We are in an unusal period now in which the federal government can borrow at extraordinarily cheap rates. Usually when you can borrow cheaply, it pays to refinance your old, more expensive debt with new cheap debt. It also makes sense to borrow for investments you need to make--especially if those investments will reward you richly with important returns. Given the gigantic backlog of infrastructure investments in this country, increasing our debt load cheaply would make a lot of sense. Just imagine if there were $10 billion that could be invested in the 20 or so largest cities in this country in inter-and intra-city rail, demolition of unsafe housing stock, and reconstruction of public parks, gardens, waterfronts, and other amenities. The projects would have to hire all their workforce from the unemployed or underworked residents in the region. Detroit, for one, could move its slow rejuvenation forward at a much faster clip. Every billion would be returned back into the economy as workers spent their pay on necessities, supporting mom and pop grocery stores, apparel stores and restaurants. Tax revenues would increase, paying off the debt even faster.
Brad Delong thinks borrowing right now makes sense for the USA. See e.g., Brad DeLong, The Usual Suspect, Project Syndicate (Feb. 29, 2012):
Suppose that the United States or the Western European core economies boost their government purchases for next year by $100 billion. Suppose further that their central banks, while unwilling to extend themselves further in unconventional monetary policy, are also unwilling to stymie elected governments’ policies by offsetting their efforts to stimulate their economies. In that case, a simple constant-monetary-conditions multiplier indicates that we can expect roughly $150 billion of extra GDP. That boost, in turn, generates $50 billion of extra tax revenue, implying a net addition to the national debt of only $50 billion.
What is the real (inflation-adjusted) interest rate that the US or Western European core economies will have to pay on that extra $50 billion of debt? If it is 1%, boosting demand and production by $150 billion next year means that $500 million must be raised each year in the future to keep the debt from growing in real terms. If it is 3%, the required increase in annual tax revenues rises to $1.5 billion a year. If it is 5%, the government will need an additional $2.5 billion per year.
Assuming that continued subnormal output casts a 10% shadow on future potential output levels, that extra $150 billion of production means that in the future, when the economy has recovered, there will be an extra $15 billion of output – and an extra $5 billion of tax revenue. Governments will not have to raise taxes to finance extra debt taken on to fund fiscal boosts. Instead, the supply-side boost to potential output over the long run from expansionary fiscal policy would be highly likely not only to pay for the additional debt needed to finance the spending boost, but also to allow for additional future tax cuts while still balancing the budget.
Mark Thoma agrees, here. Wonder if we can ever get the fools in Congress to stop their "values" ranting long enough to focus on the real issues--how to get federal dollars into depressed areas and rebuild decaying infrastructure while saving jobs at the same time...