There Is No Sovereign Debt Crisis
Forget Spain and Italy. Most governments, including ours, have never been able to borrow so cheaply.
Photo by Ralph Orlowski/Getty Images.
Spanish and Italian bond yields are surging again this week, driving those countries closer to the brink of insolvency. German government officials sound increasingly eager to kick Greece out of the eurozone, and the bond ratings agency Moody’s has put all eurozone members except Finland on notice that they’re at risk of downgrade. Under the circumstances, it’s no surprise that European stock markets have been tanking. My news feed is full of hits for “sovereign debt crisis”—a situation where governments are unable to borrow to fund their spending. This debt crisis is even being blamed for a global collapse in oil prices.
So it’s worth asking: What sovereign debt crisis?
There certainly isn’t one in the United States, where for weeks the inflation-adjusted yield on 20-year bonds has been negative. Investors, in other words, are so pessimistic about growth prospects and so frightened of losing their principal that they’re willing to pay the American government a small fee for the privilege of safeguarding their money. And a quick glance around the world reveals that the American experience is much more typical than the Greek or Italian one. British interest rates are tumbling, as are Germany’s and Japan’s. All across the world, governments have never been able to borrow so cheaply. It’s not just that the U.S. government is viewed as a safe haven or that Japan is an export dynamo. For example, Australia’s government borrowing costs are at their lowest level on record, which is entirely typical. The problem countries make the headlines. But except for a few countries on the brink of bankruptcy, most technologically advanced democracies have current borrowing costs that are extraordinarily low.
Even in the socialist dystopia of France—hardly a poster child for market-friendly tax and budget policies—10-year yields are low and falling. The world isn’t experiencing a sovereign debt crisis at all. It’s experiencing the reverse. A boom in sovereign debt—caused by a drastic loss of confidence in private-sector growth.
And the countries that can borrow cheaply—giants like the United States, the United Kingdom, Australia, Germany, and France—should be trying to take advantage of the situation with huge amounts of government investment. Instead they tend to be pursuing austerity plans.
For a high-unemployment country with low borrowing costs—such as, say, the United States—the sensible idea right now is the old-fashioned, liberal one: public works. If there are useful projects to be undertaken and idle workers who could be undertaking them, then borrow money and conduct the projects. Spending on certain types of public works today—accelerated repairs of water and transportation infrastructure, say, or rapid construction of durable military equipment—should save money in the long run. As money becomes cheaper, more projects pass cost-benefit scrutiny. A “bridge to nowhere” is a tragic waste if it diverts resources from other useful undertakings. If it can be financed at negative real rates and built by construction workers who’d otherwise be unemployed or languishing in positions that don’t take advantage of their skills, it may be a reasonable investment.
The same logic applies to bridges that aren’t to nowhere. Useful things that might seem like unaffordable luxuries in ordinary times can be done relatively cheaply today.
Not every cheap-money country has high unemployment. In Germany, for example, only 5.6 percent of the labor force is out of work. And in the tax-and-spend Nordic countries, there may not be many useful projects to undertake. In these countries, the obvious solution is to let cheap borrowing finance the projects that are being paid for with taxes, allowing for tax cuts. Denmark, for example, has the mind-boggling combination of 7.8 percent unemployment, an approximate 1 percent nominal yield on its short-term debt, and taxes equal to 49 percent of GDP. It should just not collect taxes! The Danish government can finance its lavish government benefits by cheap borrowing and can cut its high taxes to encourage private-sector investment.
America is a high-unemployment, low-tax country, so our best policy is not to cut taxes but to borrow money to finance infrastructure investment.
Unfortunately, our polarized political system makes it very unlikely that Congress would agree to do that. But there is another way. The federal government could borrow money and then cut large, unrestricted checks to state governments. More conservative states would probably use the money to cut taxes, while states like California and Maryland could use the money to preserve public services or upgrade infrastructure. Fiscal free lunches don’t come around very often, but there is one today. It’s time to stop obsessing over a handful of troubled Mediterranean countries and start spending our free money.