Should the Treasury borrow more?

Here’s Tyler Cowen:

Obviously lower interest rates — ceteris paribus — do indicate the government should borrow more, but as Scott Sumner frequently reminds us: “Never reason from a price change.”

Most of all, it seems that rates, including long rates, have declined because of a flight to safety.  The price change itself is ambiguous, but if you buy that interpretation we should be spending more, and borrowing more, to invest in safety.

I mostly agree with Tyler’s post, but a few cautionary notes. Let’s start with the first paragraph, which I believe many people are likely to misinterpret. It does not imply that, “Normally lower rates would lead you to want to borrow more, but there may be weird cases where it does not, for “never reason from a price change”: reasons. Just the opposite is true. Consider the following slightly different claim:

Obviously lower interest rates do not indicate the government should borrow more, because as Scott Sumner frequently reminds us: “Never reason from a price change.”

Why does adding “ceteris paribus” matter? Because now we are moving along a demand curve for loanable funds, rather than contemplating a shift in the demand for loanable funds. But here’s the problem, interest rates never change, ceteris paribus. If other things are equal, the interest rate won’t change. Thus the fact that interest rates changed is an indication that ceteris is not paribus. Hence the first half of Tyler’s sentence is basically meaningless; it gives us precisely zero guidance as to whether we should borrow more. It’s like saying “other things equal we should consume more oil when prices are low.” True, but meaningless, as oil prices are usually low due to declining demand, as is the case right now

When interest rates fall because the supply schedule shifts right, then there is a presumption that society should borrow more. More often, rates fall because the investment schedule shifts left, in which case there is a presumption that society should borrow less. But even in that latter case, where society should borrow less, it’s possible that the government may want to borrow more, especially the federal government.

[State and local governments are more like private companies, responding to many of the same incentives. Thus borrowing by local governments in the Sunbelt to build schools and infrastructure for new housing developments probably fell in 2009, as the housing market crashed.]

The current crisis may be one of those unusual “savings shocks”, where there actually is a presumption that we should borrow more. More likely, it is both a positive saving shock and a negative investment shock, which is why rates have fallen unusually sharply.

Are low rates a time to borrow, because we want to lock in the low rates on 30-year bonds? Maybe. But a few years ago when 30-year yields had fallen to 3%, lots of pundits on the internet said something to the effect that “now’s the time to issue lots of 30-year bonds and lock in those low rates.” They were wrong. Ditto for when rates fell to 2%.

One argument for government borrowing more today is that it can boost aggregate demand. But monetary policy is a far more effective way to boost AD. In the unlikely case where the Fed is out of ammo you might want to allow the Fed to buy a wider range of assets. But let’s say the government decides that’s too risky. What then? In that case you could issue lots of 30-year Treasury bonds and have the Fed buy them with newly created money.

But even in that case there’s no obvious reason to do more fiscal stimulus. The government doesn’t have to increase spending or cut taxes to issue bonds, it can just create a giant sovereign wealth fund and buy up private stocks and bonds with borrowed money. Fiscal policy (deficit spending) should be based on traditional cost/benefit considerations, not a desire to “boost demand”.

Congress will certainly pass some sort of “fiscal stimulus”, and all indications are that it will be far too small to have much impact. What bothers me is not so much that fiscal stimulus would do great harm at the moment (it would not), rather that it leads us to take our eye off the ball. Why is Congress not using this occasion to give the Fed additional tools? Realistically, the Fed is the only institution in Washington that can have a meaningful impact on the future path of inflation and NGDP. Heck, it’s practically the only institution that is not dysfunctional. If you think that Congress is capable of targeting inflation at 2%, then I have a bridge I’d like to sell you.



35 Responses to “Should the Treasury borrow more?”

  1. Gravatar of Benjamin Cole Benjamin Cole
    12. March 2020 at 15:38

    I think this post is probably correct, but would be improved by inclusion of consideration of money-financed fiscal programs in the present context.

    Stanley Fischer and David Beckworth have both suggested that the Federal Reserve operate some type of “fiscal facility,” but which in essence is a way to conduct helicopter drops.

    The Trump Administration actually had a good idea (!) with its proposal for a payroll-tax holiday through the end of the year.

