With interest rates low, U.S. should borrow more, Larry Summers says
With economic growth slowing worldwide, former Obama administration economic adviser Lawrence “Larry” Summers called on the U.S. to borrow more to help stimulate growth and save money in the future because of low interest rates on Treasury securities.
Governments of strong economies need to take action because, as Friday’s disappointing jobs report and other recent data have shown, “the proposition that the global economy is returning to a path of healthy growth looks highly implausible,” he said in an opinion article in the Financial Times.
“It is more likely that a pessimistic view is again taking over as falling incomes lead to falling confidence that leads to reduced spending and yet further declines in income,” said Summers, a Harvard University economist who served as President Obama’s top economic adviser from 2009-10.
Summers’ call for more government borrowing flies in the face of concerns about the huge U.S. budget deficit. But he argued that the U.S. and other countries should take advantage of exceptionally low borrowing costs as investors flee to the safety of government bonds.
“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,” Summers argued. The strategy makes sense, “even assuming that no positive demand stimulus effects are likely to materialize.”
His rationale is simple: governments need to borrow in the future to pay for things such as infrastructure projects, upgrading military equipment and to manage debt. With borrowing costs so low, Summers said, it makes sense to borrow the money now at low rates.
When real interest rates are below 1%, as they are now for U.S. Treasuries, a government project “pays for itself even before taking into account any Keynesian effects.”
“This logic suggests that countries regarded as havens that can borrow long-term at a very low cost should be rushing to take advantage of the opportunity,” Summers said. “This is a view that should be shared by those most alarmed about looming debt crises because the greater your concern about the ability to borrow in the future, the stronger the case for borrowing for the long term today.”