In relation to the release of a new book In Defense of Public Debt.
Barry Eichengreen, Professor of Economics and Political Science at the University of California, and co-authors, with the support of the Peterson Institute for International Economics, have published a new book In Defense of Public Debt.
The book has recently become available for purchase, and the Peterson Institute for International Economics presented it in the format of Barry Eichengreen’s speech, short reviews of the book and questions and answers (link to the video is given below).
The most important and interesting for Ukrainian readers ideas from the book In Defense of Public Debt are as follows:
• Before the COVID-19 pandemic, it was dangerous to increase public debt during emergencies and it was necessary to immediately turn back toward fiscal austerity to bring debt back to “normal” after emergencies. This is exactly what happened during and after the global financial crisis of 2008-2009.
• Emergencies, such as the COVID-19 pandemic, justify government’s extraordinary action, including large-scale borrowing to finance rescue operations. Governments that do not respond to this kind of emergency will not retain its legitimacy in the eyes of their own citizens. Such a government, to continue with the analogy, would be like parents who refused to borrow to obtain life-saving surgery for a child.
• Historically, significant government borrowing to mount a sturdy national defense and successfully repelling invaders were justified. These measures not only defended the states from external invasion, but also strengthened the domestic political system, since a state that provided a sturdy national defense gained legitimacy in the eyes of its public. Until 2020, the largest public debt explosions in industrialized countries were during the World Wars I and II.
• Successful debt issuers have to meet a large and liquid secondary market on which debt securities could be bought and sold, allowing investors to diversify their claims and limit their risks. In history, one of the first functions of central banks was to create the foundations of the secondary market for government securities, ensuring its stability and liquidity.
• Since 2020, the interest rates on government borrowing have considerably come down, which allows governments to have larger public debt painlessly. The main component of the debt dynamics equation (r-g) has become negative for many countries, allowing governments to borrow more to provide main public needs without serious risks to macro-financial stability. The only question is: how long will these low rates persist?
• Fundamental factors that determine low long-term interest rates are likely to continue to have an impact in the future, in particular the high savings in Germany, China and oil-producing countries, growing economic inequalities around the world and the high savings rates of the wealthy, the shift from factories to digital platforms (this reduces the need for firms to borrow). However, in part, such factors may reduce their impact in the future, causing pressure to increase interest rates.
• Governments should not use exclusively fiscal measures when macroeconomic conditions are changed and relative public debt reduces. Prudent response to the new conditions should include a combination of: 1) fiscal restraint (but when the time is right)), 2) running moderate inflation, 3) increasing productivity and accelerating economic growth. Only then governments will be able to avoid economic and political disasters in response to new challenges.
Rulers and experts in Ukraine should take into account the authors’ conclusions and move away from prejudice against government borrowing; the state priority needs should always come first, namely defense of the country from the aggressor or saving people from deadly diseases, especially since the size of Ukraine’s public debt in the global context is insignificant (about 50% of GDP), and the existential challenges facing the country are currently very acute.