Must-read: Olivier Blanchard: “Ten Take Aways from the ‘Rethinking Macro Policy: Progress or Confusion?'”

Must-Read: I think the extremely-sharp Olivier Blanchard misses an important part of my argument here. If g the rate of growth of a government’s taxing capacity > r its cost of funds via borrowing and if the government is risk-neutral then obviously the government should issue more debt: the economy is then dynamically inefficient with respect to the investments taxpayers have made in their “ownership” of the government and its assets. Any argument that such a government should not be frantically running up its debt must hinge on aversion to interest-rate risk caused by fear of the consequences in the event of an interest-rate spike. But in the case of a reserve currency-issuing sovereign, what are those consequences? The consequences are merely that one must then balance the government’s budget constraint, via some combination of higher taxes, inflation, and financial repression. And there is no reason to think that, for reserve currency-issuing sovereigns, the costs of such a balancing are unduly large.

Other policies to get rid of the distortions that produce g > r for government debt may well be better than running up the debt. But in the absence of those other policies, running up the debt is certainly better than the status quo unless the government is near the edge of its financial repression and taxing capacities and the costs of inflation are very large. And for reserve currency-issuing sovereigns those are none of them the case.

Olivier Blanchard: Ten Take Aways from the “Rethinking Macro Policy: Progress or Confusion?: “On the latter, perhaps the most provocative conclusion of the conference…

…was offered by Brad DeLong:  If the rate at which the government can borrow (r) is less than the growth rate (g), then, he argued, governments should increase, not decrease, current debt levels. If people value safety so much (and thus the safe rate is so low), then it makes sense for the state to issue safe debt, and possibly use it for productive investment.  And if the interest rate is less than the growth rate, debt is safe: the debt- to-GDP ratio will decrease, even if the government never repays the debt.
One senses that the argument has strong limits, from the likelihood that r remains less than g (the two letters appear to have become part of the general vocabulary), to the issue of what determines the demand for safe assets, to whether r less than g is an indication of dynamic inefficiency or some distortion, to whether, even if this world, high levels of debt increase the probability of multiple equilibria, rollover crises and sudden stops.

January 17, 2016


Brad DeLong
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