The Debt Pandemic

Although sovereign-bond markets remain sanguine about advanced economies’ massive pandemic-related fiscal stimulus programs, much of the accumulated debt will inevitably be passed on to future generations. Given the numerous other risks to long-term growth, how can today’s policymakers best manage the debt burden?

In this Big Picture, Modern Monetary Theory advocate Stephanie Kelton argues that no one should, because government spending in the United States is only ever constrained by the amount of real resources in the economy. But the University of Chicago’s Raghuram G. Rajan warns that today’s debt build-up risks limiting future public investment, and therefore calls for carefully targeted expenditures that protect workers and benefit the young.

For Anne O. Krueger of Johns Hopkins University, the key for US policymakers should be to reduce the federal debt-to-GDP ratio through conditional tax increases rather than engage in the “financial repression” that was used to draw down WWII’s debt burden. Todd G. Buchholz, meanwhile, urges the US Treasury to help the next generation by selling 50- and 100-year bonds, thus locking in today’s ultra-low interest rates for a lifetime. And George Soros goes further, arguing that the European Union should consider issuing perpetual bonds – or “consols” – in order to address both the pandemic and climate change.

Finally, Adair Turner, a former Chair of the United Kingdom’s Financial Services Authority, thinks that central banks in the US, the United Kingdom, and the eurozone will almost certainly end up providing monetary finance to fund higher fiscal deficits – but might be wise not to make such commitments explicit.