When President Trump released his new tax plan — all one single page of it — his critics immediately pounced on a glaring factoid: The proposal could add $5.5 trillion or more to the federal debt over the next decade.
"It will blow up the deficit and debt," declared Sen. Chris Van Hollen (D-Md.), adding that "working Americans" will pay the bill. Jason Furman, the former head of President Obama's Council of Economic Advisers, pointed to a projection that the debt increase would slow economic growth. The New York Times was ringing the alarm that the GOP is about to abandon its relentlessly austerian fiscal principles.
Obviously, this is the fattest of targets. The irony and hypocrisy of Trump's plan is sky-high. So I get the temptation to rake Trump over the coals for threatening to add to the federal debt.
Nonetheless, I must plead with Democrats: For the love of God and all that's holy, stop it!
Fear-mongering about the debt is just wrong on the economic merits. But it also undermines and destroys the very political values liberals seek to advance.
The claim that more debt will hurt the economy goes like this: More debt will lead to higher interest rates sometime in the future, forcing the federal government to hike taxes to pay those obligations. Those interest rates will crowd out private sector investment, and the taxes will slow the economy. The analysis that Furman highlighted takes this route, for example.
What this story doesn't tell us is how much borrowing we'd have to do before we start running a real risk of interest rate increases. It just assumed the risk is ever present.
But a quick glance at the data tells us the risk is minuscule: Interest rates on U.S. debt remain at historic lows. You may have heard economists talking about how America is stuck in an enormous savings glut: Huge amounts of money are sloshing around financial markets without enough assets (like U.S. treasuries) to invest in. On top of that, international trade relies on the U.S. dollar as its exchange currency of choice. So other countries are always trying to sock away big reserves of financial assets denominated in American dollars. Add it all up and demand for assets like U.S. debt vastly outstrips supply. Hence, low interest rates.
More borrowing by the U.S. would actually create more of those assets, bringing supply back even with demand. Once we've created enough assets to soak up the savings glut, then we'd face a real risk of higher interest rates.
The trouble with modern economic thinking is it more or less says that massive and persistent savings gluts can't happen. At worst, they should rapidly and naturally self-correct. So the models like the one Furman pointed to simply aren't designed to handle what's going on in our economy right now, and vastly overstate the effects of the debt load.
The next layer to this is the Federal Reserve. The central bank's job is usually described as managing interest rates. But how this works in practice is the Fed creates new money (technically bank reserves) with which it buys financial assets — again, usually U.S. treasuries. So in a pinch, the Fed can always create new demand for U.S. debt out of thin air.
Now, in the world as it exists, the Fed is an extremely inflation-averse institution that caters to the desires of big finance. It's far more likely the Fed will choke off economic growth too early than allow inflationary pressure to build too much.
But let's say you had a Fed with the opposite priorities. Surely, if you monetize enough debt, you'll cause inflation.
Well, yes, but again the question is, at what point? It's not always true that paying debt obligations with newly created money will increase inflation. It's only true when the economy is running at full capacity.
If the additional dollars spur the creation of additional goods and services, then they'll absorb the new money supplies. Only when everyone already has a good paying job, and all the productive factors in the economy are being put to full use, will the newly created money inevitably chase the same amount of goods and services that existed before. And that's what causes prices to rise.
This brings us to the real problem with Donald Trump's tax cut plan.
All borrowing financed by money creation is not created equal. Depending on how it's designed, it might drive us towards full employment, or it might not. If the government pumped that new money into a big expansion of aid to the poor, for example, it would increase aggregate demand and drive businesses to hire more. A big new industrial policy on something like infrastructure or clean energy would create millions of new jobs directly. Both policies would definitely push the economy towards full capacity.
But Trump's tax cuts would flow overwhelmingly into the pockets of the already wealthy. That's much more likely to just swell the savings glut still further, and keep interest rates depressed. So Trump's plan will make inequality much worse, and almost certainly prove useless as far as job creation goes.
That's what liberals and Democrats should be hitting him for.
But investments in the welfare state or in jobs — which liberals ostensibly support, and which would help the economy — rest on the need to borrow just as much as Trump's tax giveaways to the rich. So concern-trolling Trump and the GOP about the debt, tempting as it may be, undercuts Democrats' own policy goals.
The only time lawmakers should worry themselves about the federal debt load is when the economy is already at full capacity. Any other time, the politics of deficit fear-mongering become enormously destructive, actively preventing the very sorts of policies that could push us back to full employment.
For anyone keeping track: Other than a brief blip in the late 1990s, the U.S. economy hasn't seen anything like full employment in the last 40 years. The dangers of the debt should be the last thing on anyone's mind.