In Defense of Public Debt

Abstract

Public debts have exploded to levels unprecedented in recent history as governments responded to the COVID-19 pandemic. These rising levels of debt prompted apocalyptic warnings about the dangers of heavy debts—about the drag they will place on economic growth and the burden they impose on future generations. This book adds the other side of the equation: drawing on history, the authors provide a defense of public debt. Their account shows that the ability of governments to borrow has played a critical role in meeting emergencies, from wars and pandemics to economic and financial crises, as well as in funding essential public goods and services such as transportation, education, and healthcare. In these ways, the capacity to issue debt has been integral to state building. Transactions in public debt securities have also contributed to developing private financial markets and, through this channel, to economic growth. None of this is to deny that debt problems, debt crises, and debt defaults occur. But these dramatic events, which attract much attention, are not the entire story. In Defense of Public Debt redresses the balance. The book develops its arguments historically, recounting two millennia of public debt experience. It deploys a comprehensive database to identify the factors behind rising public debts and the circumstances under which high debts are successfully reduced. Finally, it brings the story up to date, describing the role of public debt in managing, from 2020 onward, the COVID-19 pandemic and suggesting a way forward once governments, now more heavily indebted than before, finally emerge from the crisis.

PostCOVID‐19 exit strategies and emerging markets economic challenges

“…The history of the US after WWII provides a vivid example of the success of a two‐pronged approach in facilitating the exit from a public debt overhang, stabilizing the global economy, and solidifying the global role of the dollar. The rapid decline in public debt/GDP from 1946 to 1955, was accommodated by financial repression inducing lower r , mild inflation (∼4.2%), higher taxes and robust GDP growth (Aizenman & Marion, 2011; Reinhart & Sbrancia, 2015; Reinhart et al, 2015; Eichengreen et al, 2021). The end of WWII US induced sharp drop of fiscal revenue mobilization from 50% GDP points in 1944 toward 20% by 1946.…”

“…In the medium run credible fiscal adjustments entail a decline in the public debt ratio, though at potentially large output losses when carried out under unfavorable budgetary and economic conditions. Eichengreen et al (2021) provides a detailed analysis of the public debt and fiscal dynamics in the past two centuries. Chapters 7 and 9 overview and analyze successful debt consolidations associated with adjustments aiming at reaching spells of primary surpluses at times of modest inflation and renewed growth during the 19th and the 20th century by UK, US, France, and several other countries.…”

The return of fiscal policy

“…The good household narrative is flawed because it neglects the perpetual nature of the government that can indefinitely refinance its debt as long as it is capable to service it (i.e., pay the interest). Said differently, a government, contrary to a household who eventually will come to the last period of its life and repay its debt, does not need to be solvent (Eichengreen et al 2021).…”

La moneda, la soberania y la reinvención del mundo

“…La supuesta independencia de los bancos centrales no ha hecho desaparecer el déficit públicocon independencia de que ese objetivo sea eventualmente contrario al desarrollo económico (Eichengreen, El-Ganainy, Mitchener, & Esteves, 2021), como supuestamente pretendían sus impulsores, al contrario, lo ha aumentado, especialmente en el norte. Pero ha contribuido a la expansión del sistema financiero, de la deuda, hasta niveles nunca alcanzados en la historia (Abdelal, 2007).…”