    My take on the fact that the Trump Administration payroll-tax proposal was DOA at the Congressional doorstep is that the Donks want Trump to lose (or to send tax cuts and other goodies to specific interest groups) and the GOP thinks only rich people should get tax cuts.

    Evidently, the Trump Administration still has the option of unilaterally and by executive order lowering withholding tables on income taxes. This is probably a good idea.

    Then, the Federal Reserve must engage in an aggressive quantitative easing program. Michael Woodford, Columbia University, contends that quantitative easing programs in conjunction with federal deficit spending is a helicopter drop. I presume Michael Woodford has that view if the additions to the Federal Reserve balance sheet are permanent.

    I think by now the public assumes that any additions to the Federal Reserve balance sheet will more or less be permanent. I am not sure there is any concrete expectation on the behalf of the public as to Federal Reserve policies anyway, and such expectations may be unimportant.

    The bulk of the orthodox macroeconomics profession spent decades wailing about the Federal Reserve and easy money leading to an inflationary holocaust. The expectation was for runaway inflation, and yet we seen long-term secular declines in inflation and interest rates, basically going back to 1980.

    Send in the choppers. Hell, send in the money-dropping B-52’s.

  2. Gravatar of Randomize Randomize
    12. March 2020 at 15:45

    Dr. Sumner, I live in the Puget Sound area and have a hypotheses I’d like to bounce off of you. Schools have shut down through April 24 (my wife is a teacher) and other major employers such as Amazon, Microsoft, and major utility companies (like the one I work at) have sent non-essential staff home. Major events, public meetings, etc., are all being cancelled.

    The hypothesis is this: If the fiscal stimulus looks like the payroll tax cut that Trump suggested, it could actually be harmful given the current pandemic environment. Consider the following;

    The economy is, aside from the outbreak, at full employment. Huge numbers of people have been sent home until further notice, causing supply to shrink as the number of people producing goods and services shrinks.

    Hourly employees are going without pay and are not paying payroll taxes. Their employers won’t bring them back at any price because they were sent home due to the virus and not due to the cost of labor. In other words, they’re up a creek for now.

    Payroll tax cuts for workers will put more money in the pockets of those who still have their incomes, enabling them to spend more. Thus, those who still have their jobs will gain all of the benefits and be able to consume a larger portion of the pie, leaving less for those laid-off workers. This is exacerbated by the fact that the pie is shrinking at the same time.

    Thus, the payroll tax cuts will harm those who are hurting the most while shifting some of their consumption to those of us who are lucky enough to have salaried government jobs.

    Am I right or what?

  3. Gravatar of Ray Lopez Ray Lopez
    12. March 2020 at 16:05

    @Randomize – woe, you must be new here. You do realize Sumner is an advocate of monetary policy and you’re asking him a half=baked and speculative theory of fiscal policy?

    @sumner : “If you think that Congress is capable of targeting inflation at 2%, then I have a bridge I’d like to sell you.” – what? Why would anybody think Congress is capable of targeting inflation? Isn’t that the Fed’s job? The entire sentence is strawman, even by your uneven standards.

  4. Gravatar of CA CA
    12. March 2020 at 16:23

    I sure wish Scott would join Twitter and join the conversation there!

  5. Gravatar of Steve Steve
    12. March 2020 at 16:30

    What is causing the Fed to lose credibility this time?

  6. Gravatar of Michael Sandifer Michael Sandifer
    12. March 2020 at 16:49

    “Realistically, the Fed is the only institution in Washington that can have a meaningful impact on the future path of inflation and NGDP. Heck, it’s practically the only institution that is not dysfunctional.”

    I assume this is a relative statement about not being dysfunctional. I think it’s safe to say the Fed is not a competent institution.

  7. Gravatar of mbka mbka
    12. March 2020 at 17:56


    just a quick question. We actually know how a shock from a massive pandemic works out, worldwide: 1918-89, Spanish Flu. While it was followed by the roaring Twenties (eventually), so much I know – since you did all the research on what followed 1929, did you come across data on what followed 1918-19 in terms of immediate p0olicy response and the immediate economic effects?

    It’s a bit ironic that the world seems to be re-playing 1918-1939 but with the two crises switched. In the 2000s we got the financial shock first, in 2008, and we’re getting the real shock now, in 2020.

