Good Debt vs. Bad Debt: Barry Eichengreen and his co-authors show that debt can have two sides.

• Author: Issing, Otmar

High and rising public debt used to be seen as a true "bad" for countries: for their economies threatened by devaluation and crisis, their governments which were seen as latently weak and unstable, and for their people who had to feel apologetic for coming from such poorly managed places.

Today, the situation could not be more different. Countries have effortlessly financed momentous deficits and accumulated new record debt levels with hardly a blip in financial markets. Public debt in the G-7 countries stands at 140 percent of GDP, the same level as after World War II, and the financing costs are at record low interest rates. Germany and a few other countries even get paid for debt issued as far as ten years ahead.

Add to that all the possibilities to do good things with more debt: improve our health and education system for a more resilient and future-ready society; build better infrastructure; improve income distribution towards a less divided society; finance decarbonization and thus prevent climate change; and promote our soft and hard power to face growing geopolitical challenges.

More debt will thus make individual countries and the world economically, financially, and socially richer, and debt can be much higher than previously thought. Adherents to Modern Monetary Theory go even further and want to use the money printing press of central banks.

This is where Barry Eichengreen and his co-authors come in and provide an invaluable account of historical episodes where public debt played a positive and a negative role. Debt helped build nations, boost prosperity, and win wars. And debt ruined countries, toppled regimes, and humiliated and divided their people. Debt was by itself an innovation and helped innovate and develop finance, the lubricant of our economies. And most importantly, perhaps, good debt and successful nations helped propagate the institutional frameworks that made them successful and debt better.

The separation between "good" and " bad" debt is an expost assessment. Ex ante, governments always claim that their budget deficits will create good debt. Will we look forward to a future where this distinction will become obsolete and all new debt will be good? Have we found the new "land of milk and honey" where everything will be fine if we spend more on the right things while debt finances itself? Is "this time different," to paraphrase economists Carmen M. Reinhart and Kenneth S. Rogoff? Or is there still reason to be...