Just how worried should we be about the rapidly rising national debt? Last week we told you about a budget watchdog group’s effort to raise the alarm over “debt denialism” that has taken hold in some quarters, with politicians and economists from across the political spectrum pushing fiscal concerns onto the back burner. This week, two Democratic economists who have played a role in that effort offered their latest thoughts on the debate.
Writing on the Peterson Institute for International Economics blog, Jason Furman, who served as President Obama’s chair of the Council of Economic Advisers, and Lawrence H. Summers, who served as Treasury secretary in the Clinton administration and director of the National Economic Council under Obama, addressed five debt-related points:
1. Debt alarmism is also a danger. Furman and Summers warn that excessive debt worries can be just as destructive as excessive debt creation, in large part by hindering policymakers from taking the steps needed to fight an economic downturn. “Among the largest economic policy errors of the last decade was that the fiscal stimulus was too small in the wake of the Great Recession — that is, deficits were too small, not too large,” they write. Moving forward, they argue that “the dangers posed by anti-deficit dogma in the next recession could be enormous.”
2. The costs and benefits of deficits have changed. The authors say that the persistence of low interest rates make it clear that one worry — that deficits will drive up interest rates and choke off economic growth — should be discarded. “The idea that we need deficit reduction to keep interest rates down and thus encourage borrowing and investment may have made sense years ago, but it would be an absurd diagnosis of today’s economic problems,” they write. At the same time, there are limits to how much the government can spend without sparking inflation. Given such constraints, policymakers should proceed cautiously and aim to “do no harm” by paying for new programs rather than having them increase the deficit.
3. We need to stabilize the debt while shoring up Social Security and Medicare. “Entitlement programs need to be fortified for fundamental social reasons,” Furman and Summers write. Increasing revenues (read: higher payroll taxes, “and not just from high-income households”) to cover the Social Security and Medicare shortfalls is essential, they say, and will improve the debt outlook as well.
4. The U.S. is not facing a fiscal crisis. The cost of reducing the debt is greater than any benefit that reduction would provide, Furman and Summers argue. “Countries that borrow in their own currencies and run independent monetary policies have substantial latitude on fiscal policy,” they say. “Not unlimited latitude, as some political advocates of MMT argue — just look at when the United Kingdom had to turn to the International Monetary Fund in the 1970s — but much more than indicated by the overwrought predictions of many advocates of more urgent deficit reduction.” If there is a crisis at some point in the future, “deficit reduction can be done rapidly.”
5. Fiscal policymakers should be focused on the next recession — and sustaining the country. Furman and Summers say that in a low-interest rate environment, fiscal policies will play a leading role in combating the next recession. Accordingly, policymakers should be “actively making contingency plans now for the next recession by identifying infrastructure projects, finding equitable ways to reduce sales taxes, and considering ways of giving tax benefits that maximize the propensity for them to be spent.”
More broadly, policymakers need to focus on sustaining and promoting national growth. “The budget deficit is not our only or even most important national deficit,” they write. “Those worried about placing burdens on the next generations should be even more concerned with an inadequate infrastructure, an education system that fails most young people, places where employment rates are too low, insufficient investment in scientific leadership, and a government that increasingly lacks the capacity to do fundamental tasks like collecting taxes, caring for veterans, and enforcing the law.”