  8. Gravatar of Shyam Vasudevan Shyam Vasudevan
    12. March 2020 at 18:05

    Would government borrowing to fund infrastructure which would thereby increase the productive capacity of the economy (for example building out public health facilities) count as fiscal stimulus?

  9. Gravatar of mbka mbka
    12. March 2020 at 18:05

    Should have read 1918-19, of course.

  10. Gravatar of Benjamin Cole Benjamin Cole
    12. March 2020 at 18:11


    Congratulations, fear-mongers.

    John Cochrane (who is not a fear-monger) is discussing the live possibility of a financial collapse.

    The US commercial banking system has largely been rebuilt nearly to original specs, and is inherently fragile. Summing up, banks borrow short to lend long on illiquid assets, and lend 700% of what they borrowed (through the endogenous creation of money.)

    So, summing up:

    1. Children are largely immune to coronavirus

    2. Non-elderly middling healthy adults in general are not at risk from the coronavirus.

    3. The elderly, who are largely not in the labor force, can be at risk from the coronavirus, although fatality rates are rather low.


    Collapse the economy and financial system to fight the coronavirus!

  11. Gravatar of ssumner ssumner
    12. March 2020 at 18:33

    Randomize, That sounds right.

    mbka, As far as policy, there was a surge in inflation during 1919-20, likely unrelated to the flu. (I seem to recall it reflected reduced gold demand in the stressed period after WWI.) This led to a tight money policy by the Fed, and severe deflation during 1920-21. The Spanish flu didn’t have much impact on the economy because people were much less risk averse back then, and much poorer. Thus they were anxious to keep working, and you couldn’t work from home. I think people were pretty fatalistic about whether they’d catch the flu.

    Our greater ability to “flatten the curve” may make this last much longer, but with fewer deaths.

    Good point about the real and monetary shocks being in reverse order during the interwar period.

  12. Gravatar of ssumner ssumner
    12. March 2020 at 18:35

    Shyam, It takes years to just get the environmental impact statements approved for major construction projects. So anything along those lines would have no impact on this year’s weak economy.

  13. Gravatar of Steve Steve
    12. March 2020 at 18:42

    Realistically, the Fed is the only institution in Washington that can have a meaningful impact on the future path of inflation and NGDP. Heck, it’s practically the only institution that is not dysfunctional.

    Pathetic. You don’t think a competent CDC or FDA could boost NGDP?

  14. Gravatar of Thaomas Thaomas
    12. March 2020 at 18:49

    The Fed may be capable of targeting 2% inflation (starting when?), but sure has not been willing to do what it takes to reach the target. The markets this week have been taunting the Fed, “2% average inflation target? You and whose brother?” 🙂

  15. Gravatar of Benjamin Cole Benjamin Cole
    12. March 2020 at 19:05

    From the New York Times today:

    “Trump’s Payroll Tax Cut Would Dwarf the 2008 Bank Bailout”

    “President Trump is pushing a nearly $1 trillion fiscal stimulus that some economists say would not be well targeted to offset damage from the coronavirus.”


    Yes, better to dilly-dally and bicker, than to immediately cut payroll taxes on employees and employers.

    The NYT story seems mixed-up, and conflates income taxes with payroll taxes, and the Fed money-printing bail-out of banks (a helicopter drop on Wall Street) with a tax cut on employers/employees.

    Good luck everybody.

    The lamentable President Trump is your leader, but even he has better ideas than the establishment or orthodox macroeconomics profession.

  16. Gravatar of Steve Steve
    12. March 2020 at 19:10

    Serious question: Europe’s elites appear to have adopted the burner model, i.e., just let everyone get infected and kill 3 percent of the continent.

    I assume that somehow that is Orange Man’s fault, but I’m struggling to figure out why.

  17. Gravatar of ssumner ssumner
    12. March 2020 at 20:44

    Steve, A competent CDC? Isn’t that a pipe dream?

  18. Gravatar of mbka mbka
    12. March 2020 at 21:10

    Thanks Scott and I also think it doesn’t have to be so bad this time around either. As any other catastrophe shows, real GDP shocks tend to rebound quickly.

    Another irony is that China is possibly going to be back on track pretty soon, if they can avoid a second wave.

