Jeffery Sachs Thinks America Is Close To Anarchy

Sachs’ recent HuffPo article is being torn up in the blogosphere. See Mark Thoma for a summary.

I don’t have a whole lot add except that I want to make an obvious point about debt: that for a country that owns a printing press, it’s extremely difficult for a debt crisis to emerge. Not impossible, but extremely difficult.

A crucial piece of Sachs’ argument lies in the belief that when interest rates rise, the government will need to pay more to fund itself, thereby crowding out other forms of public investment.

Here’s Sachs:

[I]nterest rates are likely to return to normal levels later this decade, and if and when that happens, debt service would then rise steeply, increasing by around 2 percent of GDP compared with 2012. Many people seem to believe that we can worry about rising interest rates when that happens, not now, but that is unsound advice. The build-up of debt will leave the budget and the economy highly vulnerable to the rise in interest rates when it occurs … As interest service costs rise, vital public investments and other programs are likely to be shed. That’s when we’ll suffer the most severe fiscal consequences of our debt buildup of debt.

Sachs is right that it’s the interest burden, not the debt, that matters for fiscal sustainability. But Sachs’ argument only holds if interest rates rise and the economy remains weak. After all, the interest burden, which needs to always be measured as a percentage of GDP, need not rise if interest rates rise and GDP growth picks up.

In fact, this has been Krugman’s stance all along: that we will see interest rates rise only when growth picks up — and when we are out of the liquidity trap and on the road to full employment.

Now, it’s very possible that interest rates could rise without growth ever picking up. But it’s important to understand what such a situation would actually look like. History tells us that for countries with a printing press to suffer from a debt crisis, there needs to be a complete breakdown of political trust. And by complete, I literally mean a situation close to anarchy. For example, if we look at Zimbabwe in the 2000s, countless citizens were being raped and murdered in the streets as the government continued to print money.

Do we think America is going to be in a state of near anarchy anytime soon? Do we think that citizens are going to be overthrowing the police and chucking Molotov cocktails at the White House next year? Or even in the next decade?

I may be exaggerating a bit. But the point is that I don’t think the people constantly fretting about debt and deficits actually understand how much America would have to change, both socially and politically, for a debt crisis to emerge.

Now, it’s seriously problematic that one of our political parties has shown a repeated willingness to do whatever it takes to dismantle the welfare state, even if it means pushing the government to the brink of default every time the silly debt-ceiling deadline comes up. But it seems to me that if we really care about ensuring fiscal sustainability, we should be directing our energy toward fixing that dynamic rather than reducing the debt.

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