Governments ought to be sure that new borrowing is doing things that will provide a lasting good, greater than the final cost of the borrowing
one thing about the thinking of John Maynard Keynes, who more or less founded macroeconomics, it is that he was in favour of governments borrowing lots of money, at least under some circumstances. The “New Keynesian” orthodoxy that evolved from his work in the second half of the 20th century was much less liberal in this regard. It put less faith in borrowing’s purported benefits, and had greater concerns about its dangers.
Most early Keynesians assumed that the deficits caused by borrowing to stimulate the economy would be temporary; after borrowing more than they raised in taxes in order to provide a fiscal stimulus, governments would be able to raise more in taxes, and thus pay off their debts, in the good times that followed.
The new orthodoxy was that governments should instead rely on monetary policy. When the economy slowed, monetary policy would loosen, making it cheaper to borrow, thus encouraging people to spend. Government borrowing, for its part, should be kept on a short leash. If governments pushed up their debt-to-ratio, markets would become unwilling to lend to them, forcing up interest rates willy-nilly. The usefulness of monetary policy demanded a sober approach to fiscal policy.
Adherents of “Modern Monetary Theory” went further than this, arguing that governments should borrow as much as was needed to achieve full employment while central banks focused simply on keeping interest rates low—a course of action which orthodox economics would expect to promptly drive up inflation. Currentlyremains on the fringes of academic economics.
But it does not currently look as though they would be. Despite the seemingly high returns to new capital, private investment in America is quite low. This suggests either that there are other obstacles to new investment, or that the high returns on investment reflect an insufficient level of competition rather than highly productive companies.
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