“Even under current conditions, I think we can afford to increase federal spending or cut taxes to stimulate the economy if there’s a downturn,” said Janet Yellen, the former Fed chief who is the incoming president of the American Economic Association. “Chronic low interest rates create additional fiscal space.”
Yellen’s remarks are part of a growing chorus of prominent economists who are building the intellectual case for the United States to take on a bit more debt. They are not saying that politicians have a blank check to spend more or that higher debt doesn’t have any negative consequences. The money still has to be paid back at some point — with interest.
But the consensus view is shifting among economists from a belief the debt harms the economy to a belief that responsible borrowing is warranted.
Yellen argued that the timing is right to make smart investments: It’s cheap to borrow with interest rates so low and unlikely rise much any time soon.
“In a world of low real rates, there’s also a strong case for programs to invest in infrastructure, education, research and development, climate change mitigation — namely investments that would elevate potential growth,” Yellen said.
Her call for more spending noticeably contrasts from her 2017 testimony before Congress that the long-term budget outlook should “keep people awake at night.”
The academic conversation around spending more to strengthen the economy comes at a time when the federal budget deficit topped $1 trillion, due to the Trump administration tax cuts and increased spending. It was the first time the deficit broke the trillion dollar mark during a January to December period since 2012 when the economy was still recovering from the Great Recession. The deficit continues to rise, according to the latest Treasury report on government debt released Monday.
Some economists called for higher taxes, especially on the rich, to fund additional spending. And many denounced Trump’s tax cuts as wasteful spending that could have gone toward other initiatives, including infrastructure. But there was a lot less worry about the current debt level.
“If you had been at the [AEA] meetings seven years ago, there would have been a lot of concern about entitlement spending. There’s very little of that now,” said Lawrence Summers, the former Treasury Secretary under Bill Clinton who helped craft the last balanced federal budget.
Indeed, many pointed to Japan, where debt is about 250 percent the size of the economy, as a good example that debt can rise a lot without triggering a doomsday scenario. Economic textbooks teach that too much debt can bankrupt a country and trigger massive inflation, which can cause a recession. But after years of high debt in Japan, plenty of investors are still willing to lend the country money, and Japan’s economy is sluggish, but stable.
U.S. debt is currently about 80 percent of GDP and is projected to grow to 95 percent of GDP by 2029, largely because of rising Social Security and Medicare spending as Baby Boomers age. But many argued it’s unlikely U.S. bonds would lose their status as one of the safest assets in the world if debt grew somewhat more.
“I would be very confident the United States would not go bankrupt,” Summers said.
Summers said he would support a “prudent” program of borrowing to finance “reasonable, prudent public investment,” for example on schools and renewable energy.
That sentiment was echoed by many.
“We are in such bad shape on infrastructure,” said economist Lisa Lynch, the provost of Brandeis University. “We had such a missed opportunity as part of the response to the Great Recession to really have doubled down on making major investments in our infrastructure.”
The economists who attend AEA are largely academics. Several who spoke with The Washington Post estimated that 80 to 90 percent of the conference attendees are politically liberal, which could explain the heightened calls for the government to do more.
But others say economists’ views are evolving on government spending, because circumstances have changed. Lower interest rates make borrowing and investing more attractive. And rapid technological advances make it more necessary for the United States to invest heavily to remain competitive.
The U.S. economy is growing at about 2 percent, a modest pace compared to prior booms. Summers has dubbed this “secular stagnation.” Trump promised his tax cuts and deregulation would lift growth, which happened in 2018, but growth slowed closer to 2 percent in 2019. And economists say a big reason the economy rarely grows beyond 3 percent anymore is because of the aging population (fewer workers) and muted productivity growth.
Janice Eberly of Northwestern’s Kellogg School of Management put up a slide showing that while the U.S. government spends more dollars today on the military and domestic programs than it did in the 1960s, federal investment as a share of GDP is at an all-time low, which is likely hurting productivity and growth.
There’s also the reality that if another recession hits, the Federal Reserve is unlikely to be able to do as much to rescue the economy. The Fed typically cut rates 5 percentage points during prior recessions. The Federal Reserve’s benchmark rate is already just shy of 1.75 percent, leaving little room to goose the economy very much.
“We don’t have monetary policy. It’s very limited at the moment,” said Kenneth Rogoff, a Harvard economics professor who foresaw much of the 2008 financial crisis.
With monetary policy hamstrung, Congress would likely need to spend more during the next recession to help revive the economy, but top economists like Rogoff acknowledge they are “not at all optimistic” that can be done.
Several economists, including Summers, proposed “automatic stabilizers” for the economy, which are measures such as payroll tax cuts or extra food stamps that would take effect once the unemployment rate climbs to a high rate. But it would take an act of Congress to set up the automatic stabilizers, which seems unlikely in the current political environment.
Other economists called for even bolder moves for the government to spend more on addressing climate change by funding more research on green technologies. There were also calls for the government to better address inequalities, such as giving children from low and moderate income families “baby bonds” that can help pay for college and other springboards to a better life.
“Everybody now assumes that social programs and social safety nets require more resources,” said Dani Rodrik, a Harvard economics professor. “Nobody stood up and said all of this inequality is because the government is doing too much.”