CHAPTER 13

GOOD DEBT, BAD DEBT

Dealing with Deficits

After reading the last chapter, anyone who has read this far and is worried about deficits will surely hear alarm bells ringing.

Yes, it’s true: I’m proposing that the U.S. government borrow more money to get the economy going again. Certain large European nations need to borrow, too. A new and much bigger push to juice up demand with public spending is not my only solution to the current mess, but it’s a big one. And I’m well aware that any new pile of debt will be added to an already towering pile of debt that the United States and other developed countries have accumulated over the past few decades.

Is such borrowing really prudent? In a word, yes. The United States, particularly, can borrow trillions more without destabilizing its economy. What’s more, I don’t see any other choice if we want ultimately to avoid even bigger deficits down the line amid an endless slump, declining competitiveness, and a rapidly aging population.

To be sure, the United States eventually needs to tame its public-debt problem. But first it needs to fix its economy. So hear me out as I explain why bigger deficits are manageable until sufficient economic growth is obtained.

When we wrote “The Way Forward” in 2011, long-term borrowing rates had declined substantially from where they were at the beginning of that year. In the United States, the rates on 10-year and 30-year Treasury bonds declined by an average of 1.5 percent (or 150 basis points, as we in finance say) from the beginning of that year through the fall. Not long after we published the paper, the economists J. Bradford DeLong of the University of California at Berkeley, and Larry Summers of Harvard University (the same Larry Summers who counseled President Obama not to go overboard on fiscal stimulus in early 2009), authored a technical economics paper for the Brookings Institution on the issue of intensive infrastructure spending, “Fiscal Policy in a Depressed Economy.”1 Their principal finding was that “when interest rates are constrained by the zero nominal lower bound, discretionary fiscal policy can be highly efficacious as a stabilization policy tool. Indeed, under what we defend as plausible assumptions of temporary expansionary fiscal policies may well reduce long-run debt-financing burdens.”

In more understandable language, DeLong and Summers argued that infrastructure spending would actually reduce future deficits by taking advantage of cheap money and labor to do now what would need to be done in any event at a later date. They demonstrated conclusively that the economic effects of additional employment, the increase in primary and secondary demand, and the increased productivity that would result from a large government-led infrastructure program would far outweigh the financing costs of shifting infrastructure work forward in time.

At various times since “The Way Forward” was published in 2011, and DeLong and Summers published their papers, interest rates have fallen even further. In late 2012 the 10-year U.S. Treasury bond was trading at a near historic low, in a range to yield between 1.5 percent and 2.0 percent, and the 30-year bond in a range to yield between 2.5 percent and 3.0 percent. Band rates have spiked from time to time since then but the ten-year rate has generally remained below 2.5 percent through this writing. Across the Atlantic, UK gilts (long-dated bonds) have traded a few hundredths of a percentage point higher than U.S. Treasuries, and German Bunds (government bonds) a few tenths of a percentage point lower. They are all joining Japanese government bond (JGB) yields, which trade between half a percent and 1 percent, on average, lower still and for 14 years haven’t traded at a yield north of 2 percent.

In short, money for public investment is cheap. As cheap as it will probably ever be.

And for those fans of the private sector who abjure government borrowing of any sort (because of fear of higher taxes in the future to pay it off) and who fear government “crowding out” private-sector access to cheap capital, I would say that, first, government acceleration of eventually needed infrastructure spending through borrowing does not increase future tax rates. Quite the contrary. If the cost of money to a government is low enough and the near-term benefits of employment-induced economic growth are significant enough, future tax rates will be lower than they would have been if costly infrastructure repairs are put off to a future time—when money is more expensive and the infrastructure problems have worsened.

Second, the notion of government crowding capital availability to the private sector at this point in history is a near impossibility, given the global capital glut we are experiencing. The problem in developed countries is not that there is a shortage of available capital, it is that there is a shortage of profitable opportunities for new investment given the global capacity glut in the tradable sectors (i.e., the making of things and provision of services that do not need to be made or provided locally). There is therefore nothing compelling the transmission of the oceans of capital sloshing around the world into dependable investments apart from the debt of hard-currency sovereigns and the periodic refinancing of the world’s largest multinational companies’ balance sheets.

