Every time Democrats bring up federal spending, Republicans counter with, “We can’t repay all this debt we already have!” Or, when Dems bring up investing in infrastructure or the Green New Deal, Republicans will scream, “It’s too much to spend on a project!” However — and as usual — in making these statements, the Republicans are betraying their lack of basic financial knowledge.
Here are two simple points regarding debt, both from corporate finance.
Debt is rarely repaid; it is almost always refunded. For example, the US government issues a 10-year bond at 5% interest in year X. 10 years later, the government sells bonds of varying maturities, usually at a lower rate.
Even if interest rates are higher in year X+10, it's not a problem if the asset base against which the bonds are issued has increased sufficiently. In this case, that would be GDP. Continuing with the above example, suppose in year X, GDP was $1 trillion dollars. So long as GDP was higher by a decent margin 10 years later, the issuance of the new bonds wouldn't be a big issue.
This is why we use debt/GDP as the proper measurement of government debt.
Here’s my personal favorite from corporate finance: utilities are debt-dependant businesses; they can’t make any type of investment decision without answering the question, “how do we explain to the bond markets why we need to issue new debt to pay for “X”?” These businesses have billions of dollars of debt, most of what is actually refunded debt from capital projects long ago. Yet the corporate bond markets continue to loan money to utilities because, as businesses, they have a long history of repaying debt. Why? Because the debt/asset ratio of these companies is still very solid.
Second, it's OK to use debt to finance growth so long as the return on investment is higher than the cost of the debt. For example, the US needs about $4-6 trillion in infrastructure investment. While issuing that amount of debt to make that investment might seem like budgetary suicide, the return on investment in terms of growth will likely exceed the cost of the debt several times over.
Let me add this point: this does not mean we have carte blanche to spend at ever-increasing rates. It does mean we should start to explain our arguments in finance terms. For example, the Green New Deal is projected to cost $2 trillion dollars. What is the projected long-term economic benefit? Will it lead to economic growth? If so, how much? How long will that growth last? What kind of tax base increase will it lead to relative to the debt issued to pay for it? These are all questions that we have to answer to sell the idea.
In other words, all this talk about "we'll never repay the debt we're issuing" or, "we can't afford it" misses the mark.
