Wise governments will set aside worries about public debt

The priority for now is reviving economies enough to push interest rates above zero

Robin Harding


© James Ferguson/FT



The national debt has inspired a million boring speeches and exactly one witty remark. “If something cannot go on forever, it will stop,” says Stein’s Law. Coined by the economist Herbert Stein, an adviser to US president Richard Nixon, it was originally about the balance of payments but he used the precise phrase in 1986 to warn Congress that the federal debt cannot rise without limit.

In response to the Covid-19 crisis, the world’s governments seem intent on putting Stein’s Law to the test. This year’s increase in public debt has little precedent outside wartime. According to the IMF, massive borrowing, along with economic contraction, will push the US debt up by more than 30 percentage points to 140 per cent of gross domestic product.

Long-term debt projections in many countries are dire. The IMF says global public debt will hit its highest level in recorded history, greater even than the peak after the second world war.

This seems to portend disaster and require corrective action. But while higher public debt has costs — most significantly if it closes off the ability to respond to a future crisis — there is little cause for immediate alarm. The “safe”, or sustainable, level of national debt is ambiguous and is likely to have risen because of slumping global interest rates.

Given the urgency of responding to Covid-19, and the risk of a plunge into mass unemployment if governments stand aside, they are correct to leave worries about public debt for another day.

Calculating a safe level of public debt is hard because sustainability depends on both interest rates and the pace of economic growth. If interest rates are 2 per cent and the economy is growing at 3 per cent, for example, then all a country has to do is sit back and wait.

As long as it does not borrow more, then debt will gradually dwindle to nothing compared with the size of the economy. If interest rates rise above economic growth, by contrast, then even small debts can get out of hand.

Attempts to estimate debt limits therefore turn into guesses about whether interest rates will rise. This is hard. One IMF effort to calculate debt limits in 2015 found that Japan and Italy had zero space to borrow any more. Both countries have nevertheless done so on a massive scale this year.

In an influential 2019 paper suggesting the costs of public debt are smaller than previously thought, former IMF chief economist Olivier Blanchard argues that interest rates have generally been below growth rates, and therefore that “higher debt may not imply a higher fiscal cost”.

At present, nominal economic growth in the US is forecast at about 4 per cent over the long run. That compares with 10-year Treasury yields of 0.65 per cent, with futures markets suggesting rates will stay low.

This implies that there is room before debt becomes a problem. If interest rates did start to rise, the US would probably have some time to adjust its fiscal policy in response.

Since debt limits are so hard to estimate, economists often look to history instead. Kenneth Rogoff and Carmen Reinhart famously found that growth rates fall when debt reaches 90 per cent of gross domestic product. A graduate student found errors in their work, but they have generated similar results in other studies.

A bigger doubt is whether past episodes of high debt after wars or in small economies are relevant to today. Given how many countries have just burst through the 90 per cent limit, that number is about to get a thorough test.

Another question, particularly for Japan and the eurozone, is whether ultra-low interest rates have fundamentally changed the calculus of public debt. One of the most paradoxical lessons of Japan’s experience over the past 30 years is that attempts to cut its budget deficit often made debt worse, not better.

Several times during the 1990s and 2000s, Japan cut spending or raised taxes. Demand then weakened and, with rates already at zero, the Bank of Japan was unable to respond. To avoid unemployment, the government had to spend more. In recent years, Prime Minister Shinzo Abe managed to stabilise Japan’s debt ratio, before Covid-19 put paid to that achievement.

A different way to look at it is that if Japan never manages to raise inflation and thus interest rates, then the Bank of Japan will never need to sell the government bonds it holds on its balance sheet. The Japanese government will effectively owe such debt to itself.

Such stagnation is not a desirable outcome, to be sure, but it would make public debt worth about 100 per cent of GDP irrelevant. If global interest rates keep declining, other central banks could wind up in a similar position.

Governments should therefore postpone any concern about public debt until they revive their economies sufficiently to get interest rates above zero. Once that is achieved then, given the costs, it may make sense to try to reduce public debt somewhat.

