With Bankers Like These

I have to admit that this post at Bloomberg from former Federal Reserve governor Narayana Kocherlakota made me sad. For example:

What level of government debt can the U.S. sustain? The answer is that it can handle a lot more. What’s much more important is its longer-term ability to reduce the federal budget deficit — and eventually run a surplus.

How can any responsible Fed governor write approvingly about running a surplus? Is the objective to destroy the private economy?


For a government’s debt to be sustainable in the long run, it must grow no faster than total economic output (as measured by, say, gross domestic product). So if the interest rate on government debt is 5 percent per year, and GDP grows at 4 percent per year, the government must run a surplus large enough to cover 1 percentage point of its interest cost if it wants to keep its ratio of debt to GDP stable. (Both my interest rate and growth rate figures are nominal — that is, I’m not netting inflation out of either.)

is closer to the mark.

But with this:

None of this suggests that the U.S. government doesn’t have a budget problem. But the issue is the deficit, not the debt.

it’s a return to the depressing. The issue is neither the deficit nor the debt but how they relate to economic growth.

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