Keynes is back and sexy.

by Shihang

Keynes is back!

“This might be OK if we could show some benefit from lower deficits, but this is a case of pain with no gain. Ostensibly, there will be a lower interest-rate burden in future years, but even this is questionable. First, the contractionary policy being pursued by the deficit hawks will slow growth and lead to lower inflation or possibly even deflation. It is entirely possible that the debt-to-GDP ratio may actually end up higher by following their policies than by pursuing more expansionary policy.

In other words, we may end up with smaller deficits and therefore accumulate less debt, but we may slow GDP growth even more. The burden of the debt depends on the size of the economy and in the scenario where we do more to slow GDP growth than the growth of the debt, then we end up with a higher interest-rate burden, not a lower one.”

If you missed the earlier post about where the deficit comes from, it comes mainly from loss revenue. In other words, if growth happens, the debt should improve.

Doesn’t this whole debt reduction business bring a certain Herbert Hoover and his tightrope act to mind? How did that one turn out?