Although sovereign bond markets remain optimistic about the massive fiscal stimulus packages of advanced economies linked to the pandemic, much of the accumulated debt will inevitably be passed on to future generations. Given the many other risks to long-term growth, how can policymakers today best manage the debt burden?
In this Big picture, defender of modern monetary theory Stephanie Kelton argues that no one should, because government spending in the United States is never limited except by the amount of real resources in the economy. But the University of Chicago Raghuram G. Rajan warns that today’s debt build-up risks limiting future public investment, and therefore calls for carefully targeted spending that protects workers and benefits young people.
For Anne O. Krueger from Johns Hopkins University, the key for US policymakers should be to reduce the ratio of federal debt to GDP through conditional tax increases rather than engage in the “financial crackdown” that has been used to reduce the debt burden of WWII. Todd G. Buchholz, meanwhile, urges the US Treasury to help the next generation by selling 50- and 100-year bonds, locking in today’s ultra-low interest rates for a lifetime. And Georges soros goes further, arguing that the European Union should consider issuing perpetual bonds – or “consols” – in order to deal with both the pandemic and climate change.
Finally, Adair turner, former chairman of the UK’s Financial Services Authority, believes central banks in the US, UK and the euro area will almost certainly end up providing monetary funding to fund larger budget deficits – but he it might be wise not to make such explicit commitments.