Despite all the talk from politicians about “out of control” federal debt, the truth is that by almost any sensible measure the federal government isn’t borrowing enough money. Consider Bloomberg’s report that total debt in the United States “has shrunk to a six-year low relative to the size of the economy as homeowners, cities and companies cut borrowing, undermining rating companies’ downgrading of the nation’s credit rating.”
Leading the charge, as you can see above, is the precipitous decline in household borrowing. It’s hard to see how that could have been avoided, but it takes a big bite out of the economy that needs to be filled by foreign demand (exports), business investment, and government purchases. But of course businesses aren’t going to just invest for no reason. They’d be investing either to sell things to households, to foreigners (exports again), or to the government. More aggressive government borrowing could help smooth the situation over either by directly bolstering government purchases, by reducing taxes on debt-constrained households, or by giving grants to state and local government so that they can boost purchases or cut taxes. And rather than “undermining confidence” in a problematic way, sky-high debt would, at worst, undermine the international value of the dollar and bolster exports.
It absolutely cuts against the grain of everything everyone’s saying right now, but it’s still true. The economy is suffering from insufficient debt, and the only party capable of borrowing enough money at sufficiently low price is the federal government.