Here's a nightmare that all frequent users of public transportation have:
It's morning, you've just woken up, the sun is shining bright. Suddenly you realize that you've over-slept your alarm, and you've got an important meeting. You scramble out of bed. You somehow manage to get your disheveled self to the metro station. Then disaster strikes. As you pull out your metro card, you realize that you have a negative balance. So you race over to the pay kiosk and whip out a bank card. But it's too late, your train has literally left the station.
Obviously, there's an easy way to prevent this series of unfortunate events, and many metro riders employ it, including yours truly. I basically never let my metro card balance fall too low. (Actually, I have an auto-refill that is triggered at ten dollars, but you get the picture) Many, if not most, metro riders always keep a balance on their cards that they never spend. This has policy implications for the metro system. And, as I will show, the US government.
Keeping a non-trivial balance at all times on your card, crucially never to be spent, is effectively an insurance policy against being caught flat footed. That is, there is a demand for metro credit that is beyond merely the desire to take rides on public transportation. Owning metro credit (as opposed to filling your card every time you take metro) has value beyond just taking metro rides. And metro earns a premium for providing this value. Effectively, all those metro riders are floating WMATA an interest free loan.
The consolidated Federal government also issues liabilities. Rather than metro credit, it issues Treasury debt, reserve balances at the Fed, and physical currency. Like metro credit, they have special properties which provide value beyond simply exchanging them one day for real goods or services. Physical cash provides an anonymous, secure, and easy way to make payments. As of now and probably forever, it is the only way to pay anybody on Earth. As with WMATA, these benefits earn the US government a premium. The government is issued an interest free loan. (The supply of cash is expanded by having the Fed purchase government debt.) Treasury bills serve as a medium of exchange in the financial system, and are frequently used as collateral. Again, the special properties of government issued financial liabilities increases the demand for them. This demand in turn greatly expands the capacity of the government to issue debt without fears of inflation.
Many economic models fully support this line of reasoning, which points to the obvious conclusion that the government is not subject to the strict solvency constraint that applies to private agents. (That is, the discounted value of net assets over the infinite time horizon must be greater than zero.) When someone in the private sector attempts to systematically to violate this constraint, we call it a Ponzi scheme. It fails because there are a finite number of potential 'investors.' However, suppose that the debt issued by Ponzi scheme had uses beyond merely the present value of the promised payoff. Thus, even with a finite number of economic agents, a permanent demand for Ponzi debt would exist, and the scheme may be able to continue indefinitely. In economics, this phenomenon is known as a 'rational Ponzi game.'
The recent surge of interest in modern money theory, or MMT, has been met with scorn and disdain from the establishment. However, a crucial insight of MMT is that since the US government is a monopolist on risk free dollar denominated financial assets which can never be defaulted on in nominal terms, and demands tax payments in US dollars, its financial assets are special. There is a demand for them other than as a store of value. MMT rightly points out that this demand isn't unlimited, but also gets it right that solvency fears about the US government are misguided to say the least. Again, the capacity to run deficits (For example, to close the output gap and achieve full employment) without fears of inflation is much more than conventional wisdom suggests.
A simple thought experiment will put the debt fears to rest. Suppose WMATA didn't allow any metro credit, and riders simply had to pay for rides as they took them. The metro system would never go into 'debt.' It would never owe anybody metro rides. But riders would be worse off. They would lose their 'insurance policies' and be inconvenienced by constantly having to refill their cards. WMATA should not be worried about the outstanding level of metro credit. In reality, as more and more riders join the system and keep that extra ten dollars on their cards for emergencies, the outstanding stock of metro credit will grow indefinitely. That's right, most metro systems are issuing debt that they will never and should never repay. It's a rational Ponzi game. By the same token, the US government, must continue to let its debt expand to meet the demands of population growth and a growing economy which will only want to hold an ever increasing quantity of financial wealth as the stock of real capital grows. We can therefore only reach the conclusion that fiscal policy should be set with respect to macro-economic outcomes, not achieving a specific budget target for its own sake.
It's been said many times, but it bears repeating. Governments are not households. Because their debts hold special properties, such as acting as a medium of exchange, or as collateral in the financial system, governments with their own free floating currencies can and should maintain positive and increasing debt stocks into the indefinite future. The kids are alright. We're not crushing them with the burden of debt. They won't cast scorn upon past generations for fiscal profligacy. In fact, if we leave future generations with an ample and abundant supply of government debt so that the financial and payment systems function smoothly, they might even thank us.
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