GOVERNMENT DEBT First and foremost, the new view of debt understates the risks to other claimants on public tax revenues – such as pensioners, who might be thought of as junior debt holders in the twenty-first-century welfare state. After all, most social-security systems are debt- like in the sense that the government takes money from you now, and promises to pay it back with interest when you are old. And for governments, this “junior” debt is massive relative to the “senior” market debt that sits atop it. Indeed, governments in OECD countries are currently paying out an average of 8% of GDP in old-age pensions, and a staggering 16% in the case of Italy and Greece. In actuality, future taxes earmarked for paying pensions swamp future taxes earmarked for paying debt by a significant multiple, although many governments have been trying to adjust pensions downward gradually, as Europe did during the financial crisis, and Mexico and Brazil have done under duress more recently. Unfortunately, slow growth and aging populations mean much remains to be done. Thus, even if it seems that governments can take on much more debt without having to pay significantly higher market interest, the real risks and costs may be hidden. Economists Alan Auerbach and Laurence Kotlikoff made a similar point in an influential series of papers back in the 1990s. Second, and perhaps even more critically, the current complacency regarding much higher debt implicitly assumes that the next crisis will look just like the last one in 2008, when interest rates on government debt collapsed.
The bottom line is that there is no guarantee that interest rates will fall in the next global crisis.
But history suggests that this is a dangerous assumption. For example, the next wave of crises could easily stem from a sudden realization that climate change is accelerating much faster than previously thought, requiring governments simultaneously to stall the capitalist engine and spend vast sums on preventive measures and remediation, not to mention dealing with climate refugees. And the next global conflagration could be a cyber war, with unknown ramifications for growth and interest rates. Moreover, aggressive experimentation with much higher debt might cause a corresponding shift in market sentiment – an example of the Nobel laureate economist Robert Lucas’s critique that big shifts in policy can backfire owing to big shifts in expectations. And, frankly, any realistic assessment of current global economic risks must acknowledge that the world’s most important economy is in a state of political paralysis, with impulsive decision-making leaving it ill-equipped to deal with an outside- the-box crisis should one arise. The bottom line is that there is no guarantee that interest rates will fall in the next global crisis. None of the preceding arguments undermine the strong case for investing now in high- return infrastructure projects (including in
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January 2020
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