And in that last statement rests the proof of the pudding. U.S. corporate bond issuance has exploded since the Great Recession. As of September 2012, U.S. corporations were on pace to have issued an average of $1.1 trillion of debt per annum for the three years from 2010 through 2012. This is an amount 55 percent higher than the average of $700 billion per annum for the bubbling decade of 1997 through 2006.

And why have America’s corporations been borrowing at such a rapid clip? It certainly can’t be because of enormous growth in either the domestic or global economies—global growth is slow and developed-world growth is anemic. And given the surfeit of cash on corporate balance sheets, it certainly does not appear that corporations are in need of liquidity. The answer, of course, is that businesses with access to global capital markets are “doin’ the gettin’ while the gettin’ is good.” They know cheap money when they see it and are grabbing it while they can. Why then shouldn’t the governments of the people of the developed world, which can borrow even more cheaply than private businesses, do likewise?

Some say that the safe-haven government-bond markets are evidence of the impact of quantitative easing on the part of central banks, that rates are this low only because central banks are buying bonds. But this is not borne out by the facts. Germany, for example—or, rather, the European Central Bank—is not doing any quantitative easing at all, and in the United States during the periods of actual quantitative easing known as QE1, QE2, and QE3, bond yields did not fall but actually, net of fluctuations, rose in a misguided anticipation of emerging inflation.

No, as discussed throughout this book, bonds are trading at levels that reflect the vast oversupply of global capital and the disinflationary pressures on the developed world of other global imbalances and a continuing debt overhang. The surplus nations are essentially begging us to take their money and do something useful with it to repair global demand—and we can do exactly that by putting our own houses in order so to speak, thus benefiting our nations, our peoples, and the world’s markets by doing that which will boost demand in the short to medium term and make us more productive and competitive in the long run.

Brad DeLong has argued that governments essentially have a moral obligation to borrow to build infrastructure under these circumstances because, through growth, such actions will ultimately reduce government debt-to-GDP ratios. He noted in October 2012: “For any credit-worthy sovereign—or for anybody who can borrow on the credit of any credit-worthy sovereign—it is fiscal expansion now that reduces the effective debt, and fiscal austerity that increases it.”2

THE WEALTH OF NATIONS

Fears about too much public debt tend to get entwined with anxiety about today’s high levels of private debt. But these are very different issues. I have devoted many pages of this book to describing the truly alarming rise of private debt in the United States and other advanced countries. Too many households borrowed too much money, often to make up for stagnating or falling incomes. And too many banks, corporations, and other financial players also gorged on debt.

In effect, China and other surplus nations gave the deficit nations a credit card with no limit, and we went nuts. That was bad. It was also bad that the U.S. government needlessly racked up trillions in public debt starting under Reagan and George W. Bush simply because politicians found that offering Americans a free lunch was a great way to get elected. After all, who doesn’t like low taxes and plenty of services?

It was equally bad that the core nations of the Eurozone stuffed the periphery nations full of loans to further their consumption of core exports and to finance extensive social-welfare systems with money they could not repay and could not print themselves. For a while, mercantilism paid well, kept core economies growing, and kept their unemployment low. Today, that has been substantially reversed.

However, none of this means that taking on more public debt right now is a bad thing if incurred for the right purposes. Government deficits are not the same as private-sector deficits to the extent that they are incurred in the same currency issued by the government incurring them. When households and private-sector businesses incur more debt than they can handle, they must go bankrupt and often restructure their debts. The results can be pretty ugly.

But governments issuing debt in their own currencies, of course, cannot go bankrupt for liquidity reasons because they can merely print whatever additional monetary resources are needed to service their debt (either directly, in the absence of a central bank, or by monetization of existing treasury debt, in the presence of one). The opposite, of course, is the problem that plagues the overly indebted countries of the Eurozone: they borrowed in a currency they don’t print and therefore face severe illiquidity problems.