Stein’s Law is often taken as a warning to act against the unsustainable. But that is not how the author intended it. It was, he wrote, “a response to those who think that if something cannot go on forever, steps must be taken to stop it — even to stop it at once”.

If public debt is indeed becoming unsustainable, the warning signals will arrive soon enough.


A poorer retirement is pandemic’s hidden legacy

Workers will need to live with lower returns from their pensions

The editorial board


© FT Montage


Job security is the immediate concern for workers everywhere as they worry whether they will still be in employment in the post-Covid world.

The health and economic crisis has sent unemployment soaring as employers have cut costs and jobs.

Yet the pandemic has also brought a nasty hidden legacy for millions: the retirement many had been saving for will be far less comfortable than they thought. 

Central banks’ action to stimulate economies and keep interest rates low have made it harder for pension funds to earn the money to pay for their members' retirement. At the same time one of the biggest sources of income for funds and individual savers, corporate dividends, has dwindled alarmingly.

Some equity markets are still well down on their pre-Covid valuations, again hitting the value of savings. Those with corporate pensions who have lost their jobs will also be losing their employer’s contribution to that pension, while some schemes are warning struggling companies are skipping payments into their schemes. Everywhere, workers face the prospect of retiring on less or working longer. 

The crisis has come at a particularly difficult time for the pensions industry, which is already under pressure from a decade of low interest rates and low bond yields. Experts had already warned the retirement savings gap — the shortfall between what people currently save and what they need for an adequate standard of living when they retire — would balloon over the next three decades.

The crisis is especially acute for corporate and public sector “defined benefit” pensions which promise members a specific payout. Many companies had already closed schemes to new entrants but the crisis could prove the death-knell for them as businesses focus on their own survival.

There are no easy policy responses to the growing crisis. In Australia, where the government has allowed members early access to their pension superannuation funds, the result has seen some 600,000 people — most of them under 35 — wipe out their savings altogether.

It is something policymakers in the UK should bear in mind as the furlough scheme, which has helped pay 80 per cent of the wages of some workers, ends in October. People must not be driven to raid their pensions. Regulators must also be alert to people chasing ultra-high risk assets in a bid for higher returns. 

In the US, the government has rightly allowed employers some breathing space on contributions to schemes to help them deal with their own cash crisis. In the UK, the regulator similarly eased its rules in April but its longer-term drive to get schemes to pay down their deficits faster looks questionable in the current environment.

Guaranteed schemes have been pushed towards low-risk — and low-return — assets over the past decade, an approach that has accelerated the decline in the value of many pensions. In 2006, such schemes had more than 60 per cent of the investments in equities.

That fell to just 24 per cent by 2019. Schemes need support in the current crisis, not to be hamstrung by an overhasty push for self-sufficiency. 

The harsh reality is that in the area of retirement savings as in many areas of life, coronavirus has brought longstanding problems suddenly to the surface. Those wanting a comfortable retirement will simply need to squirrel more away — but governments and regulators should make sure that obstacles to their doing so are removed, and that nothing is done to precipitate a crisis in the structures that look after their current retirement savings.

Sweden sounds the alarm over ‘heightened’ Baltic tensions

Stockholm looks to send strong signal to Russia over Moscow’s increased military activity

Richard Milne in Stockholm


Ground forces patrol the island of Gotland in the Baltic as Sweden steps up its military readiness © AP


Sweden has stepped up its military readiness because of the “heightened security situation” in the Baltic Sea as tensions in the region reached their highest level since the cold war.

Swedish television on Tuesday broadcast footage of armoured vehicles disembarking from the ferry on the island of Gotland, alongside holidaymakers driving campervans, as the Scandinavian country sought to send a strong signal to Russia over its increased military activity.

Ann Linde, Sweden’s foreign minister, told the Financial Times that the deployment was not related to the unrest in Belarus — where Stockholm is seeking to mediate following this month’s disputed election — but to Russian military manoeuvres.

