Credit to Larry Summers, for putting Keynesian notions of fiscal policy in the most trollworthy manner possible.In a new Reuters column…
So, what is to be done? Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more, not less, and investing in improving their future fiscal position even assuming no positive demand stimulus effects of a kind likely to materialise with negative real rates. They should accelerate any necessary maintenance project-issuing debt leaves the state richer not poorer, assuming that maintenance costs rise at or above the general inflation rate.
As my colleague Martin Feldstein has pointed out, this is a principle that applies to accelerating replacement cycles for military supplies. Similarly, government decisions to issue debt, and then buy space that is currently being leased, will improve the government’s financial position as long as the interest rate on debt is less than the ratio of rents to building values – a condition almost certain to be met in a world of sub-2% government borrowing rates.
This is not really as radical as it sounds. Austerity leads to wider budget deficits. Stimulus in the short term, if it gets the economy back to normal growth, can lead to healthier government balances.
And of course with rates where they are, the government does make money every time it borrows. Still, very amusing.