Over at today’s Matt Yglesias’s Slow Boring, “Lost Future” asked
How much of recent US economic outperformance is just debt-driven? I think we've all heard that the US is growing faster than any other developed country for a while now, post-Covid but also really post-GFC. However, we've also taken on the most debt. Are we just experiencing debt-fueled growth? Which obviously has a hard limit somewhere.
Evidently, LF has not been reading my Substack, but he’s not the only one. 😊 The US Government having borrowed a lot of money since the Global Financial Crisis has not, could not have caused growth. Nobody knows exactly how greater numbers of people working with more machines and real estate and using better procedures leads to producing more (meaning collectively more valuable) goods and services, but it does not depend on the amount or rate of increase in debt of the USG.
LF may have in mind that this increase in output of goods and services would not happen if there were not enough aggregated demand to pay the workers, machine owners, real estate owners, and developers of the new procedures. That is of course true, and it is certainly possible that from time to time there might not be enough aggregate demand to permit the growth.[1]
This was the case during the Global Financial Crisis because central banks – the Fed less than the ECB -- failed (and the functional equivalent if China did not fail) to provide enough aggregate demand. Central banks buying government debt is _one way_ of creating aggregate demand but to a first approximation it does not much matter whose debt the central bank buys.
Of course if the central bank has NOT provided enough aggregate demand and there are unemployed workers, machines and real estate, a government that is following the rule of thumb of deficits = Σ(expenditures with NPV>0) will see that lots more activities will pass the NPV test and so will spend on those activities, deficits will rise, the central bank will buy government debt, aggregate demand will increase and fewer workers, machines and real estate sites will be unemployed. Looking back, it will appear as if the increase in government spending and debt (rather than the increase in other spending and debt) “stimulated” the economy. [Matt’s answer indicates that he, like many people, is a victim of this misperception.]
Once the central bank has provided enough aggregate demand to employ all the workers, machines, and real estate, however, the appearance of government debt stimulating the economy goes away. An increase in government debt, a deficit, just transfers spending and resource use from one activity to another and not to an increase in the total. More specifically if the NPV of the things the government is spending one is lower than the NPV of the alternatives, roughly speaking if deficits > Σ(expenditures with NPV>0), the deficit will actually reduce the value of total output in the future.
So, the answer to FF’s question is, “No,” the growth of the US economy is not due to the large amount of debt that has accumulated since the GFC. On the contrary, there are ways that less accumulation of debt (reduced government spending on things with NPV <0 and more taxation that led to reduced private spending on things with NPV < 0) would have produced even more growth.
As for the second part of LF’s question, “the hard limit on debt,” see, https://thomaslhutcheson.substack.com/p/austerity-sic-is-in-the-air
Or
https://thomaslhutcheson.substack.com/p/debtpocalypse
Image prompt: group of people looking in amazement at a huge pile of bricks with $ signs on each brick and the pile labeled “Debt”
[Standard bleg: Although my style is know-it-all-ism, I do sometime entertain the thought that, here and there, I might be mistaken on some minor detail. I would welcome comments on these views.]
[1] It is also possible for there to be (arithmetically) “enough” aggregate demand but it not to be distributed “correctly,” there is “too much” for some things and their prices rise because no more of them can at the moment be produced and “too little” for other things and the people and machine and real estate that could produce them become less than fully employed.
This can arise when there has been a large change in the distribution of supply or demand among sectors of the economy and relative prices have not adjusted to in a way that amounts demanded shifts enough to employ all the machines and people and real estate. One reason that relative prices do not adjust quickly is that some relative prices need to fall as other need to rise, but cannot (easily and quickly) fall, they are “sticky downward.” In this case the only way for all the people and machines and real estate to become fully employed is for the non-sticky prices to rise and the sticky ones not to rise, but this implies that the central bank has to provide enough aggregate demand to produce and increase in the average of the prices of goods and services: produce inflation.