In a recent FT column,
Lawrence Summers argued that “governments that enjoy [today’s] low
borrowing costs can improve their creditworthiness by borrowing more not
less.” He ended his column by writing, “Any rational business leader
would use a moment like this to term out its debt.” Contrary to Summers,
I will argue that a rational business in anything like the financial
position of the world’s major governments would cut spending immediately, in order to rein in massive deficits.
Now in fairness to Summers, he makes some technical arguments involving negative real interest rates, and he is careful to restrict his case for deficit-spending to projects that “reduce future spending or raise future incomes.” With a generous interpretation, Summers’ argument reduces to a tautology: we could take him to be saying that if a business found that it would be profitable to take on more debt, then a profit-seeking business would do so. Yes, that’s true as far as it goes, but it doesn’t at all follow that the United States and other governments today, ought to be taking on more debt. Summers’s analysis focuses on a few technicalities while ignoring the elephant in the room.
First, it’s significant that private business has not, in fact, been running up massive debt, even with record-low interest rates. It’s true, businesses do not enjoy quite the low yields that the U.S. government gets on its Treasury securities, but the average borrowing cost for AAA corporations is nonetheless at a 50-year low.
Even though both the federal government and the private sector are currently enjoying the lowest interest rates in half a century, look at how differently they have behaved regarding their indebtedness during recessions:
Read more: http://www.theamericanconservative.com/articles/would-private-business-run-up-more-debt-than-government/
Now in fairness to Summers, he makes some technical arguments involving negative real interest rates, and he is careful to restrict his case for deficit-spending to projects that “reduce future spending or raise future incomes.” With a generous interpretation, Summers’ argument reduces to a tautology: we could take him to be saying that if a business found that it would be profitable to take on more debt, then a profit-seeking business would do so. Yes, that’s true as far as it goes, but it doesn’t at all follow that the United States and other governments today, ought to be taking on more debt. Summers’s analysis focuses on a few technicalities while ignoring the elephant in the room.
First, it’s significant that private business has not, in fact, been running up massive debt, even with record-low interest rates. It’s true, businesses do not enjoy quite the low yields that the U.S. government gets on its Treasury securities, but the average borrowing cost for AAA corporations is nonetheless at a 50-year low.
Even though both the federal government and the private sector are currently enjoying the lowest interest rates in half a century, look at how differently they have behaved regarding their indebtedness during recessions:
Read more: http://www.theamericanconservative.com/articles/would-private-business-run-up-more-debt-than-government/
No comments:
Post a Comment