One objection – laid out by Harvard’s Kenneth Rogoff in the Financial Times in August – is that people will fear higher future taxes and save still more. I am unpersuaded: household savings have fallen in Japan. But there is a good answer: use cheap funds to raise future wealth and so improve the fiscal position in the long run. It is inconceivable that creditworthy governments would be unable to earn a return well above their negligible costs of borrowing, by investing in physical and human assets, on their own or together with the private sector….I especially like the jab of pointing out that the UK overcame its "big" debt by... initiating the Industrial Revolution. Yep, the future is full of promise. If only the leaders would lead instead of hiding in their inner sanctums terrified of what might be in the future.
Another noteworthy objection – grounded in the seminal work of Prof Rogoff and Carmen Reinhart of the Peterson Institute for International Economics in Washington – is that growth slows sharply once public debt exceeds 90 per cent of GDP. Yet this is a statistical relationship, not an iron law. In 1815, UK public debt was 260 per cent of GDP. What followed? The industrial revolution.
What matters is how borrowing is used…. Contrary to conventional wisdom, fiscal policy is not exhausted. This is what Christine Lagarde, new managing director of the International Monetary Fund, argued at the Jackson Hole monetary conference last month. The need is to combine borrowing of cheap funds now with credible curbs on spending in the longer term.
Tuesday, September 6, 2011
Here is a bit from an article by Martin Wolf at the Financial Times: