On the optimum level of public debt

14 Mar, 2015 at 09:03 | Posted in Economics | 4 Comments

The failure of successive administrations in most developed countries to embark on any vigorous policy aimed at bringing down unconscionably high levels of unemployment has been due in no small measure to a ‘viewing with alarm’ of the size of the national debts, often alleged to be already excessive, or at least threatening to become so, and  by ideologically urged striving toward ‘balanced’ government budgets without any consideration of whether such debts and deficits are or threaten to become excessive in terms of some determinable impact on the real general welfare. darling-let-s-get-deeply-into-debtIf they are examined in the light of their impact on welfare, however, they can usually be shown to be well below their optimum levels, let alone at levels that could have dire consequences.

To view government debts in terms of the ‘functional finance’ concept introduced by Abba Lerner, is to consider their role in the macroeconomic balance of the economy. In simple, bare bones terms, the function of government debts that is significant for the macroeconomic health of an economy is that they provide the assets into which individuals can put whatever accumulated savings they attempt to set aside in excess of what can be wisely invested in privately owned real assets. A debt that is smaller than this will cause the attempted excess savings, by being reflected in a reduced level of consumption outlays, to be lost in reduced real income and increased unemployment.

William Vickrey


  1. Another important point here is that so called “government debt” at zero or low rates of interest is essentially the same thing as money (base money to be exact). As Martin Wolf (chief economics correspondent at the Financial Times) put it, “Central-bank money can also be thought of as non-interest-bearing, irredeemable government debt. But 10-year JGBs yield less than 0.5 per cent. So the difference between the two forms of government “debt” is tiny…”. See:


    Thus those who deplore a rise in government debt (at low rates of interest) really need to tell us what’s so terrible about the state issuing more money to everyone in a recession with a view to inducing everyone to spend more and thus create more employment.

    • Because of things like balance of payments, movement of peoples, whether new money is productively used and by who, the main benefit of debt is as a constraint. MMTers tend to refer to inflation as the constraint but there is a whole lot of cronyism that can occur between here and an inflation constraint not least what you measure. Debatable whether replacing inside money cronyism with outside money cronyism is a step forward.

  2. A lot of people, when they talk about public debt, actually mean the ratio of public debt to GDP. OC, you can reduce that ratio by increasing GDP, as long as the debt increases more slowly. Instead of saying that the public debt is too high, why don’t people say that the GDP is too low?

    • Presumably because “people” who say that public debt is too high are talking about actual debt and are not “a lot of people” who are actually talking about a ratio of debt to GDP.

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