Presumably there is some threshold at which debt (or the rate at which we acquire it, or one of the aforementioned adjusted for population) is a bad thing and unsustainable, right? This is a genuine question—macroeconomics is counterintuitive to me.
It is bad when it causes excessive inflation. The "debt" in itself can never be unsustainable, since it is denominated in USD, which is a floating fiat currency that the US government controls. The US government is the source of all dollars, so it can never 'run out of dollars'. However, printing too many dollars can lead to inflation. So the deficit could be called unsustainable if it causes unwanted inflation.
Debt does not (necessarily) mean high taxes in the future.
Deficit is Government spending - Tax collected. High deficits might lead to inflation. One way to control inflation would be to increase taxes(draining money out of the economy)
> In general, when the government consumes a lot, the private sector can consume less of the national product.
This is not exactly true. When there is still "slack" in the economy(it is not at full employment, the private sector isn't investing for other reasons etc.), government spending tends to have low inflationary pressure. It is only when the economy is operating at peak productive capacity that government consumption crowds out private sector consumption.
> Debt does not (necessarily) mean high taxes in the future.
You are right, that's why I called it another possibility. To list them all explicitly.
Higher debt now means that the future either has default, higher (than anticipated) inflation or higher taxes.
(A steady inflation doesn't do anything to debts: at the time the debt is incurred, any anticipated inflation shows up in the nominal interest rate. Similarly, getting a reputation for defaulting increases your nominal interest rate. A reputation for high taxes doesn't do anything to the interest rate directly.)
Responsible governments try to avoid default and ever increasing inflation. That leaves taxes. Or taking on less debt in the first place.
About slack:
Modern central banks target inflation. If there's slack like you describe, a competent central bank will inject more money until inflation is at the target.
Central banks wire their profits to the treasury. That includes the seigniorage income they make from propping up inflation back to the target.
That's just bog standard monetary policy. And doesn't crowd out private sector investment and consumption and is perfectly capable of picking up any slack.
(That's not to say the fiscal side of government doesn't have any effects at all. But that's more on the supply side.)
ISTM just looking at the federal debt as a single number is a bit misleading. Any treasury debut held by the Federal Reserve (in US terms, or similar central banks of other countries) is effectively interest-free, so it is certainly sustainable. The only downside there is the potential for inflation if it's done too much.
Debt help by citizens of the country is also somewhat neutral in terms of sustainability. The government needs to pay interest on it, but the money ultimately goes into the economy, so that might also be sustainable in larger amounts than might be intuitive.
Foreign-held debt is another matter, and I'm not enough of an expert to speak on the ramifications there. But I do think in general it's important to recognize that national governments which control their own monetary policy are a very different beast than a household or a business, and so their debt liabilities can't necessarily be thought of in the same way.
Foreign held debt is not much of a problem in principle, if the interest is lower than what the country earns from owning foreign assets.
But government debt is a problem even if the government doesn't go bankrupt:
You are right that a government that can print its own money can hardly go bankrupt financially. But it's perhaps not ideal for the government to consume ever increasing portions of what the nation produces? Forget about money and finance for a second: given the same material resources the private sector is usually more efficient at satisfying human wants.
> given the same material resources the private sector is usually more efficient at satisfying human wants.
I think this is a very dangerous simplification. There are certainly areas where private sector does a much better job than the public sector. But there are also areas where the public sector in general is superior. Examples are things like healthcare, infrastructure and education.
It’s not obvious that the public sector does a better job in healthcare, infrastructure or education. Rather we as a society feel that those things which should be available to all regardless of ones circumstances.
If you only educated those who could pay, they would be able to get educated more cheaply than our current system. However, this would eventually destroy the economic productivity of our country.
The private sector tends to do poorly in any area where the returns on an investment are not captureable by the investor individual but instead accrue to society as a whole.
The returns to education mostly accrue to the one get educated. So the private sector is perfectly capable of providing education. (And we see that in practice.)
If you believe 'The Case Against Education' the individual captures more than 100% of the net returns from education, ie there are negative externalities. That means society consumes more education than is optimal on utilitarian grounds.
That conclusion is counter-intuitive, but the argument is simple: education is mostly a signalling arms race.
> Caplan argues that the primary function of education is not to enhance students' skill but to certify their intelligence, conscientiousness, and conformity – attributes that are valued by employers. He ultimately estimates that approximately 80% of individuals' return to education is the result of signaling, with the remainder due to human capital accumulation.
There is certainly a LOT of signaling involved in education. As a college dropout and self taught developer this is intimately clear to me.
However, I have traveled enough of the world and lived enough places to see what happens when education systems are weak or non-existent. I think you underestimate the degree to which high levels of illiteracy and innumeracy absolutely destroy the potential for economic growth and prosperity.
It is possibly true that we (the USA) consume more education than is pragmaticly optimal. However, removing public education would result in a loss of economic output that far exceeds the savings. Predicting who will need that education sufficiently accurately is imposy for both society as a whole and for individuals contemplating their future.
Hypothetically - actually not so much - this was one of the issues in 2008.
If the financial system creates such quantities of debt, that the regular capital and interest repayments exceed the available money supply, that would be a hard threshold. This is quite a large number if you calculate, even with high interest rates, so highly unlike in practice. Plus bank lending has a side effect of money creation, which stops it happening within the banking system.
However government debt and company bonds are non-bank debt, and securitised loans also don't have the money creation property, so one of the issues in 2008 can be presumed to be that the expansion of the debt supply relative to the money supply probably did become an issue in some countries.
Probably, but it will depend on the interest rate.
The lower the interest rate, the higher the safe level of debt.
Right now federal bonds have a negative interest rate, so perhaps there is no limit to the amount of debt, and in fact that there might be a minimum safe lower bound. Or maybe not; we don't have much experience in dealing with this sort of situation since it was seen to be impossible.
Putting that aside, the UK had debt around 200% of GDP after the Napoleonic Wars, and eventually paid most of it down. So the "bad & unsustainable level" appears to be well above that.
That was in the midst of the Industrial Revolution and during a time when the UK also had direct and indirect control of exploitable colonies, I don't think the debt to GDP figures of the time are particularly relevant to modern nation states.
Japan has avoided financial collapse with a giant debt to GDP ratio for years now, I think the advent of QE and owning your own debt via central banks has made the whole thing seem a bit silly.
