Public Debt in the "New Normal"

This paper shows that important insights for fiscal policy can be derived from Joseph Schumpeter's academic work. This concerns his fundamental distinction between theories in which the monetary sphere is identical with the real sphere ("real analysis"), and theories in which financial sphere is independent of the real sphere. From the "monetary analysis" propagated by Schumpeter follows that the financing of government investment does not depend on household saving. Thus, Schumpeter's growth theory shows that credit-financed investment, which leads to an innovative use of existing resources, plays a decisive role in economic development. For fiscal policy, this results in the model of the "entrepreneurial state" (Mazzucato) as an engine for future investment. This model goes far beyond the narrow portrayal of government debt in "real analysis" of the neoclassical theory, which assigns the state merely the role of a capital destroyer. But it also offers a broader perspective than that of monetary Keynesian theory, including MMT, in which government debt is seen to serve only to produce full employment (but not beyond). Schumpeter's rejection of the concept of a purely goods-based real interest rate is also innovative. It provides the basis for the strategy of "yield curve control," in which the long-term interest rate is directly controlled by the central bank so that the sustainability of government debt is not determined by capital markets.