Chill Out About the Debt
A new IMF report says rich countries should learn to stop worrying and embrace their debt.
The debt is no big deal.
By Pat GarofaloJune 3, 2015 | 1:00 p.m. EDT+ More
The financial crisis of 2008 didn't just cause widespread economic misery across the globe in the form of high unemployment rates, vast numbers of foreclosures and significant wealth obliteration. It also left public balance sheets in a bad way, as countries increased their deficits in order to fund efforts to combat the downturn.
That, in turn, set off several years of debt obsession among policymakers. After the much-maligned but ultimately successful recovery measures taken in 2009 put scary deficit numbers in the headlines, Democrats and Republicans in the U.S. endlessly argued over how much to cut spending in order to decrease said deficit and avoid the dreaded debt crisis (that never actually came). Few voices – though there were certainly some – advocated for more spending in order to boost the economy out of its long and lingering stagnation, or that cutting spending in a weak economy was pretty much counterproductive.
In Europe, the conversation was even worse, with countries like the U.K. and Germany not only implementing austerity themselves, but foisting it onto the rest of the continent, no matter the individual circumstances nations faced.
[SEE: Political Cartoons on the Economy]
Now, however, economists at the International Monetary Fund have a message for all the lawmakers still lamenting their nations' debt loads: Chill.
According to Jonathan Ostry, Atish Ghosh and Raphael Espinoza, rich countries that are working overtime to lessen their debt could be making a critical error. Instead, they argued, "Living with the debt is the welfare-maximizing policy." They added:
Where countries retain ample fiscal space, governments should not pursue policies aimed at paying down the debt, instead allowing the debt ratio to decline through growth and "opportunistic" revenues, living with the debt otherwise. The reason is that the deadweight loss associated with inherited public debt represents a sunk cost – so, abstracting from rollover risk, there is little purpose in paying it down by raising taxes or cutting productive government spending (of course if there is scope to cut unproductive spending this should be pursued). Distorting your economy to deliberately pay down the debt only adds to the burden of the debt, rather than reducing it.
In short: Do nothing about the debt, and the debt will go down organically as economic growth increases and more revenues come in. The trio pointed to countries such as the United States, Germany, the U.K. and several others as having ample space to deal with their debt through long-term growth rather than unproductive cuts and taxes. (For countries such as Greece and Japan, however, they argued that the opposite is true, which is a point worth quibbling with in light of the misery austerity has brought to the former.)
[SEE: Congress Cartoons]
As the Brookings Institution's David Wessel noted, this is a big deal coming from the IMF. "We've come a long way from the days when the International Monetary Fund so often advised governments to cut their budget deficits that some joked that IMF stood for It's Mostly Fiscal," he wrote.
Indeed, the IMF's new report is aligned with its recent general turn away from austerity and push for economies to embrace more public spending as a way of finally shaking off the effects of the financial crisis – not to mention its work on how declining unionization is helping increase income inequality.
Of course, none of the evidence up to this point has uprooted the conviction that the debt is a Very Serious Problem that must be addressed now, now, now, so a pivot today in Washington and elsewhere is pretty unlikely. But in the future, it'd be nice if the post-2008 years served as a warning, rather than a guidebook, for reacting to economic calamities.
http://www.usnews.com/opinion/blogs...f-to-rich-countries-chill-out-about-your-debt
A new IMF report says rich countries should learn to stop worrying and embrace their debt.
The debt is no big deal.
By Pat GarofaloJune 3, 2015 | 1:00 p.m. EDT+ More
The financial crisis of 2008 didn't just cause widespread economic misery across the globe in the form of high unemployment rates, vast numbers of foreclosures and significant wealth obliteration. It also left public balance sheets in a bad way, as countries increased their deficits in order to fund efforts to combat the downturn.
That, in turn, set off several years of debt obsession among policymakers. After the much-maligned but ultimately successful recovery measures taken in 2009 put scary deficit numbers in the headlines, Democrats and Republicans in the U.S. endlessly argued over how much to cut spending in order to decrease said deficit and avoid the dreaded debt crisis (that never actually came). Few voices – though there were certainly some – advocated for more spending in order to boost the economy out of its long and lingering stagnation, or that cutting spending in a weak economy was pretty much counterproductive.
In Europe, the conversation was even worse, with countries like the U.K. and Germany not only implementing austerity themselves, but foisting it onto the rest of the continent, no matter the individual circumstances nations faced.
[SEE: Political Cartoons on the Economy]
Now, however, economists at the International Monetary Fund have a message for all the lawmakers still lamenting their nations' debt loads: Chill.
According to Jonathan Ostry, Atish Ghosh and Raphael Espinoza, rich countries that are working overtime to lessen their debt could be making a critical error. Instead, they argued, "Living with the debt is the welfare-maximizing policy." They added:
Where countries retain ample fiscal space, governments should not pursue policies aimed at paying down the debt, instead allowing the debt ratio to decline through growth and "opportunistic" revenues, living with the debt otherwise. The reason is that the deadweight loss associated with inherited public debt represents a sunk cost – so, abstracting from rollover risk, there is little purpose in paying it down by raising taxes or cutting productive government spending (of course if there is scope to cut unproductive spending this should be pursued). Distorting your economy to deliberately pay down the debt only adds to the burden of the debt, rather than reducing it.
In short: Do nothing about the debt, and the debt will go down organically as economic growth increases and more revenues come in. The trio pointed to countries such as the United States, Germany, the U.K. and several others as having ample space to deal with their debt through long-term growth rather than unproductive cuts and taxes. (For countries such as Greece and Japan, however, they argued that the opposite is true, which is a point worth quibbling with in light of the misery austerity has brought to the former.)
[SEE: Congress Cartoons]
As the Brookings Institution's David Wessel noted, this is a big deal coming from the IMF. "We've come a long way from the days when the International Monetary Fund so often advised governments to cut their budget deficits that some joked that IMF stood for It's Mostly Fiscal," he wrote.
Indeed, the IMF's new report is aligned with its recent general turn away from austerity and push for economies to embrace more public spending as a way of finally shaking off the effects of the financial crisis – not to mention its work on how declining unionization is helping increase income inequality.
Of course, none of the evidence up to this point has uprooted the conviction that the debt is a Very Serious Problem that must be addressed now, now, now, so a pivot today in Washington and elsewhere is pretty unlikely. But in the future, it'd be nice if the post-2008 years served as a warning, rather than a guidebook, for reacting to economic calamities.
http://www.usnews.com/opinion/blogs...f-to-rich-countries-chill-out-about-your-debt
