Introduction: Private Wealth and Public Debt

In the economic area comprising the OECD countries plus China, almost half of private wealth consists of net public debt. Private wealth is nearly twice the size of private real assets. Due to the continuing rise in life expectancy, the share of public debt in private wealth is growing. As long as public debt does not become too great, real interest rates can be low, but positive in the twenty-first century. The main reason for this is private retirement planning in light of high life expectancy. Investment cannot keep up with increasing private saving. In the twenty-first century, public debt is a macroeconomic steering instrument. Fiscal policy uses it to ensure that a positive, but low real interest rate level continues to prevail.

Concluding Remarks on the Negative Natural Rate of Interest

The Great Divergence: The period of production T is not rising anymore. The “waiting period” Z is rising over time with the rising standard of living and rising life expectancy, and this is the case worldwide. In the interest of full employment, the public debt periodD has to compensate for this divergence: T = Z − D. Using an extrapolation procedure that we have developed and the available empirical data, we calculate total private wealth in the OECD plus China region. Net public debt already accounts for nearly half of private wealth today. COVID-19 increases the optimal steady-statepublic debt period. Both our theory and our empirical findings are increasingly confirmed by the work of other economists: for example, by Lawrence Summers’secular stagnation thesis and by the study of Jordà, Schularick and others on the secular evolution of private wealth.

Europe, the Euro and German Demographic Renewal

Access to the domestic market is nowadays the trump card of trade diplomacy. The larger the domestic market, the more effective it is. The euro is thus the decisive pillar of the European single market. The German debt brake is incompatible with the long-term stability of the euro. For as long as it applies, full employment can never be achieved in the eurozone as a whole. Under currentfiscal policy, full employment would require unrealistically high export surpluses. A euro doomed to underemployment will collapse. Hence, the international fiscal order must also be applied among the nation states in the euroarea. Germany’s resulting obligations offer an opportunity for a German demographic renewal by aggressively encouraging the immigration of skilled workers.

The Natural Rate of Interest and the Optimal Rate of Interest in the Steady State

The “natural rate of interest” is the hypothetical, risk-free real rate of interest that would obtain in a closed economy, if net public debt were zero. It is considerably less than the optimal steady-state rate of interest, which is equal to the system’s growth rate. This holds for a very general “meta-model.” The fundamental equation of capital theory holds on the optimal steady-state path: T = Z − D, where T is the overall economic period of production, Z is the representative private “waiting period” of consumers and D is the public debt ratio. Prosperity is at least 30% lower at the natural rate of interest than at the optimal rate.

Investment, Saving and Stagnation from a Keynesian Perspective

It can also be shown from a Keynesian perspective that planned investment and saving are diverging in the twenty-first century and that there is a risk of sustained (secular) underemployment unless appropriate countermeasures are taken by the state. In this chapter, we look at the arguments that Keynesian authors have used, in both older and more recent writings, to demonstrate the possibility of secular stagnation and at the possibilities they considered for overcoming tendencies toward stagnation. We make clear that, despite general differences in the theoretical framework and some differences in detail, there are a number of parallels between the Keynesian view and the new capital-theoretical conception presented in this book. This applies both for the causes of the structural divergence between planned private saving and private investment and for its consequences.

Appendix: Two Faces of Public Debt

Firstly, Germany has a highly developed welfare state. Secondly, the free exchange of goods, all across Europe and indeed all around the world, is a key element of the German economic system. Thirdly, to the acclaim of voters, German policy is committed to the goal of price stability. Is the debt brake compatible with these three guiding principles of German economic policy? I doubt it. In the German discussion, public debt is only seen in a negative light—wrongly, as I will show.

Monetary Stability and the Stability of the Open Society

Historical experience shows that the welfare state is what holds democracy and the market economy together. Neither a welfare state that is too small nor one that is too large can fulfill this connective function. A “stability pact” between citizens and the state is needed: 1. A welfare state to provide citizens security even in their old age. 2. In order to preserve appropriate incentives, the retirement system has to be a form of “saving” (forced saving) for old age. 3. In addition, most citizens also undertake voluntary saving. 4. The state provides for monetary stability. 5. The state uses itsfiscal policy to promote high employment. A modern understanding of personal freedom includes the security provided by a welfare state of appropriate dimensions. It follows that in the twenty-first century, a large part of the wealth of citizens consists of net claims on the state.

Land

Private wealth is comprised in part of capitalized future land rents. The Golden Rule of Accumulation is preserved even if we introduce land into our meta-model. Urban land is far more valuable than agricultural land. The risk tied to land leads to a reduction in its value in the form of a “risk premium” α > 0. Land rents can be taxed without any possibility of the tax being passed on to tenants and without loss of efficiency. If the tax is offset by a reduction in income tax, their taxation can even give rise to efficiency gains and positive distributive effects. The possibility of government intervention in the residential rental market represents a further risk for landowners. The sensitivity of the value of land to changes in the interest rate and hence the risk premium α rise with falling interest rates. In light of these many different risks, land as investment can only to a limited extent be a substitute for government bonds and hence for increasing private wealth by way of public debt. We calculate the value of land as asset category in the OECD plus China region. To this end, we primarily rely on data from statistical offices that provide figures for land in their national balance sheets. Our calculations show that the value of land in the countries of the OECD plus China region is about twice annual consumption in the region.

Wealth and Desired Wealth

With increasing general prosperity, desired wealth increases faster than current consumption. There is thus a secular tendency for the “waiting period” Z to grow. This is already the case for demographic reasons that hold for the global population as a whole. The proportion of the global population living in absolute poverty is rapidly declining. A monetary system offering stable purchasing power represents an important contribution of society to facilitating adequate private provision for the future. The “savings triangle” is a highly simplified, but neat representation of these interrelationships. It offers a good approximation of the facts.

Concluding Remarks on Economic Policy

The German debt brake is not compatible with the long-term stability of the euro. “New thinking” requires that public debt and price stability are no longer opponents, but rather allies in the Keynes world of persistently low interest rates. The proposed balanced account agreement is made more concrete here: An appropriate target (real) interest rate on the global capital market is between one and 1.5% per year lower than the growth rate of the OECD plus China region. If the actual interest rate is below the target rate, the countries with current account surpluses undertake to increase their public debt periodD gradually according to a definite formula. In symmetrical fashion, if the real interest rate is “too high,” countries with current account deficits have the duty to reduce their public debt period. The rules of the balanced account agreement replace the debt brake. They are the instruments of soundfiscal policy.