Jamie Galbraith Makes an Assumption
By Arnold Kling
But there isn’t, in fact, a “long-term deficit problem.” So long as interest rates stay below the growth rate, as they are, debt-to-GDP levels eventually stabilize and even decline. The notion that there is a big problem is pure propaganda based on a pseudo-debate, pitting two viewpoints that nevertheless converge on the practical issue.
Pointer from Mark Thoma.
Having an interest rate that is below the growth rate of nominal GDP is indeed a wonderful thing. The government can have an infinite debt and still be solvent.
However, it is dangerous to assume that the interest rate will always be below the growth rate of nominal GDP. In fact, the interest rate tends to fluctuate around nominal GDP growth, sometimes above and sometimes below. See the table in my article. It would be nice if Galbraith would look at this history, instead of making unrealistic assumptions.