    This: ” The Spanish flu didn’t have much impact on the economy because people were much less risk averse back then, and much poorer.” reminded me of an article that MR linked to on Typhoid Mary. It casually mentioned that NYC in 1907 had 3000-odd typhoid cases with around 500 or so deaths. Typhoid Mary was a cook that had caused multiple outbreaks as an asymptotic carrier, cooking for families. When it was found out that she was the cause, she was arrested but eventually released under the mere promise that she wouldn’t work as a cook. She was still infectious and also ignored the advice, infected scores of other people until arrested a final time. It really makes you scratch your head – you’d expect a much more draconian response 100 years ago, but no.

  19. Gravatar of Benjamin Cole Benjamin Cole
    12. March 2020 at 21:20

    12. March 2020 at 19:10

    Fatality rates from coronavirus are probably well below 1% and pretty much restricted to the elderly.

    This is from Harvard:

    “In fact, a recent New England Journal of Medicine report states that the fatality rate of the new coronavirus infection “may be considerably less than 1%.”

    Danger, Will Robinson, Danger!

  20. Gravatar of myb6 myb6
    12. March 2020 at 21:50

    If I may, I feel the “flight-to-safety” factor in that quote wasn’t sufficiently addressed. Sure, low Treasury rates are partly due to low investment demand, but there’s also the improving *relative* position of the Treasury as an issuer along with inelastic demand for safe investments.

    There’s an easy way to go about this. Bake the new, poorer economic conditions into your investment analyses, compare to the new lower rates, and see if any projects come out ahead.

    But, do you really think low real investment demand is the primary driver with coronavirus? Take the time horizons implied by even risky lending right now and they’re an order of magnitude beyond when we can reasonably expect covid to weigh so heavily on activity.

    I like your idea about the vacation without the cash. But now imagine that nobody’s ever heard of a vacation before. This whole thing has hit us *insanely fast*, as far as institutional learning goes, we’re not organized financially for this, and so many businesses and households were operating on razor margins as it was.

    Some of the chaos is also just a run: I think SPY is a good deal now but wait til next week. So maybe Fed backstopping would indeed be prosocial.

    Fed private-sector asset purchases would be a lot more palatable if there were business/household equivalents. It’s a totally half-baked idea, but I think prior tax returns and a detailed explanation of covid-related harms should net you an instant Treasury grant/loan, clawbacked later if diligence finds malfeasance. Some extra Treasury issues for the Fed to buy, more fair on “socialism for the rich” and “tax breaks don’t help ppl out of work b/c covid” criticisms, more cost-effective than universal checks or tax holidays.

  21. Gravatar of Todd Ramsey Todd Ramsey
    13. March 2020 at 05:31

    Is the Fed $1.5 trillion repo injection a big deal, or basically small potatoes?

  22. Gravatar of msgkings msgkings
    13. March 2020 at 07:46

    @Todd R: I asked the same thing in the prior thread

  23. Gravatar of ssumner ssumner
    13. March 2020 at 08:32

    mbka, Right now East Asia is the only bright spot in the developed world. I have my fingers crossed that they are able to hold the line.

    myb6, Yes, the relative position of Treasuries is helped by their safety in a crisis–I agree.

    Todd, Small potatoes. The Fed’s been reactive, not proactive. It needs to get ahead of the curve and institute some more structural changes in policy. These might include level targeting, and/or asking Congress for more tools.

  24. Gravatar of Christian List Christian List
    13. March 2020 at 08:56

    So Trump gets brought down by a virus from China, named after a Mexican beer. Isn’t that ironic. Maybe that’s what he meant by covfefe?

    @Benjamin Cole
    You’ve given the fatality rate of Covid-19 a hundred times now. And guess what? You still don’t get the point. You really are amazing.

  25. Gravatar of Benjamin Cole Benjamin Cole
    13. March 2020 at 09:51

    Christian List—

    Actually, I think the best course of action would be to build “herd immunity” as quickly as possible. Evidently when 60% of a population becomes immune to a virus, the new infection rate peters out. Not enough bodies to act as the transmission mechanism.

    All this hysteria and canceling of public events and school years and so on only delays the inevitable, unless there is a vaccine at hand.

    But if it makes you feel any better – – –

    Danger, Will Robinson, Danger!

  26. Gravatar of Carl Carl
    13. March 2020 at 10:06

    @Benjamin Cole
    If 60% of the US population gets Coronavirus to acquire herd immunity and the fatality rate is one percent, that means 300m people x 0.6 x 0.01 which equals 1.8m dead. That equates to the entire state of West Virginia.

