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to stimulate the economy, and for how long. The most entertaining row involved Harvard economic historian Niall Ferguson and Princeton economist Paul Krugman. Ferguson, a conservative, warned (at a 30 April symposium at the Metropolitan Museum of Art in New York) that if the U.S. government carried on borrowing at the current pace, “the financial credibility of the United States would be called into question.” He drew on his detailed studies of finance in an earlier era of terrible instability, the 1930s. Paul Krugman, the leading liberal columnist in the United States, soon responded on his blog, saying this was the “back to the dark ages of economics.” Krugman is a supporter of the case for deficit financing first espoused by the eminent 1930s economist John Maynard Keynes. The clash between these two titan egos continued in newspaper columns and blogs until August, trading accusations of ignorance on the one hand and racism on the other. Finally, Krugman accused Ferguson of being a poseur, while Ferguson accused Krugman of playground immaturity.

This issue has stimulated a partisan row between the political left and right, not just in the United States. Yet there is a genuine intellectual debate behind the row, with many respected economists on each side. Paul Krugman is the most ardent advocate of deficit spending as large and long-lasting as needed to ensure the economy does not get stuck in a deep recession that will cause many people to lose their jobs and incomes. He has the authority of the IMF on his side, although its tone is far more measured. A comment by some of the IMF’s top economists said fiscal stimulus is necessary and what’s more: “It is essential for governments to indicate from the start that the extent of the fiscal expansion will be contingent on the state of the economy. Sizable upfront stimulus is needed, but policymakers must commit to doing more if needed. This should be announced at the start, so later increases do not look like acts of desperation.”14

The world of economics has split into two camps on this question. When different eminent economists can disagree so sharply, it’s clear this is an area of judgment rather than hard science. What does economic analysis actually tell us? The greater the government demand to borrow, the higher the interest rate needed to be paid to increase the supply of savings available to meet it. So governments will need over time to pay higher interest rates in order to continue borrowing more and more. At a certain point, rising government borrowing becomes impossible for an economy to sustain. The point is reached when the interest rate (after adjusting for inflation) exceeds the economy’s long-term potential growth rate. Either large-scale borrowing that pushes the interest rate higher than that point or depressed economic growth can act as the trigger. The long-term growth rate will depend on many factors, including innovation and productivity, the average age and skills of the workforce and thus birthrates and immigration, on the use of natural resources, and also on the impact of the government on the economy through tax levels and borrowing. According to John Lipsky of the IMF: “We have estimated that maintaining public debt at its post-crisis levels could reduce potential growth in advanced economies by as much as ½ percentage point annually compared with pre-crisis performance.”15 These debt spirals, when the interest still due grows faster than the amount by which the outstanding debt is repaid, are a real possibility, not a theoretical one—Japan has been on or over the edge of one since the 1990s.

Many economists had started to say by the middle of 2009 that governments were going too far, and were building up unsustainable levels of public debt. One was a Japanese economist, Keiichiro Kobayashi, drawing on the experience of Japan’s “lost decade” of the 1990s. He argued that the lesson of that financial crisis, in which many of Japan’s banks went bust under the weight of bad or “toxic” debts, was that government borrowing adding more debt onto an