The Economy

IMF Economists Say ‘Just Live With’ Debt

While some countries face 'debt sustainability constraints' that leave them no choice but to pay down debt, others can fund themselves at very low ...
Matthew HellerJune 3, 2015
IMF Economists Say ‘Just Live With’ Debt

Three International Monetary Fund researchers have added a novel twist to the austerity debate, suggesting that some countries may be better off by not paying down their debt.

The IMF, of course, is the institution charged with helping countries reduce their debt burdens. And it has been particularly busy since the global financial crisis forced countries to take on more debt to avert the collapse of their economies.

But in a new staff discussion note published Tuesday, three economists in the IMF’s research department — Jonathan Ostry, Atish Ghosh, and Raphael Espinoza — question the conventional economic wisdom that sovereign debt burdens must be paid down.

A Better Way to Do Ecommerce

A Better Way to Do Ecommerce

Learn how Precision Medical leveraged OneWorld to cut the cost of billing in half and added $2.5M in annual revenue.

“Recent debates have centered on the pace at which to pay down this debt, with few questions being asked about whether the debt needs to be paid down in the first place,” Ostry and Ghosh wrote in a blog post accompanying the note.

“A radical solution for high debt is to do nothing at all — just live with it,” they said.

Ostry and Ghosh concede that the distortionary taxation required for servicing public debt reduces the incentives of both capital and labor, resulting in lower private and public capital stocks and lower growth.

But they argue that “it does not follow that paying down the debt is good for growth. This is a case where the cure may be worse than the disease: paying down the debt would require further distorting the economy, with a corresponding toll on investment and growth.”

Advanced economies, including the United States, United Kingdom, and Germany, that are solidly in the “green zone” of ample fiscal space can wait for their debt ratios to fall through higher economic growth or a boost in tax revenues over time, the researchers said.

At first blush, The Wall Street Journal said, the researchers’ argument “may seem out of character for the IMF. But upon further review, it’s actually in line with the fund’s recent calls for governments around the world to spur growth by spending more on infrastructure.”

“It’s also in line with U.S. administration calls for more spending by Germany and other countries that can afford to stimulate economic expansion,” the WSJ added.