519. Why Some Public Debt Is Good for the Economy with Barry Eichengreen

As conversation swirls around how the U.S. is going to pay back its $30 trillion debt, old concerns about public debt have been raised once again.

Barry Eichengreen is a professor of economics at UC Berkeley and one of the leading experts on international currency markets and their history. His books include Globalizing Capital: A History of the International Monetary System, The Populist Temptation: Economic Grievance and Political Reaction in the Modern Era, and most recently, In Defense of Public Debt. 

Barry and Greg delve into the pros and cons of public debt, the mechanisms ensuring sovereign debt repayment, and the potential risks of inflation, and put modern debt levels into perspective by looking back at other major financial events in history. They also discuss the impact of political polarization on long-term financial decisions.

**This episode was recorded in 2021.** 

*unSILOed Podcast is produced by University FM.*

Show Links:

Recommended Resources:

• Napoleonic Wars
• Corporation of Foreign Bondholders
• Foreign Bondholders Protective Council
• Mario Draghi
• Ricardian Equivalence 
• Anne Osborn Krueger
• Argentine Debt Crisis

Guest Profile:

• Faculty Profile at UC Berkeley
• Professional Profile on X

His Work:

• In Defense of Public Debt
• The Populist Temptation: Economic Grievance and Political Reaction in the Modern Era
• Globalizing Capital: A History of the International Monetary System
• Hall of Mirrors: The Great Depression, the Great Recession, and the Uses-and Misuses-of History 
• Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System
• Golden Fetters: The Gold Standard and the Great Depression, 1919-1939

Episode Quotes:

The political capacity to issue public debt goes hand in hand with financial development

31:25: If you go back and look at the history, you see the value to financial markets of sovereign debt—that as sovereigns’ and states’ debts begin to be recognized as safe and liquid with political checks and balances, they become safe. With the development of markets in them, they become more liquid. They're then used as collateral for other borrowing and lending, and you accelerate the development of private financial markets. So, I think the political capacity to issue public debt goes hand in hand with financial development, and financial development, historically, is an important component of economic development.

Public debt as a lifeline in times of crisis

02:58: Public debt has been critically important in history. To enable states to meet emergencies—so, if you look at the history, it has been issued typically in wartime to defend the realm. Admittedly, states and rulers have issued it to fight offensive as well as defensive wars, but also to meet threats, pandemics, natural disasters, and other national emergencies.

Why public debt levels depend on politics and time

34:50: I don't think economic science is advanced to the point where we can identify an optimal or uniquely sustainable level of public debt. I think politics impinges on this as well. So, if you ask a German politician and an American politician what an appropriate or optimal level of public debt is, they'll give you very different answers. Economic circumstances change over time as well. So, public U.S. public debt in the hands of the public has basically tripled since the turn of the century. Debt service—interest paid on that debt as a share of GDP—hasn't budged. Interest rates have come down, and they've been trending downward for the better part of 30 or 40 years. That has made it easier to sustain a heavier level of public debt.