The Dangerous Notion That Thinking Doesn't Matter

-- Posted by Neil H. Buchanan

This past weekend, hours before the print edition of Sunday's New York Times had even landed on my doorstep, I received emails from Professors Dorf and Lawsky. Both emails contained links to a new op-ed entitled: "The Dangerous Notion That Debt Doesn't Matter." The author, Steven Rattner, is identified as a Wall Street executive and former Treasury official. Professor Dorf's email said, in essence: "This guy is nuts." Professor Lawsky's email said, in essence: "This guy agrees with you." Of course, one way -- perhaps even the most natural way -- to read those emails is to infer that even my closest friends think I am nuts. Stipulating that I am ill-positioned to argue against that conclusion, however, I think that Rattner's op-ed reflects a deeply confused point of view that also includes some sensible and important arguments. The confused part is, unfortunately, REALLY confused; and it also seems to be the part that Rattner cares about most deeply.

Rattner begins: "With little fanfare, a dangerous notion has taken hold in progressive policy circles: that the amount of money borrowed by the federal government from Americans to finance its mammoth deficits doesn’t matter." This is simply false. No one on the left or center-left, to my knowledge, argues that the level of federal borrowing does not matter. (Some on the right, for example Dick Cheney, have aggressively made such arguments.) We often argue that debt and deficits matter in ways that are poorly understood, or that particular arguments about federal borrowing are simply wrong, or that deficits can be good as well as bad. We do not, however, argue that government borrowing does not matter.

But if I were to argue that, say, buying a house does not automatically guarantee that a person will achieve the American Dream, that is hardly a blanket condemnation of home buying. Rattner might have been incorrectly implying that anyone who denies the validity of any anti-deficit argument is denying the validity of all anti-deficit arguments, no matter the context.

Even this, however, turns out to be too generous to Rattner's position. He quickly lays down his cards: "Here’s the theory, in its most extreme configuration: To the extent that the government sells its debt to Americans (as opposed to foreigners), those obligations will disappear as aging folks who buy those Treasuries die off." No one, but no one, has ever made the argument that Rattner attributes to "progressive policy circles." (Yes, I understand that I am setting myself up for a gotcha, if any reader can find a counter-example to my broad claim. If that happens, I will gladly amend my assertion to: "Only the most crazed lunatic has ever made the argument that Rattner attributes ...") He is not merely generalizing inappropriately, he really is just plain nuts!

The argument that reasonable people do make is this: One party's debt is another party's asset. When the government owes money to a bondholder, the bondholder is legally entitled to repayment under the terms of the debt contract. If the debt is not redeemed during a person's lifetime, it will be repaid to those who inherit (or purchase) the debt upon his death. Whenever the debt is repaid in the future, money will be received by a person in the future. That means that the existence of borrowing, even borrowing that is not repaid for centuries, does not represent a direct intergenerational transfer. Future Americans will be on the hook as taxpayers for the principal and interest on the debt, but future Americans will also be the ones who receive those principal and interest payments.

This argument requires two immediate caveats: (1) Debt that is not held by Americans is not intergenerationally neutral in this way, and (2) Even internally-held debt has important distributional implications, as it potentially shifts income from all taxpayers toward rich bondholders (which makes it especially important to know how the borrowed funds are spent). Recently, Paul Krugman has been discussing this argument and its caveats, showing that the vast majority of Treasury debt is still held by Americans, while expressly acknowledging that the argument sets aside distributive consequences.

Krugman, on his blog, reasonably notes that Rattner's op-ed "does seem to be aimed at me." Krugman's best guess is that Rattner "read my article, saw that I was denying that debt imposes the kind of burden on the next generation that people say, and immediately threw down the paper and began composing an indignant reply to what he assumed I must have been saying." That makes as much sense as anything. There is simply no way that anyone could read Krugman or anyone else to be arguing that dead people's debts simply go away. Rattner became confused, and he began to write without thinking.

Interestingly, however, one could argue that those of us who focus on Rattner's embarrassing mistake are also throwing down the paper too soon. True, in this case, we would actually be justified in imagining that someone who is so sloppy in his arguments is unlikely to have something worthy to say. As it happens, however, I am one of those people who feels compelled to finish what he starts, so I bulled forward to the bitter end of Rattner's piece.

The good news is that the end is not bitter at all. Rattner, who happily identifies himself as a "deficit hawk," actually calms down and makes exactly the arguments that supposed deficit doves like me make all the time. (My most recent law review article on these topics is at 31 Va. Tax Rev. 375. Pre-publication draft here.) Specifically, Rattner allows "that with the economy still barely above stall speed, now is hardly the moment for the government to slam on the fiscal brakes, debt or no debt," and he then argues that the government should separate operating expenses from capital spending, to prevent the anti-spending zealots from cutting important public investments in infrastructure, education, and so on.

These two ideas -- that short-term borrowing is good during a recession, and that long-term borrowing is good when used to finance public investment -- are at the core of my proposal to create a "Growth Budgeting Board," which would be empowered to protect deficit spending under those two conditions. Perhaps Rattner is simply identifying himself as a deficit hawk as part of an effort to cast his views as Nixon-in-China breakthroughs. In any event, no deficit dove that I know would disagree with him on either of these two issues.

It is a shame that Rattner's op-ed will be remembered by nearly everyone as a rant against one of the most absurd straw men of all time. If he could have convinced more people to join the camp that understands that borrowing is neither good nor bad per se, and that we currently desperately need to engage in good deficit spending, then he might have done the world an important service.