The needless panic about government debt 

The compromise on Sept. 30 that keeps the government open for 45 days does not change the fundamental issue of spending and debt. 

Right-wing members of the House of Representatives who set the agenda for the Republican Party want to cut government spending to the bone. This means in effect making the federal government less influential and less able to challenge powerful private interests and operate effectively internationally. The right-wingers argue that government spending must be reduced to ward off a national debt crisis some time out in the future, but what they really want is a weak federal government. 

Reactionary Republican warnings about the dangers of government spending have been central to the Republican repertoire since the 19th century, but they are more serious today because the U.S. faces challenges from Russian President Vladimir Putin and Chinese President Xi Jinping that will require more federal government leadership and spending. Republicans, however, seem not to understand what is meant by Russia’s attack on Ukraine, its interference in elections in the U.S. and around the world, and China’s aggressive moves in the South China Sea and around Taiwan. What Putin and Xi want, however, is clear. They want to overthrow the post-World War II power balance that the U.S. has led in creating. The U.S. and its allies will need to spend money to deal with these challenges, but right-wingers want to deny the government the resources to do so.  

This month Republicans showed themselves willing to close the government to force spending cuts that they say are needed to avoid the future government debt crisis they imagine. The crucial issue that will dominate over the next 45 days is additional aid to Ukraine. Right-wing Republicans want to eliminate it in the future even though Ukraine is fighting a war that Putin himself says is aimed at defeating the U.S. The right-wingers seem to believe that a weakened American government that they starve for resources can survive in Putin and Xi’s newly threatening world.   

In addition to aid to Ukraine what else do these right-wingers want to cut? Prominently, they would not agree to $4 billion in additional money for “border security” that is in President Biden’s budget. 

The right-wingers do not want to spend to mitigate the effects of climate change, fires, floods, and droughts that are happening already and certainly will need to be faced long before their imagined government debt crisis. 

They want to cut funding for scientific research while Xi’s China invests more and plans ahead in scientific areas that will be the future. They want to cut child focused assistance programs and day care that are needed to allow tens of millions of Americans to have fully productive lives. 

The right-wingers are afraid to call for big cuts in Social Security and Medicare, so they are holding back on this part of their wish list. Those tens of millions of Americans who need Social Security, Medicare and the safety net, however, should worry about the future of these programs while these ideologues dominate the Republican Party. 

It will not be possible to convince American voters in the next 45 days that government borrowing and debt is not an immediate problem and is unlikely to be so in the foreseeable future. The arguments for this benign view of government debt are there however. A central one is that government spending and debt problems, when they have arisen around the world, almost always arise when a country has to borrow and pay back in foreign currency. The U.S. will not have such a problem because it can borrow in dollars. 

History makes this clear. Germany, Austria and America’s allies after World War I needed to borrow to rebuild and could not borrow in their own currencies. They had to borrow dollars and pay their dollar-denominated war debts to American banks and other lenders in dollars.  

In 1928 and 1929, interest rates to borrow dollars rose. The countries could not borrow dollars at the rates that prevailed in the early 20s, so the currencies of the borrowers collapsed. The U.S. eventually cancelled most of the war debts, but it was too late.  

The U.S. government in 2023 is not in this situation. It does not have to repay the debt in foreign currencies. As a result, it has an almost limitless ability to create and borrow funds. 

The anti-government right-wing has been hammering home its false narrative about the dangers of government debt for almost a century so it is hard to root out. They love to say that repaying the debt will crush your grandchildren. This is hogwash but this story has deep roots in the public psyche. The fact that 25 or so U.S. recessions and depressions over the past 250 years have never been caused by too much government spending or handicapped future generations does not faze those who propagate this false narrative.  

(For the best discussion of the private vs. public debt issue over 250 years of U.S. history see Richard Vague, “The Paradox of Debt,” especially fig. 8.3 and the section on “The Lived Experience of Debt Cycles.”) 

The collapse of the real estate market in 2008-09 is a recent glaring example of a financial collapse driven by private not public debt. It was caused by a huge overhang of private housing debt. An effective government response should have been government spending to fill the void created by the collapse of private real estate investment. Sadly, for millions of Americans who lost their homes, such a response was blocked by Republicans.  

More recently unlike in 2008-2009, the $4 trillion or so in government spending that filled the spending gap during the COVID crisis allowed for a rapid and relatively painless recovery, something that anti-government Republicans studiously fail to notice. 

In summary, the U.S. needs to see through the false narrative about government debt and spending so that it can deal with the economic and political challenges posed by Putin’s invasion of Ukraine and Xi’s militance. These threats will require spending and this country, so rich in real resources, can afford them. What it cannot afford is to have its hands tied by the right-wing’s concerns about government spending and debt. 

Paul A. London, Ph.D., was a senior policy adviser and deputy undersecretary of Commerce for Economics and Statistics in the 1990s, a deputy assistant administrator at the Federal Energy Administration and Energy Department, and a visiting fellow at the American Enterprise Institute. A legislative assistant to Sen. Walter Mondale (D-Minn.) in the 1970s, he was a foreign service officer in Paris and Vietnam and is the author of two books, including “The Competition Solution: The Bipartisan Secret Behind American Prosperity” (2005).