the movement of markets, usually with mostly borrowed money.
Also, the problem is not the Fed’s low interest rates, but the combination of loose money and lax regulation. Low interest rates are just what the real economy needs, to grow. The era of regulated finance, between the ‘40s and the ‘70s, was also a period of very low and even negative real interest rates, which was good for the real economy. In that era, finance could not use cheap money for pure speculation.
With regard to your questions, the time to bring down the debt to GDP ratio is when the economy is prospering. In good times, we need only very moderate deficits, and the debt to GDP ratio will shrink of its own accord as long as the economy is growing faster than the debt. But this weak recovery is a moment to take advantage of very low interest rates, and borrow money to underwrite public infrastructure investment in order to stimulate the employment and growth that the traumatized private sector just isn’t providing.
Further, the challenges of reforming Social Security and Medicare, which are real, need to be kept far away from general fiscal policy. The use of Medicare and Social Security cuts to support fiscal restraint (which is ill-timed as macroeconomic policy) is merely an opportunistic way of cutting these programs, which need reform of their financing but not cuts in their benefits.