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Bearable Burden?

The US and UK can handle decades of debt, according to a Financial Times commentator who says that seeing debt as a serious problem is an “alarmist view.” “High debt is seen as a serious problem – as Adam Smith warned more than two centuries ago: ‘The practice of funding has gradually enfeebled any state which has adopted it.’ The difficulty with this alarmist view is that economics does not tell us what is a ‘high’ level of debt. Without such knowledge, it is impossible to say that debt is too high or to announce that debt reduction should be an urgent short-term priority. It is true that such huge increases in government debt reflect serious economic problems. But, given the enormous financial shock the economy has experienced, we may be better off with high debt for a long period of time. In fact, although economics is quiet on the issue of what it means for debt to be too high it does tell us that in the face of large temporary shocks the optimal response is for debt to show large and long-lasting swings. Debt should act as a buffer to help the government respond to shocks. The logic is simple. The UK and US governments have the ability to borrow long term and the option to roll over their borrowing. Rather than abruptly raising taxation and cutting government expenditure, they should adjust fiscal policy over the long term.”
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