Monday , January 18 2021
Home / Project Syndicate / An Interview with Willem H. Buiter

An Interview with Willem H. Buiter

Summary:
This week, PS talks with Willem H. Buiter, a visiting professor at Columbia University who was formerly Chief Economist at Citigroup. Project Syndicate: In May, you argued that, when economies face a liquidity trap at the effective lower bound for the nominal policy interest rate, monetized increases in public spending or tax cuts are an appropriate policy response. But once interest rates return to “normal,” governments “will have to adjust their fiscal position and its financing accordingly.” Let’s apply this logic to the United States, which, as you’ve acknowledged, “faces fewer constraints than other countries on the federal government’s ability to borrow and to monetize public debt.” What risks do you see

Topics:
Willem H. Buiter considers the following as important:

This could be interesting, too:

Global Economic Intersection Analysis Blog Feed writes Economic Failures Of The IPCC Process

Global Economic Intersection Analysis Blog Feed writes The Grip Tightens

[email protected] (Cyril Morong) writes The CPI increased 1.4% in 2020

Timothy Taylor writes More on the Origins of “Pushing on a String”

This week, PS talks with Willem H. Buiter, a visiting professor at Columbia University who was formerly Chief Economist at Citigroup.

Project Syndicate: In May, you argued that, when economies face a liquidity trap at the effective lower bound for the nominal policy interest rate, monetized increases in public spending or tax cuts are an appropriate policy response. But once interest rates return to “normal,” governments “will have to adjust their fiscal position and its financing accordingly.” Let’s apply this logic to the United States, which, as you’ve acknowledged, “faces fewer constraints than other countries on the federal government’s ability to borrow and to monetize public debt.” What risks do you see arising from current government stimulus policies, and how – and when – might they be mitigated?

Willem H. Buiter: In the US, unemployment is substantial, capital utilization is low, policy interest rates are near zero, and longer-maturity safe rates are at historic lows. So there is no reason not to provide further fiscal stimulus (tax cuts or increased public spending on goods and services) and to monetize the resulting increase in the federal deficit. Global demand for the US dollar – which remains the world’s only serious reserve currency – is robust enough to prevent a sharp, destabilizing currency depreciation.

Because interest rates of all maturities are at historic lows, financing the increase in the federal deficit by selling debt to the markets, rather than to the Federal Reserve, is an option, but monetization remains the cheaper approach. In the longer term, if interest rates on public debt rise significantly, and the Fed escapes its liquidity trap – two developments that are highly unlikely in the next few years – fiscal and monetary tightening may be required. In such a scenario, a more robust post-COVID-19 private economy is likely to limit the damage such restrictive fiscal and monetary policies do to effective demand and economic activity.

PS: The challenge is somewhat different in the eurozone, which you have noted is “at constant risk of national sovereign-debt defaults.” The only way to reduce this risk, you argue, is with “a much larger countercyclical recovery fund, proper conditionality to ensure fiscal sustainability, and an effective sovereign-debt restructuring mechanism.” In June, you, Ian Ball, and Dag Detter urged governments to adopt public-sector net worth as the key metric when calculating their fiscal position. How might such accounting alter assessments of eurozone countries’ fiscal positions and the required conditionality?

WHB: Market participants and other observers often miss the fact that most governments own significant stocks of commercial assets, much of it real estate. This failure leads them to overestimate both the amount of fiscal tightening that is needed to ensure government solvency and, when sovereign debt restructuring is required, the scale of the necessary “haircuts” imposed on creditors.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

or

Register for FREE to access two premium articles per month.

Register

Buiter recommends

We ask all our Say More contributors to tell our readers about a few books that have impressed them recently. Here are Buiter's picks:

Leave a Reply

Your email address will not be published. Required fields are marked *