The interest in Alexander Hamilton, thanks to the musical and the buzz around women’s faces gracing various denominations of US currency — but not displacing the first secretary of the Treasury, thank goodness — have led Paul Krugman to reflect on Hamilton’s contributions to modern economic theory, specifically Hamilton’s First Report in the Public Credit in 1790.
Paul Krugman, In Hamilton’s Debt
Hamilton argued that the existence of a significant, indeed fairly large national debt would be good for business. Why? Because “in countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money.” That is, bonds issued by the U.S. government would provide a safe, easily traded asset that the private sector could use as a store of value, as collateral for deals, and in general as a lubricant for business activity. As a result, the debt would become a “national blessing,” making the economy more productive.
This argument anticipates, to a remarkable degree, one of the hottest ideas in modern macroeconomics: the notion that we are suffering from a global “safe asset shortage.” The private sector, according to this argument, can’t function well without a sufficient pool of assets whose value isn’t in question — and for a variety of reasons, there just aren’t enough such assets these days.
As a result, investors have been bidding up the prices of government debt, leading to incredibly low interest rates. But it would be better for almost everyone, the story goes, if governments were to issue more debt, investing the proceeds in much-needed infrastructure even while providing the private sector with the collateral it needs to function. And it’s a very persuasive story to just about everyone who has looked hard at the evidence.
Unfortunately, policy makers won’t do the right thing, largely because they keep listening to fiscal scolds — people who insist that public debt is a terrible thing even when borrowing costs almost nothing. The influence of these scolds, their virtual veto over fiscal policy, somehow persists even though their predictions of soaring interest rates and runaway inflation keep not coming true.
The point is that Alexander Hamilton knew better.
If only we had a few Hamiltons running for office today. Perhaps they’d realize that with our ability to raise money at the lowest conceivable levels the country could be investing in the future: in infrastructure, the transition from fossil fuels to solar and other sustainable energy, new industry, and the education of our young.
But the do-nothings on the Right will continue to foil forward-leaning investments in a continuing cut-off-your-nose spitefulness that characterizes the establishment GOP.