But here’s a thought regarding sovereign debt that few seem to pay much attention to. As much as hard-currency-printing countries can never be insolvent from a liquidity standpoint, it is equally true that a developed-world country would be extremely unlikely to become insolvent by virtue of an excess of liabilities over assets. Even Japan, which has the highest debt ratios in the world, leveraged itself to the hilt during its bubble, and is still arguably underwater in much of its corporate and financial sector, is a long way from having debt that exceeds the total value of all its assets.

It is very easy to measure the liabilities (debts) of a government, and we hear endless scary reports about just how big those liabilities are, both in the short term and looking decades ahead over the horizon. But what about the assets of a national government, or a nation as a whole? How does one establish the base—the wealth of nations, as it were—that essentially backs the “full faith and credit” promise of governments to pay their debts?

Before answering these questions with some numbers, let’s establish a basic premise that is necessary to grasp those numbers. While the age of absolute monarchies may be long gone in the developed world, today’s modern democratic governments have, in many ways, just as much “sovereign” power as the kings of old had. The power of these governments is the final power in each of our lands. And among those final powers are the right to tax and the right of eminent domain.

The parliaments and congresses of the developed world possess the right—given internal consensus within those bodies—to tax income and property as is necessary to cover the expenses of government, including the payment of interest on, and the principal amount of, government debt. Moreover, for fair and just compensation (measured in the currency of the realm—a critical point) all governments in the developed world have the power to take possession of all property within their respective borders to the extent that there is a fairly broadly defined public purpose in their doing so. In other words, governments have access, at least in theory, to all the wealth of their nations.

That is the sometimes forgotten definition of sovereignty, for economic purposes: ultimate control over the means of exchange (money), the power to tax, the ultimate right of ownership for legitimate public purposes, and—of course—the so-called police power to enforce all of the above, together with other laws and regulations of the state. I realize that these statements, while true, must be highly disturbing to my more libertarian friends. But modern constitutional governments evolved, among other reasons, to have the capacity to ensure stability and tranquility via collective action, if necessary . . . and specifically at times in which private interests are unable to work things out on their own. Yes, America’s founding fathers were rebelling against an autocrat, but they certainly understood that a government of, by, and for the people would at times need to lead and muster collective responses to both internal and external challenges.

This is so important that I want to emphasize it further by reference to a whole school of economic thought known as Modern Monetary Theory (MMT). There is an excellent primer on the subject by L. Randall Wray of the University of Missouri at Kansas City titled Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. Wray, together with his UMKC colleague Stephanie Kelton and others such as James K. Galbraith of the University of Texas at Austin (the son of the renowned economist John Kenneth Galbraith), have formed the vanguard of MMT.3

MMT correctly points out that the value of fiat currency derives from the issuing government’s power to tax and the fact that the currency itself is accepted in payment of such taxes. Wray notes that it is often felt that currency is accepted for payment of purchases, wages, or debts mainly because of the notion that other people and institutions (both in the issuing country or, as in the case of the U.S. dollar, abroad) are also likely to accept it. This mistaken notion—or, as Wray puts it, “greater fool” analysis—would also give rise to the idea that a change in such sentiment is also a possibility—that we might awaken one day with the major currency-issuing nations printing “unpopular” fiat notes that no one would want. This is not, the MMTers would posit, even a possibility in the case of a large economy of a wealthy country that issues its own currency. In theory, currency issuance could be limitless (as could government spending) as long as the amount of currency in issuance is correctly sized to the measure of the issuing economy and its flows, with the only variable being the currency’s relative value versus that of currencies of which there is lesser supply. In other words, it is a matter of degree of value, not acceptance, with an offset to devaluation being ultimately found in the economic growth that occurs as a result of increased spending. It relates to the cost of money to a degree, but not to the ability of the government of a large nation to raise money or pay its debts in its own currency.