“When Russia is doing a big exercise we have an interest in showing that we have a very strong military in Sweden and that we’re of course prepared for a heightened security situation in our area,” she said.

Sweden has in recent years increased its defence spending, following decades of decline, in response to a more assertive Russia and fears over Moscow’s intentions in the Baltic region.


Ann Linde, Swedish foreign minister © AFP/Getty Images


Johan Wiktorin, a member of the Royal Swedish Academy of War Sciences and head of strategic intelligence firm Intil, said Swedish fighter jets and tanks had been deployed on Gotland — dubbed an “aircraft carrier” in the Baltic Sea — while four corvettes were on exercise nearby alongside a Finnish minesweeper.

He also said a US special forces aircraft landed on Gotland over the weekend as Norwegian fighter jets flew alongside US long-range B-52 bombers in the Arctic.

“Sweden is showing it’s prepared. It’s always better to be prepared than surprised,” Mr Wiktorin said, noting that the last time Sweden publicly lifted its military readiness to this level was following the failed 1991 coup against then Soviet president Mikhail Gorbachev.

Jan Thornqvist, commander of joint operations for Sweden’s armed forces, said: “There is currently extensive military activity in the Baltic Sea, conducted by Russian as well as western players, on a scale the likes of which have not been seen since the cold war.”

Map of Sweden showing Gotland and the Baltic Sea


The turbulence in Belarus, which has been rocked by protests against President Alexander Lukashenko, underscored how unstable events were becoming, he added. He noted Lithuanian claims that a Belarusian military helicopter had entered its airspace over the weekend.

Peter Hultqvist, Sweden’s defence minister, told local media that the country was “not naive in any way” over Moscow’s assertiveness. “What we’re doing . . . is sending a signal both to our partners and to the Russian side that we stand up for Swedish integrity and sovereignty,” he said.

Ms Linde made the point that the situation was “much more tense in the cold war, and we managed then. She added: “Yes, there’s a little movement in some cases like a military build-up, but I think you might want to see it in a longer perspective.”


Swedish military hardware was put on display as part of the preparedness exercises © AP


Sweden's armed forces said the threat of a military attack on the country was still low, but Mr Wiktorin said they wanted to be ready to intervene if an incursion were to be made by another country's vessel or aircraft.

On Belarus, Ms Linde said Sweden understood that neither the opposition nor Mr Lukashenko wanted external interference. She said that Sweden — as the incoming chair of the Organisation for Security and Co-operation in Europe, of which Belarus and Russia are members — was thus already trying to bring the two sides together.

“We don’t see this as a geopolitical conflict where people are against Russia and in favour of the EU. We see this as the rightful claim for democracy and freedom in Belarus,” she added.

Russia’s embassy in Stockholm declined to comment.

The End of Western Opportunism

For the past 50 years, the West has clung to the hope that modernization would automatically transform China into a capitalist liberal democracy. For decades, maintaining this illusion was good for the bottom line, but now the implications of China's ascendancy have become disturbingly clear.

Joschka Fischer

fischer172_XinhuaWang Ye via Getty Images_xi jinping


BERLIN – The confrontation between China and the West is escalating almost daily. The conflict is about technology, trade, global market share, and supply chains, but also about fundamental values. Underpinning this economic and ideological competition is the goal of global predominance in the twenty-first century.

But why is the current escalation happening now? It is not as though the West suddenly had some epiphany about the implications of China’s rise. The fact that China is a Leninist one-party dictatorship is not news, and it did not stop Western countries – led by the United States – from steadily deepening their trade and economic ties with China since the 1970s.

Likewise, China’s leaders have long dismissed outside criticism of their human-rights record and oppression of minorities. Rampant industrial espionage and theft of Western technology and intellectual property are other well-known problems that the West has more or less tolerated for decades in exchange for access to China’s vast market and low-cost labor.

