Cosman: To spur economic growth, policymakers must overcome fear of debt

On Oct. 1, Federal Reserve Chief Ben Bernanke addressed the Economic Club of Indiana. In his speech, Bernanke included an apt criticism of the impending “fiscal cliff” and the U.S. government’s fascination with debt reduction – a fascination with the potential to send the economy back into recession.

First off: Yes, at more than $16 trillion, the national debt is a problem. But it is not the most urgent problem on which politicians and policymakers in Washington, D.C. should be focusing.

The most pressing issue, rather, is the current economic recession. It is a matter of long-term versus short-term effects.

Bernanke put it correctly in his speech, acknowledging that while “fiscal policymakers … must find ways to put the federal budget on a sustainable path,” they should not do so “as to endanger the economic recovery in the near term.”

The argument is that if the “fiscal cliff” – the built-in tax increases and spending cuts as part of the debt-ceiling compromise – comes to pass, it could potentially, as Bernanke says, “throw the economy back into recession.” Unfortunately, Congressional discussion aimed at avoiding the fiscal cliff appears to be stalled. This lack of legislative action stems from one thing: fear of increasing the national debt.

While the national debt remains a political hotbed, as no one on either side of the aisle wants to be responsible for its increase, there are two key factors that seem to be forgotten.

Though federal debt held by the public at nearly 80 percent of gross domestic product sounds foreboding, it is not the highest the U.S. has seen in the last century. Even if the federal debt reaches 100 percent of GDP, it is not yet time for panic.

Individuals regularly take on debt, like home mortgages, at far more than 100 percent of their yearly income. So why can’t the federal government? Considering the federal government has a greater ability to generate income in the form of tax increases than an individual, the national debt is not the crisis so many make it out to be.

Worry and preoccupation with the debt is particularly troubling in times of recession. The U.S. Government Accountability Office lists economic recession as the first and foremost appropriate reason for the federal government to take on debt.

“Borrowing … can reduce the severity of recession. Government spending … can also substitute for missing private spending,” according to the GAO. If the consumer-spending portion of GDP is down, the government can step in and spend more to keep GDP steady. It’s simple algebra.

When American citizens cannot or will not spend to stimulate the economy, it is up to the federal government. While deficit spending may increase the national debt in the short run, a stimulated economy brought out of recession will do just as much to bring the debt down in the long run as any fiscal policy Band-Aid.

“Congress and [President Barack Obama’s] administration will soon have to address the so-called fiscal cliff,” Bernanke said in his speech. That is the issue in most need of legislative action, not the unnecessary fixation on the national debt. So while the Republican National Convention featured a running debt clock, it would have been more prudent to show a clock winding down before the fiscal cliff measures are enacted.

Misguided worry that our national debt will sink the U.S. economy is preventing serious discussion on how to fix the fact that our economy is already sunk. The curtains are gone and the water is boiling, but the real issue is that the kitchen’s on fire.