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The U.S. should sell debt beyond the longest existing maturity of 30 years to lock in low interest rates and press ahead with deficit spending until full employment is restored, former Treasury Secretary Robert Rubin said Thursday.
Governments should also avoid returning to traditional fiscal targets because it's difficult to say with precision when deficits are in true danger of getting out of control, Rubin wrote in a paper along with former budget office director Peter Orszag and Nobel Prize economist Joseph Stiglitz.
"The need right now is for substantial fiscal support to the economy. In the near term, there should therefore be no overall spending cuts or tax increases until full employment is restored" and none of those moves at least until 2023, they wrote. "Even more stimulus may be necessary in the short run to restore pre-crisis economic activity and minimize hardships for American households."
In the longer term it's better to focus fiscal management on programs that grow or shrink along with the economy's strength, they wrote in a paper for the Peterson Institute for International Economics.
NO TOP-DOWN ANCHORS
"We have grown skeptical about the usefulness of basing fiscal policy on any top-down anchor," according to the paper. "We propose a new approach in which fiscal discretion is retained but exercised after making the budget adjust more automatically."
Areas for expanded automatic stabilizers include infrastructure, aid for state and local governments and unemployment benefits. Major long-term programs like healthcare should also be indexed to better account for their costs.
Assuming low interest rates will last for a long time is dangerous, so locking in long-term debt is a safer bet, they wrote. "The most straightforward way of providing such insurance against rate changes would be to extend Treasury maturities, both by increasing the issuance of longer-dated instruments (i.e., 10-, 20-, and 30-year) and by creating new instruments (e.g., 50- or 100-year bonds or even perpetual bonds)."
"We think the continuation of very low nominal and real rates for some time is a reasonable central scenario but have less conviction that the risks of an increase in rates are as remote as often described."