Benjamin Friedman: recommendation

Transcript context

…Fiscal sustainability. Paul Krugman and others argue that because interest payments, as a share of US GDP, are stable or sometimes even declining, that our current path is fiscally sustainable. Do you agree? No, I don’t. It is certainly true that if long-term interest rates remain — by which, I mean real interest rates, interest rates net of inflation — remain at or near their current levels, or even go down, then the fiscal burden associated with any given debt level that the government — or for that matter, a business, or for that matter, a homeowner — has is much more sustainable. A question that I put to my students now that it would never have occurred to me to put to you and your classmates 30-odd years ago is the following. You are a young graduate student just getting married, and you and your wife would like to buy a house. Or you and your husband would like to buy a house. Because nowadays, unlike when you were a student, we have lots of women graduate students, which is a good thing. You and your wife or husband would like to buy a house, and some bank is willing to lend to you to buy that house at a zero interest rate. How big a house do you buy if somebody is willing to lend to you at a zero interest rate? Well, it’s an extreme version of what you’re saying. If interest rates remain super low, then government, business, households can all afford higher levels of debt without it becoming in any way unsustainable. Now, I kept emphasizing if interest rates remain low, and we don’t know that they will. Now, if I can put in a plug for a policy idea, this is why I have been recommending to anybody who will listen that this is a great time for the United States Treasury to lengthen out the maturity of the US government’s outstanding debt. The average maturity of the outstanding debt is around six years, and we happened to have super-low interest rates, it would be lovely to think that they’re going to be here forever. Some economists think they will be. I’m more cautious. I would use the current market environment as a way to lock in those interest rates because we know that we’re going to have a high government debt level for a very long period of time and much better it not be a burden. Pandemic aside, if, on average, G is greater than R, can’t we just grow our way out of the debt? As you mentioned, now borrowing rates are negative in real terms, right? Economic growth, on average, is positive, so just keep on plowing straight ahead. Let the clock tick.…

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