patrick.net

Brad DeLong argues that governments have historically not had enough debt, and should have more.

Why? Because, he says, r-g — the difference between the real rate of interest on government debt and the rate of economic growth — has been consistently negative. Why is this significant?

We normally imagine that if a government engages in deficit spending now, it will have to engage in compensating austerity of some form later — even if it doesn’t plan to pay of the debt, it will still have to cut spending or raise taxes so as to run a primary, non-interest surplus if it wants to stabilize the ratio of debt to GDP.

But when r is less than g, a higher debt stabilizes itself: erosion of the debt ratio by growth means that no primary surplus is needed. So you can eat your cake and have it too. A bigger debt lets the government do useful things, like invest in infrastructure; it gives investors the safe assets they want; and it need not lead to any future pain.

He concludes:

North Atlantic public sectors should be larger than they have been in the past century.
North Atlantic public debt levels should be higher than they have been in the past century.
With prudent regulation—i.e., the effective limitation of the banking sector’s ability to write unhedged puts on the currency—the power to tax the financial sector via financial repression provides sufficient insurance against an adverse preference shock to the desire for government debt.

http://equitablegrowth.org/2015/04/05/draft-rethinking-macroeconomics-conference-fiscal-policy-panel/