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World needs more U.S. government debt

April 27, 2016
Kocherlakota

(University photo / Brandon Vick)

In a column published today by Bloomberg View, economics professor Narayana Kocherlakota argues that, in this time of global economic uncertainty, the U.S. government should be issuing more debt in order to strengthen the domestic economy.

Kocherlakota, the University’s first Lionel W. McKenzie professor of economics and former president of the Federal Reserve Bank of Minneapolis, explains that the United States is in “a unique position to issue the kind of extremely safe bonds that are in great demand among the world’s investors.”

To some, the idea that the U.S. government isn’t issuing enough debt may seem counterintuitive — after all, federal debt outstanding has more than doubled over the past 10 years. But scarcity is not about supply alone. In the wake of the financial crisis, households and businesses are demanding more safe assets to protect themselves against sudden downturns. Similarly, regulators are requiring banks to hold more safe assets. Market prices tell us that the government needs to produce more safety in order to meet this increased demand.

According to Kocherlakota, the current restrictions on debt are artificial and politically motivated. Moreover, they “punish savers, choke off economic growth, and could sow the seeds of the next financial crisis.”

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Category: Voices & Opinion