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In our opinion: The government should know that good times won’t last forever

SHARE In our opinion: The government should know that good times won’t last forever
This Feb. 9, 2018, file photo shows the Capitol Dome of the Capitol Building at sunrise in Washington. The federal budget deficit has surged to $779 billion in fiscal 2018, its highest level in six years as President Donald Trump's tax cuts caused the gov

This Feb. 9, 2018, file photo shows the Capitol Dome of the Capitol Building at sunrise in Washington. The federal budget deficit has surged to $779 billion in fiscal 2018, its highest level in six years as President Donald Trump’s tax cuts caused the government to borrow more heavily in order to cover its spending.

Andrew Harnik, AP

Many economists are embracing two theories to make us all feel better about the enormous public debt piling up in Washington.

One of these holds that as long as economic growth remains faster than the increase in borrowing costs, there is nothing to worry about. This explains why interest rates remain low and businesses continue thriving while everyone is borrowing more.

Oliver Blanchard, the former chief of the International Monetary Fund, is a new proponent of this. He told the Wall Street Journal he is rewriting the fiscal-policy chapter of a textbook he authored on macroeconomics.

The other theory, known as Modern Monetary Theory, holds that debt, at any level, is nothing to worry about. As long as the United States borrows money in its own dollars, it can just print more to cover the costs.

Our advice is to be cautious whenever experts try to tell you the rules have been rewritten. Perhaps people once questioned the rules in Argentina, Venezuela and even Germany in the 1920s, but that didn’t keep their economies from collapsing.

The United States has the advantage of being the world’s largest economy and of having the world’s reserve currency. Both things make it attractive to investors and allow it to stretch the rules farther than those other hapless countries could. But we are much more inclined to believe the blunt, if crude, advice former Sen. Alan Simpson gave the Journal. “If you spend more than you earn, you lose your butt.”

Unfortunately, not a lot of people share his wisdom these days. Eleven years may not seem so long to people of a certain age, but the distance between today and the great recession apparently is more than long enough for people to naively think the economy has invented a perpetual motion machine.

The Pew Research Center recently found only 48 percent of Americans believe Washington should make deficit-reduction a priority. That compares with 72 percent in 2013. And as long as voters don’t care, neither do politicians.

Today, the only difference between the two major parties lies in how they would increase deficit spending. Republicans want to do it by cutting taxes while continuing to spend. Democrats promise new, expensive programs that expand the welfare state.

It shouldn’t take a genius to see where this is heading.

Economies thrive on public confidence, and it doesn’t take much to turn the tide. That can happen in ways as unpredictable as a natural disaster or as avoidable as a trade war. The Washington Post last week quoted several top executives saying they are losing confidence in the economy because of the president’s use of tariffs to gain foreign policy leverage.

If confidence begins to cascade in a big way, consumer spending would drop, growth would recede and government would be left with little borrowing capacity to counter a recession.

Writing for Bloomberg, Princeton’s Bill Dudley gave some credence to the idea that debt can actually pay for itself in a growing economy, especially if it is used to build infrastructure that helps commerce move quicker. But he said he wouldn’t push that theory too far.

The idea of Modern Monetary Theory, however, is as wrong as the notion of a free lunch, he said. “... America as a whole consumes considerably more than it produces,” he wrote. It needs foreign investors in order to keep doing this. Sooner or later, the Federal Reserve would need to either increase interest rates to spur demand from those investors or weaken the dollar to spur inflation and make it easier to pay debts.

The bottom line is that while no one can accurately predict the future, it would be unwise to bet that good times can last forever. Governments, like individuals, should use good times to prepare for the bad.