IMF paper on debt: A Rorschach test

Editor’s note: This post originally appeared in the Wall Street Journal Think Tank blog on June 8, 2015.

International Monetary Fund staff economists have stimulated a much-needed discussion (at least on Think Tank) of the best approach governments of strong economies such as the U.S. and Germany should take to their debt burdens. “[T]he mantra that it is always desirable to reduce public debt must not go unquestioned,” they write.

Their paper is something of a Rorschach test: Everyone seems to read into it something different.

I read it as a challenge to those who argue that the highest priority of the U.S. government (and 2016 presidential candidates) ought to be taking action today to reduce the historically large debt-to-gross domestic product burden before it’s too late. I was thinking about folks who fixate on the national debt clock, who argue for cutting spending now (can you say “sequester”?), and who reason that the economy is growing slowly, in part, because uncertainty over future deficits is discouraging business investment and hiring.

Salim Furth of the Heritage Foundation read it as an endorsement of European and U.S. fiscal policy because governments have, in fact, done pretty much what the IMF prescribed: Narrowed the deficit but not paid down the debt. Perhaps, but the criticism seemed to me to be aimed at those who think the Obama administration has been irresponsibly profligate and who applaud Germany for fiscal rectitude. (For another view on Europe, see Nobel laureate Amartya Sen’ s recent “The Economic Consequences of Austerity”.)

Maya MacGuineas of the Committee for a Responsible Federal Budget found support for (self-described) deficit hawks, saying that most are “not talking about paying down the debt but calling for sensible deficit reduction that slows the growth of the federal debt to give the economy time to catch up.” That’s good to know, but there are some deficit hawks out there warning of imminent catastrophe because the federal debt has doubled as a percentage of gross domestic product on President Barack Obama’s watch and who are blocking any increased public-investment spending in Congress.

Now, I’m not completely convinced by the IMF argument. We learned during the recent crisis that the federal debt can grow by 40 percentage points of GDP in a half-dozen years. At today’s debt levels, could the U.S. repeat that if another disaster (financial or military) struck?

You can read the IMF paper or a blog post summary for yourself. It’s clear to me that they are trying to provide intellectual ammunition to those (like Mr. Sen) who argue that spurring economic growth ought to be at least as high on the policy priority list, if not higher, for the U.S., Germany, and similarly situated economies than worrying about the size of their government debts.