Public debt financing through political processes: a review essay of Olivier Blanchard’s Fiscal Policy under Low Interest Rates

Abstract

In his recent book Fiscal Policy under Low Interest Rates, Olivier Blanchard argues that when interest rates are low, policymakers can use public debt finance to increase the welfare of a nation. I argue that Blanchard’s model suffers from the “organismic theory of the State” and, as such, reaches dubious conclusions. At its core, an organismic model presumes that politicians can and do make transfers that maximize the welfare of all individuals. While this is, of course, plausible, an individualistic view states that whether government transfers increase welfare for all individuals depends on the political decision-making process of time and place. While some political processes redistribute funds equally, others redistribute unequally—that is, they increase welfare for some but decrease the welfare of others. Blanchard’s organismic model takes this fact for granted. I use the individualistic view to argue that even if interest rates are low, if a political process is one that redistributes unequally, transfers under public debt financing can result in or exacerbate income inequality. To illustrate this point, I show that in the US, increases in public debt financing have increased welfare for some individuals—the low- and upper-income quintiles—but have decreased it for others—the middle-income quintiles.