Thread by @DeficitOwls

MMTers rightly point out that "the burden of the national debt" is largely a myth for a nation like the US. But I don't think enough attention has been paid to the difference between peacetime debt and wartime debt. This will become important for a Green New Deal. (1/n)

(With the caveat that this thread is about a total war like WW2, not the kind of smaller ongoing wars that the US has been engaged in the last few decades) (1.5/n)

In normal times, basically everything the commentariat says about national debt is wrong, but in an economy completely mobilized for waging a war (or waging a GND), some of it becomes (almost) true. (2/)

The way national debt comes into being is that the government spends money into the economy, then doesn't tax it all back, leaving some behind, which accumulate as people's savings. These savings take the form of currency, bank reserves, or government bonds. (3/)

In normal times, people are generally happy to save more (it is unfulfilled savings desires that give us the unemployment problem). But in wartime, with an economy already running at 110%, people wind up with money they'd rather be spending. (4/)

It's the government's job to prevent this money from being spent, because trying to buy goods (in an economy where all spare output is going to the war effort) will simply bid up prices, causing inflation. (5/)

This can be done by 1) increasing taxes (take the money away), 2) mass saving campaigns (convince people not to spend it), or 3) involuntary saving of various kinds (don't allow people to spend it). (Obviously, most people would prefer 2!) (6/)

With either voluntary or involuntary saving, those funds become the national debt. And a debt built up in this way is a different animal than debt built up in normal times. After the war, when productive capacity can be returned to producing consumer goods instead of (7/)

war goods, people will expect to be able to spend some or all of these pent-up savings. If the economy at that time can't handle all the spending, then we'd get inflation, unless the gov did something about it. (8/)

So, as Japan is demonstrating, in normal times (when the economy has spare capacity) it basically does not matter how large the national debt gets, but in a mobilized economy, it might matter. The larger the debt builds up during the mobilization, the more and/or longer the (9/)

inflationary pressure will be afterwards, when people try to spend those savings. If the savings build up very large (due to a long war and (relatively) low taxes), then people might start to expect that they'll never realistically be able to spend those savings, (10/)

because the gov will have to keep private spending down long after the war is over to prevent inflation. In that case, they may change their mind about accumulating saving today, increasing inflationary pressure today. (11/)

Another example is inflation expectations. In normal times, inflation expectations are basically irrelevant for national debt. But for a mobilized economy, if people expect there to be a lot of inflation between now and when those savings are released for spending, (12/)

eroding their value, then they may be less interested in saving today.

It's worth noting that the "burden our grandkids" argument is still wrong. Regardless of whether we pay more taxes during the mobilization or save more, both we and our grandkids will have the same (13/)

respective standard of living. That's determined by the real goods and services produced in the economy, both now or in the future. But, if there are higher taxes during the war, then there's fewer savings building up, meaning less need for inflation controlling taxes (14/)

(or other measures) after the war. Whereas if there are lower taxes during the war, people will build up more savings, increasing the need for inflation control after the war. (15/)

Basically the trade-off is: either our grandkids can spend all their money, or they can have a lot more money but not be allowed to spend it all. (Assuming full employment and the same labor supply either way,) their material standard of living would be the same, but (16/)

their bank balance would be different.

Still another issue is interest payments. That interest is additional income for holders of government debt. If they try to spend that income during the mobilization, that adds to inflationary pressure, and it's potentially the same (17/)

after the war too. So the charge that 'higher taxes are needed to cover higher interest payments,' while basically false during normal times, has an element of truth when we're talking about this wartime debt: if those interest payments are contributing to the (18/)

inflation problem, either during or after the war, then we'd need additional inflation control measures, such as higher taxes. (19/)

That's enough for now, but there's a lot of meat to this topic which I think will need a lot more attention as Green New Deal plans become more concrete. If the GND proposes to use all available capacity to fight climate change, then we will face a "pent-up savings" issue. (Fine)