Western governments and investors remained sanguine even after the 1989 Tiananmen Square massacre in Beijing. No sooner had the dust settled than Western businesses poured into the country like never before.

Through it all, Western leaders assumed that modernization and economic development would lead China eventually to adopt democracy, embrace human rights, and the rule of law. They were wrong. The Communist Party of China has evolved a novel hybrid development model consisting of a one-party dictatorship, a highly competitive economy, and a consumer society.

So far, this approach has been extremely successful. While political power has remained squarely in communist hands, almost everything else has been turned over to the forces of high-tech consumer capitalism. The Soviet Union could not have dreamed of such an innovation in political economy.

The results have been impressive – and, in many ways, unprecedented. Hundreds of millions of people have escaped absolute poverty and joined an ascendant middle class. Just one generation ago, China was a technological and scientific backwater.

Today, it is a global leader in many of the critical sectors that will define the twenty-first century – digitalization, artificial intelligence, and quantum and super computers. With China now poised to leave the US behind in many of these domains, it is only a matter of time before it becomes the world’s leading economy across all the metrics that matter.

The reason why the Sino-American confrontation is escalating only now is relatively simple: the end is in sight for the West. Ever since the beginning of industrialization, the West has held an effective monopoly on global power.

But now an Asian great power will soon bring an end to Western hegemony as we know it. This is not just about US President Donald Trump’s administration. The growing challenge to Western power will remain long after Trump is gone, and regardless of whether he is gone this November.

After all, while China has grown stronger, the leading Western power has become relatively weaker. The 2008 global financial crisis played a crucial role in altering both Chinese and global perceptions of the US model. Suddenly, the West’s vulnerabilities were laid bare for everyone to see.

And now, the COVID-19 crisis is further exposing America’s weaknesses and domestic fault lines. The floundering US response to the pandemic will powerfully reinforce the global impression conveyed by the 2008 meltdown, as will its confused approach to China.

US policymakers have yet to reach a consensus on the role they would like to see China play internationally. Many in the US foreign-policy establishment want to prevent or delay China’s rise to economic and technological leadership.

Yet it is too late for that. What would a containment strategy against a world-leading economy of 1.4 billion people even look like? It could not possibly succeed without inflicting serious damage on everyone else.

That said, it is equally clear that the Western strategy of adaptation, accommodation, and economic opportunism – an approach that has often bordered on naiveté – cannot continue. So, what is to be done?

For starters, the West must shed its illusions about China – both those based on strategic ingenuousness and those grounded in the power politics of a bygone era. The West will have to find a way to live with China as it actually is. That means finding a path between kowtowing and confrontation, with Western values and interests serving as the guide.

For example, trade with China must continue, but under new conditions. China’s ascendency is forcing Western countries to pursue their own industrial policies. Crafting them will require deciding which technologies to share and which direct investments from China to accept.

The fundamental difference in values between the West and China will remain indefinitely, and it is here that the West must draw the line. Any concession that entails a sacrifice of fundamental principles, for example in cultural matters, must be rejected.

If this values-based approach results in economic disadvantages, so be it. By the same token, the West should abandon the conceit that it can push, force, or cajole China to become a democracy wrought in its own image.

The shared values between Western countries necessarily should limit the scope of geopolitical cooperation with China, as will China’s expansionist behavior in its own neighborhood, especially in the South China Sea and regarding Taiwan. But on global issues such as climate change and pandemic prevention, cooperation will remain indispensable.

At the end of the day, the Sino-Western confrontation is about fundamental values that must not be negotiated away. To preserve its own interests and peaceful coexistence in the twenty-first century, the West will have to acknowledge and defend the genuine sources of its staying power.


Joschka Fischer was German Foreign Minister and Vice Chancellor from 1998-2005, a term marked by Germany's strong support for NATO's intervention in Kosovo in 1999, followed by its opposition to the war in Iraq. Fischer entered electoral politics after participating in the anti-establishment protests of the 1960s and 1970s, and played a key role in founding Germany's Green Party, which he led for almost two decades.