Now, I have some problems with MMT theory when it comes to its potential multilateral impacts (on both developed-world and emerging-world trading partners) during the period in between which the spending is telegraphed/begun and the point at which it has produced the desired growth (which I obviously believe it will). Too much such money creation would be highly destabilizing and induce potential emergency actions to thwart it by countries either dependent on the issuing country for exports or which compete with the issuing country’s exports on price. So I believe the amount of money creation and resulting spending that is viable is not—as a practical matter—limitless. Neither do many MMTers; they would say for reasons of government and nongovernment budgetary discipline as well as destabilization of global currencies. I am just a bit more wary about the latter.

And clearly the taxing that would be required to support limitless amounts of debt would be deleterious to private-sector risk taking after a point—a point from which we are still rather far away, however. I don’t know if the developed world, even with its enormous “buffer stock” of labor (an MMT term) acting as a bulwark against runaway inflation, can aspire to the guarantees of full employment that the MMTers believe would be possible using the government as employer of last resort. But it is clear to me that we can do a lot better than we are and that considerably more government debt issuance to spur growth, relative to national assets and the power to tax both those assets and flows, is possible in the United States, Japan, and the United Kingdom (and the Eurozone if its members could ever get their acts together and issue Eurobonds, jointly and severally).

What are those national assets that developed-world governments have the right to tax and, in exchange for fiat money, take possession of? And how do they relate to outstanding debts and government deficits?

There are several ways of calculating national wealth. Net private-sector wealth is one. Tallying up all the financial assets of all players in an economy is another. A more inclusive approach measures both financial and non-financial wealth to account for the value of assets such as natural resources (land and extractable commodities) and human labor.

It is important to note that within any nation, one party’s liability is another party’s asset (for example, if you own a home with a mortgage, your mortgage is your liability but is an asset of your lender; or if you buy a Treasury bond, it is a liability of your government but is most assuredly your asset). So whether that of a government or the private sector, the debt of a nation needs to be evaluated in consideration of the overall value of an economy, not merely its output.

Let’s get more concrete here by looking at the wealth of the United States, which we can then compare to all the frightful liabilities we are always hearing about. More specifically, let’s examine three different estimates of total U.S. wealth.

The first estimate is from Allianz Global Wealth Report, and is a total of all private wealth. According to Allianz, the United States was worth $43 trillion in 2011.4

A second, much bigger, estimate comes from the 2012 Inclusive Wealth Report published by United Nations University International Human Dimensions Programme. That organization, which takes into account nonfinancial assets such as oil deposits, pegs U.S. net worth at $118 trillion.5

Finally, there is an even bigger number—$164 trillion—which is the Federal Reserve’s estimate of total U.S. financial assets.6 There is lots of double counting in that number, but any way you measure it, the United States is a very wealthy nation.

MANAGEABLE U.S. DEBTS

Given the United States’ aggregate assets, total public-sector debts are far less significant than politicians, the media, and the “fix the debt” crowd of debt-scolding economists and business leaders would have us believe.

In proper context, America’s supposed ocean of red ink looks more like a lake.

In November 2012, the total debt owed by the U.S. Treasury was $16.4 trillion. But this number is misleading. Of that $16.4 trillion, $4.8 trillion was owned by and/or owed to other government agencies (mostly the Social Security trust funds, which—like other divisions of government—need to know they have sufficient funding down the line but don’t need it today) and another $1.7 trillion was held by the Federal Reserve Bank (which is “owned,” for all intents and purposes, by the U.S. Treasury).

So that takes total U.S. debt that is owed to private interests down to $9.9 trillion. And here’s the last point: only $5.5 trillion of that amount is owed to those outside of the United States; and of that amount, $3.9 trillion is owed to foreign governments and central banks of (mostly) trade surplus countries. The remaining $4.4 trillion is assets of parties in the United States (mostly in the private sector) and a part of overall U.S. nongovernmental wealth.

So to recap: The U.S. government, which controls its own currency and presides over a nation worth somewhere between $43 trillion and $164 trillion, owes a mere $5.5 trillion to parties outside its borders.

