To my dismay, writers with established audiences have neglected to write in specifics on this subject much this year (of all years), and today (of all days) I just can't sit by while it goes unnoticed any longer: For the first five months of 2012, free market actors have continually decided to pay the US federal government to borrow their money for periods of ten years -- longer than the free market has been able to maintain a business cycle in modern times -- and today those free market actors have also decided that it's in their individual best interest to pay the US federal government to borrow their money for periods of twenty years -- longer than the free market has ever been able to maintain a business cycle. That will probably need some unpacking, so allow me to explain.
Every business day the US federal government auctions off bonds on the debt it wishes to take out. Since what they are auctioning off is basically negative money, the "highest bids" are actually submitted by those creditors which will charge the lowest interest rates (in the sense that charging less is actually paying more). In addition to normal bonds with "nominal" interest rates, the US federal government also auctions off inflation-protected bonds which are rated with "real" interest rates, meaning that they don't devalue as the dollar devalues. It is this latter interest rate that matters most. The minor reason that real interest matters more is that it better reflects the actual cost to the US government of the debt it is levied on, as most of the value lost to inflation of the US dollar gets returned to the US Treasury via the Federal Reserve's return-of-profits requirement. The major reason that real interest matters more is that almost all financial actors buying federal bonds have access to global markets, and so their personal unboundedness with respect to the dollar means that their return is recognized only with respect to real value.
With that understanding we now look at the continual conservative critique of progressive economic policy, which is a stool with three legs. The first leg is that interest rates are about to go up on US debt, so we can't plan to borrow any more now. The second leg is that the market is worried about the US federal government holding an unsustainable level of debt, and won't accept more over the long-term. The third leg is that the US federal government can't afford its current debt, and certainly not take on more. Conservatives (in both major parties in the US, and in most countries around the world) have been as one voice on these points for years now, and luckily enough for all we can just look at the actual data. In fact, we are in extra luck, as one clump of data can inform us on all three legs, by telling us what debt actually costs the US, whether the free market is willing to borrow large amounts of long-term US federal government debt, and how many times in the past few years interest rates on US federal debt have stayed unusually high for extended periods. Here is that data, with real interest rates for 7-year, 10-year, 20-year, and 30-year shown in orange, blue, red, and green respectively, starting on January 20th 2009, since that's when deficits started mattering again:
Just to make this absolutely clear since today's data isn't yet available for plotting on FRED, here's the data in the raw: http://www.treasury.gov/...
What we can say conclusively, then, is that there has never been a period of unusually high interest rates in the last few years of conservatives' proclamations of high interest rates being just around the corner. We can also say conclusively that the free market not only thinks US federal debt is manageable at its current level, but that it is practically begging for more debt to be taken on, and over extremely long time frames at that. And finally, we can see that free-market actors so value and trust US debt that for 7-year debt, 10-year debt, 20-year debt, and 30-year debt they are willing to charge only -0.85%, -0.59%, -0.03%, and 0.36% interest rates, respectively, all record lows. You did not read that incorrectly, free-market actors see US federal debt as such a great thing that they are charging negative interest on it, meaning that they are actually paying the US federal government to borrow their money. For seven years. For ten years. Even for twenty years they are willing to pay. Even thirty-year interest rates are so low that they might as well be considered a rounding error in the grand scheme of things. We could quite actually come up with every project that we might consider doing with public funding over the next twenty years, finance them all purely with debt, start them now rather than waiting, and we would still be better off for it from just a purely fiscal standpoint without even considering all of the value we would get out of those public projects or considering all of the secondary effects and economic growth that would spur.
Something that's worth noting about this that is especially telling and also worrisome is that these 20-year and even 10-year time frames are longer than the free market has demonstrated that it can manage a business cycle when left to itself. That is, actual long-term investors are speaking with their feet in this new economy, and, aside from the gold bugs who always bet on gold, they are saying that public debt is better than any -- any! -- private debt for not having to micromanage your holdings from day to day. Whether or not a certain class of pundits wants to admit it, the market couldn't put it any more clearly: Unmanaged long-term investments in private firms is dead. Without huge changes, never again will we see the day where a person can put money into the stock market for decades, no matter how diversified at the outset, and expect to actually gain anything from it in the end.
So, yes, federal debt is better than free in the long-term, everybody that actually is putting their own money on the line (i.e. conservative politicians, pundits, and ratings agencies excluded) thinks US federal debt is fantastic, and, given how small the spreads are between long-term and medium-term interest, no one is actually betting that interest rates will spike upward anytime soon. As with most conservative conceptions of the world, once you kick out the legs, all you're left with is so much stool.