When Metaphors Fail

Consider this nonsense:

What if borrowing money made you so much richer over the long-term that it paid for itself? It’s not crazy. Millions of families make such a decision every year when they take on debt to pay for school. Indeed, investing in yourself is a bet that often pays off. But can the same be true for an entire country?

Brad DeLong and Larry Summers say yes. In a provocative new paper, they argue that when the economy is depressed like today, government spending can be a free lunch. It can pay for itself.

Except here’s the thing: families don’t borrow from themselves; they borrow from other holders of capital. The government, on the other hand, basically borrows from itself. Now, economists like to get technical and explain that the Fed is not the same as the treasury. It’s also true that the department of the interior is not the same as the department of defense, but no one would suggest that the former loaning to the latter would constitute anything other than the government loaning money to itself.

Now, to answer the question at hand: yes, investing in the country over the long term should pay off. But let’s not kid ourselves. When the government borrows from itself, and particularly when the method for doing so is having the central bank purchase bonds from another department, all that happens is inflation. Inflation and investment are two different things. The latter, for example, is productive while the other is destructive. And it takes a significant amount of ignorance, deceit, or stupidity to call inflation a form of investment.

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