And Jan Hatzius of Goldman Sachs projected in early 2013 that in his reasonable (midpoint) forecast, using real GDP growth averaging less than 3 percent for 2013 and 2014 (which may prove a bit high), the U.S. budget deficit will—if nothing further is done—fall on its own accord to below 3 percent of GDP ($500 billion). Even if growth is more sluggish, this doesn’t really sound so scary to me, yet budget deficits at the time of Hatzius’s report were a source of endless hand-wringing and shrill warnings. Worse, hysteria about the debt led politicians to effectively tie their own hands in dealing with the worst economic slump since the Great Depression.

What the fearmongers say is that the party can’t go on forever and that global capital markets will eventually exact a terrible retribution on the U.S. government for its profligate ways (the same is said about the governments of the UK and Japan). Yet such retribution would seem to make very little sense at all. And according to those same capital markets, it’s not happening: the market value of U.S. government debt is near all-time highs and interest rates are at historic lows.

The U.S. government has borrowed more money more rapidly since the financial crisis hit in 2008 than at any time in its history, save the World War II years. From the time that Lehman Brothers crashed, in September 2008, to the beginning of 2013, the U.S. government borrowed $6.8 trillion, including both intragovernment debt and that held by the public.7 That is roughly $4.3 billion a day. It’s $179 million an hour. Or $3 million a minute.

To be sure, this borrowing binge provoked panic in plenty of places. Senators and presidential candidates decried the binge. A boyish Congressman rose from obscurity to become the vice-presidential nominee of his party by warning that the debt would lead to ruin. A powerful grassroots movement, the Tea Party, rose up to stop the borrowing and began knocking off establishment Republicans deemed insufficiently hawkish on the deficit. A billionaire, Peter G. Peterson, began spending an ever-larger chunk of his fortune to sound the alarm about the deficit. A national commission was formed to find a solution. The U.S. government almost shut down following a showdown over the budget ceiling.

Yet capital markets basically just yawned as the United States borrowed $179 million an hour. Every time the United States auctioned off Treasuries, there were plenty of buyers. Indeed, things went in exactly the opposite direction that deficit hawks might have imagined. So many people wanted to buy U.S. debt that U.S. borrowing costs fell to record lows. Whether or not this phenomenon proves what many economists believe—that government bond interest rates, in countries with large economies and sovereign currencies, are a policy matter engineered by central banks and are not, as free-marketers take as gospel, established by market forces—makes little difference to me. Either way, the global capital glut is such that we can expect to be saddled with the beneficiaries of low rates for some time to come.

Debt crisis? What debt crisis?

Now, concluding that we are not in a debt crisis is not the same as suggesting that a country can simply print money willy-nilly to finance all government expenditures and not worry about revenue at all. For there are three other key factors in this mix: the relative values of currencies, the connection between a devalued currency and inflation, and the adverse impact on overall economic growth when a bloated debt burden forces taxes higher in order to service that debt (and the multilateral issues about which I have spoken earlier in this chapter).

In normal times, all of these would raise valid concerns for economies engaged in high levels of deficit spending and debt accumulation. These are not, as I have repeated throughout this book, normal times. The normal good effects of deficit spending are not occurring as usual. However, neither are the normal bad effects.

As Keynes taught, deficit spending is generally just what the doctor ordered to recover from a recession—especially one accompanied by a private debt overhang. When nominal growth and inflation both slow, fiscal (and monetary) stimulus is more than called for and is normally successful in reviving commerce and consumption. Inflation, which hopefully results, devalues the debt previously incurred and devalues the currency, which makes exports more competitive. But again, nothing is “normal” this time around.

As I’ve noted throughout, in the present supply-induced demand deficiency, the mechanisms that would normally transmit monetary stimulus to reverse disinflation are not functioning. Moreover, the forms of deficit spending that are occurring in most developed nations are of the wrong type. As with monetary actions, much deficit spending has been focused on subsidizing existing programs and government operations, rather than instituting new spending aimed directly at job creation, and thereby stimulating sustainable growth.

