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Let He Who Is Without National Debt Sin Cast the First Stone

A small part of me is glad that bond market vigilantes are focused on the federal budget, the deficit and the national debt. Not caring about the amount that the government is borrowing would make bond traders far too much like the mortgage market that was willing to look the other way as no-doc, ninja (no income, no job or assets) and payment-option adjustable rate mortgage loans helped lead to the economic problems that we’re suffering through today.

But most of the bond market’s concerns are remarkably misplaced or misstated, and they are clearly being hyped for political purposes. Those in Washington, D.C., who are using these concerns to attract attention are not just incorrect but almost laughably wrong. They are also at least partly to blame for what they are now so willing to blame on others.

The problem is not, as some inside the Beltway have been insisting with increased vehemence in recent days, that the federal government is currently running big deficits and borrowing. With businesses and consumers still not spending very much and the Federal Reserve not able to stimulate economic activity by lowering interest rates, fiscal policy — tax cuts and spending increases and, therefore, increased government borrowing — has been the only tool available to policymakers. Using it now makes sense.

The increased national debt that has resulted from use of fiscal policy to deal with the economy was completely expected and absolutely desirable unless you believe the government should be doing nothing. The Bush administration (remember the $150 billion stimulus and Troubled Asset Relief Program?) and the Obama White House were applauded when they rejected that option. In fact, President George W. Bush was widely castigated toward the end of his presidency for not doing more. And with the monetary and fiscal policy measures taken to that point not having the desired effect, Wall Street and Main Street alike insisted that Barack Obama get involved in economic policymaking before he actually took the oath of office. Doing something rather than nothing in response to the economic emergency — that is, increasing the national debt — literally was demanded.

Historically, increasing the national debt to deal with economic and military emergencies has been such a typical response that it really should be considered nonpartisan rather bipartisan. In his blog Thursday, University of California, Berkeley, (my alma mater) economics professor Brad DeLong posted a series of graphs showing federal borrowing has always increased substantially in these circumstances. In other words, that the debt is currently growing is anything but surprising and should not be disturbing.

No budget sin (and I’m using that word very intentionally) is being committed because the government is borrowing now. Given the state of the economy and the tools available to policymakers, increased federal deficits and debt are necessary and were completely predictable.

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