  27. Gravatar of Carl Carl
    13. March 2020 at 10:38

    @Benjamin Cole
    One more note. In the process of getting herd immunity if all the 1.8m who died went to a hospital, and our spare hospital capacity were 300K as estimated in the videos linked to by Scott in a recent post, that would mean a 6x overwhelm of hospital capacity. That doesn’t account for all the patients who will need hospitalization who will not die, a number which will presumably be some multiple of 1.8m nor does it account for the inevitable physical breakdown of medical personnel.

  28. Gravatar of Christian List Christian List
    13. March 2020 at 10:49

    @Benjamin Cole
    Delaying is the whole point.

    Letting nature run is course is not an option. This has been tried in Hubei and Lombardy for just a few weeks and it ended in a disaster. How can you not see this?

    The “building up” of herd immunity is not a strategy, there is nothing to build up, it is a passive process that occurs either way.

    “Herd immunity” is a term that originated from vaccination by the way. If you vaccinate enough people, then the herd is immune. But even you have said that there is no vaccine.

    So people have to get sick, but it’s not even sure if you can become immune this way.

    Corona are cold viruses and from all the human pathogenic Coronaviruses that existed before Covid-19 it is not verified at all that you can become really immune.

    So your plan is: Let nature run its course, let hundreds of thousands of people get sick and a few tens of thousands of people die, in the vague hope that at some point herd immunity will occur, from a disease where we don’t even know if this is possible at all.

    I have to say that this is a very consistent Darwinian plan, but people won’t go along with it. Even the totalitarian regime in China has not tolerated the deaths. Even less so will the people of the Western world.

  29. Gravatar of Christian List Christian List
    13. March 2020 at 11:38


    Excuse me if I express a little criticism, but your summary of Typhoid Mary is biased. I assume in order to support your thesis of risk aversion. But your example does not support that thesis. Let me give you an example:

    released under the mere promise that she wouldn’t work as a cook. She was still infectious and also ignored the advice, infected scores of other people until arrested a final time. It really makes you scratch your head – you’d expect a much more draconian response 100 years ago, but no.

    “Mere promise”? What else do you suggest? An oath with a blood ritual? She was put under complete quarantine for 3 years, it was more or less a hospital jail. Then she was paroled, with a clear ban on certain work. It was not an “advice”, it was a clear ban on certain work. She then changed her name with criminal intent and went into hiding, but she was tracked down. When they found out that she violated the work prohibition, they locked her up in the hospital jail again until she died. She was locked up for 3 + 23 years! She never got out again. If that’s not strong response, what is a strong response in your book???

  30. Gravatar of Ray Lopez Ray Lopez
    13. March 2020 at 13:08

    Hey Christian List (Herr Dockter) and Benjamin Cole (tin-foil hat economist) – this is an economics blog, not a Covid-19 blog. Can’t you two trade emails and take your conversation offline? Some of us are here to learn about Sumner’s brand of monetarism.

  31. Gravatar of Christian List Christian List
    13. March 2020 at 13:25

    Hey Ray, you don’t want to learn anything here, you are just a really boring troll, repeating your absurd thesis of the short-run neutrality of money over and over again for 5 years, like the madman that you are. From this perspective, Benjamin Cole is light years ahead of you.

  32. Gravatar of Kgaard Kgaard
    14. March 2020 at 04:20

    Hi Scott … I’m curious why you think the Fed’s new repo facility is small potatoes. Is it because it is basically serving a reactive function — meeting panic demand and nothing more?

    Clearly the facility was not taken up much, which maybe a hint to its utility.

  33. Gravatar of msgkings msgkings
    14. March 2020 at 10:14

    Christian List 1, Ray Lopez 0

  34. Gravatar of ssumner ssumner
    14. March 2020 at 11:59

    Kgaard, Yes, that’s not really monetary policy, it’s just meeting a sudden spike in the demand for liquidity. You need a dramatic shift in monetary policy, to boost NGDP expectations for 2021 and 2022.

  35. Gravatar of Michael Rulle Michael Rulle
    15. March 2020 at 04:38

    @Ben Cole

    I keep forgetting to ask—-are you the same Ben Cole who has the Market Monetarist Blog?!

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