Ordinarily, flooding an economy with excess money (which is what happens when a government deficit-spends—they create/print money that does not have a source in economic output; no one “earned” it) would serve both to fuel domestic inflation and devalue the currency. These are conventional supply-and-demand functions, as excess cash is delinked from boosted output, causing prices to rise; and as the supply of cash makes the currency less valuable (because there is so much of it) exports, in turn, become more expensive.

Yet this hasn’t happened. And such adverse effects, along with some kind of debt crisis, are extremely unlikely to occur in the absence of substantial rebalancing of the global economy. There’s simply too much cheap money and cheap labor floating around. The chances of markets sustaining higher interest rates for any meaningful period of time, amid a capital glut, are slim to none. The likelihood of sustainable inflation in a globally oversupplied labor market featuring dramatic wage imbalances is similarly small. The likelihood of deficits leading to meaningful currency devaluation within/among developed nations when all are trying the same thing at once is zero, for what I hope by now are obvious reasons.

Allow me to dispatch one other phantom threat associated with heavy public borrowing, which is that high debt-to-GDP levels stunt economic growth. This is a supply-side concept that extrapolates deficits into debt, debt into higher interest rates, higher interest rates into lower investment (and higher savings), all of the foregoing into stagflation (low growth with inflation), and inflation to a weaker dollar.

All that sure sounds bad. And during stronger economic times, irresponsible deficit spending should have exactly many of these results.

But things work differently in weaker times. We know this because we have a fair amount of evidence from past episodes in which deficit spending was extensively utilized amid slow economic growth. There just isn’t strong evidence that more borrowing leads to higher interest rates, less investment, and stagnating growth. Correlations between high levels of sovereign debt and anemic economic growth would appear to be awash in false positives, noted most directly in the International Monetary Fund’s October 2012 World Economic Outlook, in which the authors wrote:

Our analysis is not meant to dispute the notion that, all else equal, higher levels of debt may lead to higher real interest rates. Rather it highlights that there is no simple relationship between debt and growth. In fact, our subsequent analysis emphasizes that there are many factors that matter for a country’s growth and debt performance. Moreover, there is no single threshold for debt ratios that can delineate the “bad” from the “good.”8

Note the language: “may lead to higher real interest rates.” As present conditions amply demonstrate, it also may not. And the “may” remains “won’t” until the developed world’s output gap is closed considerably. Until then, higher levels of deficit spending will translate to increasing output, not to inflating prices for existing output.

It can’t be emphasized enough just how cheap it has been for the U.S. government to borrow in recent years. In fact, borrowing costs are so low that the United States spent less money last year servicing its debt, as a percentage of GDP, than it did in 1979—before the first great borrowing binge under President Reagan. America’s interest costs are lower today as a percentage of GDP, with $16 trillion in debt, than when the national debt was a mere $845 billion.

Again: what debt crisis?

EUROPEAN DEBT

The Eurozone presents an entirely different conundrum when it comes to deficits and debt.

The signatories to the Maastricht Treaty on European Union (TEU) in 1992 took steps to advance their union and create a common currency under a set of provisions that have since become their worst nightmare. One problem lies with the basic notion of having a currency union without also having a fiscal union—that is, sharing currency but not sharing budgeting power. Add to that the same global phenomena that drove credit bubbles throughout the developed world during the first decade of the euro’s existence and you’re just asking for trouble.

So here we are, four years after the debt crisis was “revealed” in Europe, with the Eurozone stuck in the mud fiscally and destabilizing capital markets everywhere with unending hints of an even bigger meltdown. To boot, the Eurozone is not generating sufficient growth to help raise global demand and mitigate the problem of oversupply.

The Eurozone’s disconnection of its monetary authority from the fiscal realms of each constituent nation, along with the uncoordinated regulation of its banking system has created massive imbalances internal to the zone itself. Worse yet, Europe’s leaders haven’t aggressively used the monetary tools they do have to offset fiscal shortcomings—through the direct purchase of sovereign debt by the European Central Bank. On top of that is the inability inherent in a shared currency to adjust the value of that currency between surplus/creditor nations and deficit/debtor nations. All this helps explain why Europe has leaned so heavily on the austerity route.

