“On the current path, the CBO predicted in March that the debt would grow to 102 percent of GDP by the end of 2021, to 107 percent by 2031, and 202 percent by 2051. It also predicted that by 2051, the federal government will be spending more than a quarter of its annual budget just to pay interest on the principal. But those estimates came before President Joe Biden signed the $1.9 trillion COVID-19 relief bill, which made the long-term budget outlook even worse.
What is the risk to the U.S. economy? Fiscal hawks have been sounding the alarm about rising debt levels for decades, but their nightmare scenario of runaway inflation hasn’t come to pass.”
“As the industrialized world racked up debt through the 2010s, inflation and interest rates stayed low—contrary to the warnings of the doomsayers.
This situation, Furman and Summers say, implies that the U.S. government has much more leeway to borrow money, spend it on government projects, and grow its way out of the debt than fiscal hawks have led us to believe. Furman argues that the story is much the same regarding the pandemic-era economy.”
“John Cochrane, an economist at Stanford University’s Hoover Institution, disagrees. “If you wait until the crisis comes, everything is much much worse,” he says.
As a fiscal hawk, Cochrane acknowledges that his doomsaying has been wrong for the past decade, but he says that doesn’t mean he’s wrong now.
“I live in California. We live on earthquake faults.” Cochrane says. “We haven’t had a major earthquake, a magnitude nine, for about a hundred years.” It would be foolish to consider someone a doomsayer for preparing for an earthquake in California, he says, despite the fact that major earthquakes aren’t a common occurrence.
“That’s the nature of the danger that faces us. It’s not a slow predictable thing,” says Cochrane. “It is the danger of a crisis breaking out. So I’m happy to be wrong for a while, but that doesn’t mean that the earthquake fault is not under us and growing bigger as we speak.””
“”If it costs you…zero to borrow and something does more than zero, it’s worth doing,” says Furman. “It then needs to do a decent amount more than zero such that when you tax it…it pays itself back.” Furman claims that the expenditures that do this are limited, but says that the evidence points to the value of investing in children in areas like preschool and child health care.
Cochrane agrees that government spending on certain projects theoretically can boost growth, but he is skeptical of the government’s ability to spend the money wisely.”
“Furman and Summers’ paper also expresses concerns about debt projections beyond 2030 absent Social Security and Medicare reform as baby boomers retire en masse. Simpson and Bowles recognized that the bill on eldercare would eventually be the item to bust the budget.
“All else equal, addressing entitlements sooner is better than addressing entitlements later,” Furman says. “If you want to address it more on benefit reduction, then you probably do want an earlier start, I’m comfortable doing it on the tax side. I understand others probably want to do it on the benefits side. And if I were them, I’d want to get started sooner too.””
“”The question is where do you want to stabilize the debt,” says Furman. “People used to think it should be 30 percent of GDP. Is that what we need to do in order to be safe? I think if you’re asking that question without looking at interest rates, then you’re in danger of a very incomplete answer.”
“Most people acknowledge that there are limits but they envision slow, steady warnings. That you’ll see the problem coming and you’ll have plenty of time to fix things,” says Cochrane. “And I looked through history and I noticed that when things go wrong, they go wrong in a big crisis.””
“”Things always go boom all of a sudden, and so the key to fiscal management is to keep some dry powder around to have some ability to be able to borrow more,” Cochrane says. “Imagine if world war breaks out, and we’ve already borrowed the 100 percent debt-to-GDP ratio that we ended World War II with. Well, once we’re at a 100, 150, 200, our ability to meet that next crisis with borrowing is gone and then that next crisis is a catastrophe.””