For years, economists have been debating the best way to reduce the debt-to-GDP ratio. The fear is that we may soon cross over to a point of no return that inevitably leads to some form of debt crisis. However, in recent years, a growing number of economists and commentators have come to believe that the debt doesn’t matter. Thanks to permanent low interest rates and low inflationary risks, we can disregard the debt and achieve low unemployment and high output.
There are problems with this position. First, the fact that interest rates have stayed low in recent years does not mean that they will never significantly rise. Second, and maybe more importantly, even if interest rates never increase and inflation never materializes, there is a significant cost to high debt that is best avoided, especially if one values smaller government.
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