It has become fashionable in recent months for economists to argue that the nation’s growing public debt is not a problem but something to be, if not exactly embraced, then at least not avoided.
Harvard University economists Lawrence Summers and Jason Furman penned a recent article in “Foreign Affairs,” titled “Who’s Afraid of Budget Deficits?” in which they argue that debt reduction should not be a priority.
Olivier Blanchard, the former chief economist at the International Monetary Fund and now a senior fellow at the Peterson Institute for International Economics, told his audience at the American Economic Association annual meeting last month that debt is sustainable when the risk-free interest rate is below the economy’s growth rate, which he says is the historical norm.
Witness the fact that long-term interest rates
have remained low even as the deficit and debt have ballooned, largely the result of a $1.5 trillion tax cut as provided in the 2017 Tax Cuts and Jobs Act.
The Congressional Budget Office projects a $900 billion deficit in fiscal 2019 and an increase in publicly held debt to $16.6 trillion, or 78% of gross domestic product, double what it was in 2008. By 2029, CBO expects debt to reach $28.7 trillion, or 93% of GDP, which would be higher than at any time except in the immediate aftermath of World War II.
It was only 10 years ago that Reinhart and Rogoff were all the rage with their timely publication of “This Time is Different.”
That would be Harvard economists Carmen Reinhart and Kenneth Rogoff, who documented eight centuries of financial crises. As they write in the book’s preface: “If there is a common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers often poses greater systemic risks than it seems during a boom.”
“Excessive debt accumulation.” The economists found in a subsequent 2010 paper that high public debt was associated with slower economic growth. (A kerfuffle over a spreadsheet error in the paper did nothing to upend the conclusion that too much debt is bad!)
Read Rogoff in 2019: Fiscal policy won’t save us in the next recession
In a recent op-ed in “The Guardian” on the biggest risks to the global economy in 2019, Rogoff shows no sign of abandoning his cautionary warnings about the dangers of debt accumulation.
While admitting that a sustained rise in real, long-term interest rates is a “low-probability event” right now, he reminds us that the debt assumed when real rates are low becomes much more of a burden when they rise unexpectedly and without warning. (No, they don’t ring a bell at the top.)
What’s more, a high debt burden limits the government’s ability to respond during an economic or financial crisis.
“Most serious academic studies find that very high debt levels are associated with slower long-term growth,” Rogoff writes, linking to the IMF’s April 2018 Fiscal Monitor. In that report, the IMF highlights the surge in global debt, including public debt, which in advanced economies has reached levels as a share of GDP not seen since World War II.
For emerging economies, rising debt means a larger share of taxes and spending has to be devoted to servicing that debt instead of being allocated to productive investments.
At the time, the IMF advised countries to take advantage of a period of global growth to curtail fiscal stimulus, to save it for a rainy day.
“Historical experience shows that high debt and deficits in a country increases the depth and duration of a recession — such as in the aftermath of a financial crisis — because governments are unable to deploy sufficient fiscal support to the economy,” according to the report.
The IMF’s advice, to both advanced and emerging economies, is to put deficits and debt “firmly on a downward path” and focus on fiscal reforms that increase productivity.
The idea that debt and deficits don’t matter may be music to the ears of the newly elected progressives in the U.S. House of Representatives, who are enamored of MMT, or Modern Monetary Theory. According to MMT, governments that issue their own currency can just print money to finance spending and investments, constrained only by inflation.
But in all fairness, Summers and Furman aren’t quite as blasé about the dangers of excessive government debt as some of the reporting on their article suggests. In fact, they stake out a middle ground.
“Unlike in the past, budgeters need not make reducing projected deficits a priority,” they write. “But they should ensure that, except during downturns, when fiscal stimulus is required, new spending and tax cuts do not add to the debt.”
In short, focus on important investments and do no harm, the economists advise.
Just look at the bright side. How far we have come from John Maynard Keynes’s advocacy of wasteful government spending to cure unemployment — “two pyramids, two masses for the dead, are twice as good as one” — to economists’ defense of debt as a means of financing needed investments in infrastructure, education and health care!