So, yes, unlike the United States, the individual nations of the Eurozone really do have a serious and enduring debt and deficit problem. But it’s a problem that can be solved—if the wealthy surplus/creditor nations, Germany first and foremost, are willing politically to endure such a remedy.

DEMOCRACY AND DEBT

One last point before we leave the topic of deficits: bold new borrowing to increase demand and spur growth would be consistent with the public’s view that fixing the economy is more important than reducing deficits.

Poll after poll over the past few years has found that while many Americans are worried about deficits and the national debt, creating jobs and improving the economy has been a higher priority for the public. For example, a June 2010 NBC News/Wall Street Journal poll found that 33 percent of Americans named job creation and economic growth as their top priority; 15 percent named “deficit and government spending.” A FOX News/Opinion Dynamics poll that same month found a similar spread, with 32 percent naming jobs as a top priority compared to only 12 percent that named the deficit.

Two other polls in the preelection summer of 2010 found much smaller spreads, but a series of polls in the fall of 2010 all found the public much more concerned about jobs than the deficit—often by huge margins. For example, a CBS News poll after the November 2010 election, which swept many Tea Party–backed candidates into Congress, asked this question: “Of all the problems facing this country today, which one do you most want the new Congress to concentrate on first when it begins in January?” Fifty-four percent of respondents named the economy and jobs. Just four percent named the deficit and national debt.

Most polls throughout 2011 and 2012 found that the public remained focused on jobs and the economy over the deficit by two-to-one margins or more, although some—most notably by Gallup—have shown much smaller margins. A CBS News/New York Times poll in September 2012 found that 37 percent of respondents named jobs and the economy as the top issue that they would vote on in this election and just 4 percent named the budget deficit and national debt. A Bloomberg poll the same month found 43 percent identifying jobs and the economy as the most important issue facing the country with 14 percent naming the federal deficit. Polls by the Pew Research Center have found similar trends. Finally, exit polls after the 2012 election showed that job creation remained a priority over deficit reduction.9

Also, when given the direct choice between spending money to invest in infrastructure/public-sector hiring, for, say, teachers and firemen versus cutting spending to reduce the deficit, Americans routinely say they’d rather preserve jobs or create jobs than cut the deficit. In one poll, for example, 52 percent said that we should be spending money, while only 43 percent said that we should cut spending for deficit reduction.10

Sure, the Tea Party talked a lot about deficits when it emerged in 2009/2010, but there was never evidence that the movement was mainly focused on deficits—as opposed to other issues like taxes and health care—or that they spoke for a majority of Americans who favored austerity.

As I discussed earlier, Americans don’t spend a lot of time worrying about debt, either their own or the government’s. While that is normally a bad thing, it’s actually helpful during an economic crisis, when political leaders need to borrow a lot of money fast to restart growth.

No, what’s standing in the way of smart public investment right now are the economically powerful, not the masses. In many cases these same people sat by quietly during the Bush years as the United States needlessly piled up trillions of dollars in new debt in order to enjoy the benefits of near-record low tax rates. Now, when the United States really does need to borrow, they have suddenly become converts to fiscal discipline.

Maybe it’s naive to expect more from ideological conservatives. But surely the more sober business leaders pushing for austerity, like Pete Peterson, should know better. If you’re a corporate CEO, or once were, you know how important demand is for driving growth and you know, or should know, that cutting government spending reduces demand. As well, as a CEO, you should know a thing or two about global capital markets and be familiar with how those markets have shown an insatiable appetite for U.S government debt that is unlikely to abate for many years to come—putting the lie to foolish predictions of a debt crisis.

Business leaders should be leading the charge for more borrowing to recharge growth, not jumping aboard an austerity push by politicians who don’t know the first thing about macroeconomics.

The sheer amount of money that the United States has been borrowing, along with the sources of some of that money (e.g., China), certainly looks alarming to anyone not well-read in economics. And the very idea of Keynesianism may seem inherently suspect in many parts of the United States. Yet despite all this, ordinary Americans get the simple idea that government needs to step in to create demand during a slump.

It’s time for our leaders to catch up with the people.