The full column appears here:
https://www.ft.com/content/da150515-a5e9-4237-9b70-757dd958bf0d
There is unanimity about macro-economic policy for now, but not about the exit strategy
The
major change in the major economies that is certain to follow the Covid-19
shock is a large and permanent rise in public debt ratios, including a rise in
the US debt ratio to a new high for the series in the entire history of the
Republic.
Macro-economists
have been almost unanimous in agreeing that the stimulus packages to protect
economic activity during the lockdowns have been appropriate, but an important
debate is developing about the long term impact of higher debt ratios on the
global economy.
Mainstream
New Keynesian macro-economists (for example, Larry Summers and Paul Krugman)
are not concerned about possible damage from higher public debt per se,
and some appear to believe that this will actually be a positive, because it
may offset the forces of secular stagnation. They also believe that debt
servicing costs (ie bond yields) will probably remain below nominal GDP growth
rates indefinitely, so high public debt and borrowing will be sustainable.
However,
there is an important group of macro-economists, led by Ken Rogoff and John
Cochrane, who believe that high debt ratios can lead to “runs” in public debt
markets, even in advanced economies with their own central banks. They are
therefore concerned that high and rising debt may result in financial calamity.
Although
the New Keynesians are almost certainly right in the short and medium term, the
debt school should not be ignored. A new strategy for the exit needs to be
developed to mitigate these risks.
