Should governments borrow more?

Brad DeLong of the University of California at Berkeley suggested at the International Monetary Fund’s “Rethinking Macro” conference last week that rich countries should borrow more.

From the WSJ blog:

The interest rate that rich countries with super-safe debt ... pay is astonishingly low... In the U.S., the Treasury yield has gone from roughly equal to growth in nominal GDP in 2005 to 3 percentage points lower today.

By Mr. DeLong’s reckoning, this means those countries are borrowing too little... Mr. DeLong asks, “Isn’t the point of the market economy to make things that are valuable?” Since the debt of rich countries is “very cheap to make… shouldn’t we be making more of it?”

However, DeLong's suggestion could be problematic if future GDP growth turns out lower than currently projected.

Paulo Mauro, formerly of the IMF and now at the Peterson Institute for International Economics, raised this issue in a blog post.

For example, a country projecting a stable government debt ratio of 100 percent of GDP over the next decade or two would experience an increase in that ratio to 140 percent in 10 years if growth turns out to be 1 percentage point lower than assumed. As deficits rise, the ratio would balloon to more than 200 percent after 20 years.

In this regard, it is probably useful to remember that apart from the US, many of the economies with very low interest rates, for examples Japan and Germany, are rapidly ageing societies, and thus have little capacity for rapid economic growth. Japan in particular has already spent much of the past few decades in virtual stagnation.