Tyler Cowen forwards an email sent by a loyal reader disputing the argument that governments should borrow and spend more when interest rates are low.

But assume that the U.S. borrows an extra trillion of dollars now, due in 10 years (the average debt duration of the U.S. debt is something like 4 years?). Sure, the interest rate is low, but the borrowing is cheap only as long as we assume that during the 10 years the U.S. repays this whole extra debt, compared to what would have happened in the baseline world.

This does not affect the argument in any way.  The economic argument for borrowing when interest rates are low says this.  Suppose you have a plan for the future about when you will do your spending, borrowing, and repayment.  This plan is predicated on your expectations of the path of interest rates. Now suppose that, as a surprise, interest rates are lower today than you expected.  Then, other things equal, your original plan is no longer optimal.  You should re-adjust and borrow more today.

The operative word here is “more.”  I did not write “borrow a lot today.”  And in fact the conclusion could be that you don’t borrow at all because if the original plan was to make re-payments, then “borrowing more” means (on net) just repaying less.

There is nothing at all deep about the economics here.  And in fact, its rare that there is much deep economics involved when the economics really matters. Economics is really, really easy.  What is hard is to use economics faithfully in your rhetoric.  Advocates of increased borrowing and spending don’t ever refer to the default plan from which we should be adjusting.  And without that (and the default plan probably doesn’t really exist) there isn’t much economics behind the rhetoric.

All sides are guilty.  Tyler’s reader should be saying “the price of funds is determined by the path of interest rates, not just their value now and therefore this mutes to some degree the effect on borrowing of a drop in interest rates.”  This is another very simple economic point.  But it’s hard to resist the temptation to distort it from a simple comparative statement to one that is absolute.

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