Barry Eichengreen on the New Era of High Government Debt

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, we are here at Jackson Hole. And I know that so much of the focus is on the short-term outlook for rates. But really, this is a gathering to talk about the longer-term framework of monetary policy.

Joe Weisenthal (0:28)

Yeah, it's so funny because it is an academic conference, and there are all these big think conversations going on about the changing nature of the global economy. Something like that, I think, is actually the theme, like the structural changes in the global economy. But 99% of the media interest in this whole event is like, are we going to get a rate hike in November or December? But there is so much more.

Tracy Alloway (0:52)

Right. And one of the big themes that is emerging is this idea of living in a world where there is more debt outstanding. And we've seen that sort of pop up a number of times in recent months. Of course, you had Fitch downgrading its credit rating because partly of the public finance trajectory.

You've had volatility in the treasury market. You've had questions over whether or not investors are still going to want to buy bonds at a time when there's enormous supply and also the Fed out to raise rates and potentially bring down inflation.

Joe Weisenthal (1:27)

Yeah, I would say there's sort of two dynamics that I think is really interesting here with regards to sort of like public spending and public debt. So I think there's sort of like some of the technical factors that you've described. And of course, we talked about them with Darrell Duffy as well, the capacity for debt absorption.

And then we're also living in an age that's very different from the 2010s in which fiscal authorities are just taking a much more active role in economic management. And so the 2010s, we sort of, you know, fiscal took a backseat.

All the pressure was placed on the monetary authorities to get us back to full employment, so forth.

And the 2020s so far feel very different from that because we've had these big spending bills, very active management. And so how that interacts with policy, what that means for inflation, what that means for central bankers, et cetera. And I think all of these questions, like what that means for central bankers, what that means for the macro trajectory going forward is going to be debated, I mean, probably for years.

Tracy Alloway (2:23)

Exactly right. Let's get a jumpstart on this topic of high public debt. And I'm glad to say we really do have the perfect guest. We're going to be speaking with Barry Eichengreen. He is the Professor of Economics at University of California at Berkeley, and the man that central bankers here at Jackson Hole have tapped to research and discuss this exact topic. So Barry, thank you so much for coming on Odd Lots.

Barry Eichengreen (2:48)

Good to be with you. Before we go on, tell me, where did the name Odd Lots come from?

Tracy Alloway (2:54)

Well, it's actually an old bond term for bond trades of non-standardized sizes.

Joe Weisenthal (3:00)

When we started the podcast years ago, we didn't really know what it was going to be, but we sort of had a sense that maybe like, you know, we try to find some off-the-beaten-path stories. And so what's something that sounded like that? Like, Odd Lots sounded good and it stuck.

Barry Eichengreen (3:13)

Yeah, it works.

Tracy Alloway (3:14)

So Barry, let me start with a really simple question here.

Why do governments seem to borrow so much? Like, what is going on that in 2023, we do have these massive fiscal deficits?

And we have had them for a long time.

Barry Eichengreen (3:30)

Governments borrow for both reasons, good and bad. So we've seen that governments borrow to finance emergency responses to great recessions, financial crises, pandemics, wars. And throughout history, they have done that. When in exceptional circumstances, governments have to resort to exceptional fiscal policies.

And they do do so by borrowing, sometimes big time.

On the other hand, it would be nice for governments to reduce those heavy debt burdens once the emergency has passed and restore that capacity to borrow. And that's where the borrowing for bad reasons kicks in. When you have divided government, where you have inability of different political factions to agree on which form of public spending to cut or whose taxes to increase in order to restore fiscal balance, restore fiscal sustainability, you have the persistence of those fiscal deficits and high debt ratios. So again, there are good reasons why governments incur public debts and there are bad reasons why they persist.