John Cochrane thinks the federal government should take advantage of today’s low interest rates by refinancing as much of the national debt as possible into long-dated securities. Dylan Matthews speaks to some Treasury officials who explain why they don’t do this, and everything they say is correct. Nevertheless, we should do what Cochrane says.
In fact, I think we should go even further than Cochrane wants and sell perpetual bonds, or “consols,” that just pay interest forever and ever. Some of the advantages of this are the ones that Cochrane glosses over. But the more important reason to sell consols is to get people like John Cochrane to stop complaining about future interest rate risk. There is a powerful desire out there to worry about the national debt. The market price of the national debt is screaming as loudly as possible that people should stop worrying about the national debt. So instead, people have chosen to fixate on the possibility of a future market spike in the interest rate. A large-scale refinancing operation will either fail (in which case, no harm no foul) or else more likely it will succeed, in which case people will have to stop warning about this future spike.
We’d then have a nice objective look at the state of federal finances and could discuss rationally whether it makes sense to finance government operations out of taxes or out of borrowing.
