The consensus on the dangers of rising debt has shifted dramatically over the last decade. Economists have been reexamining how best to spur recovery and encourage wider-spread prosperity as persistently low interest rates defy earlier warnings about the cost of massive government borrowing.
“The facts have changed and economists have, sensibly, changed their minds,” the Financial Times editorial board noted yesterday. “Inflation, economic growth and interest rates failed to recover as anticipated after the financial crisis. This not only kept borrowing costs down but demonstrated that cutting spending may have had a bigger negative impact than expected.”
Against that backdrop, three prominent fiscal policy experts — Peter Orszag, former director of the Congressional Budget Office; Robert Rubin, the Treasury secretary under President Bill Clinton; and the Nobel Prize-winning Columbia University economist Joseph Stiglitz — are calling for a broad revamping of federal tax and spending policies. In a paper published this week by the Peterson Institute for International Economics, they warn that, in our uncertain world, the current low interest rates shouldn’t be taken for granted and propose a number of changes to make fiscal policy more responsive to economic conditions.
“The goal is to streamline the decisions policymakers must make and curb potential sources of budgetary instability while preserving an ability to make corrections on top of such adjustments,” they write. “To move in this direction, we propose reducing the budget’s exposure to interest rate variation while also making it respond more automatically not only to short-term economic conditions but also to drivers of long-term fiscal pressures (for example, in health care and pensions).”
They make five key recommendations:
- Relying more on automatic stabilizers such as unemployment benefits.
- Creating a “permanent” new infrastructure program that spends more when the economy turns down or when the expected returns on investment are high.
- Lengthening the maturity of U.S. debt to lock in the long-term benefit of low rates and reduce the impact of any sudden rise in rates. The authors say they support the creation of bond maturities longer than 30 years. “At today’s yield curve, I’d do as much as I could” to extend the maturity, former Treasury Secretary Rubin told Bloomberg.
- Indexing Social Security to changes in life expectancy as part of a goal of having the government’s long-term fiscal commitments tied more directly to their drivers
- Allowing policymakers to streamline their decision-making and focus more on budget adjustments in response to changing circumstances.
“These five points are admittedly more a sketch than a full fiscal plan,” the authors write. “But our main point is to highlight the problems in being too certain about fiscal prognostications in a world that continuously surprises all of us, and this five-point architecture points the way toward a more resilient budget policy.”