Ten years ago, the United States was clawing its way out of a miserable recession. Washington was running an annual deficit of $1.3 trillion, and the national debt had reached $9 trillion, roughly 60 percent of GDP. Those figures were frightening enough to spur the Obama White House and Congress to create a panel of experts to address the long-term budget and to kick-start several rounds of government austerity, making cuts to the defense budget and a wide range of domestic programs.
Today, the country is clawing its way out of another miserable recession. Washington is running an annual deficit of $3.1 trillion, and the national debt has reached $21 trillion, more than 100 percent of GDP. Yet even as some Republicans are beginning to warn of the need for belt-tightening in the coming years, Congress is considering another large stimulus on a bipartisan basis, Democrats are vowing not to allow President Donald Trump’s deficits to squeeze out their own priorities, and few if any are warning about the wrath of the bond market and death by red ink.
A quiet revolution is happening in economists’ understanding of deficits and debts, with Democrats abandoning many of their concerns about long-term spending pressures and Republicans clinging to a queasy yes-for-us, no-for-you position on deficit spending. That revolution is a complicated one, driven by falling interest rates and by the changes to demographics, private saving, corporate behavior, monetary policy, and global investment flows behind them. But fiscal responsibility means something different today: Stop worrying and learn to love red ink.
A number of lessons have emerged from the past decade. The first and perhaps most important is to run a deficit. Or, put more technically, the United States should abandon the goal of balancing its budget when the economy is good, and it should run deficits, sometimes large deficits, in perpetuity. Not too long ago, many green-eyeshade types held that the government should run deficits to stimulate the economy when it is suffering, but not when it is doing well. Following this orthodoxy would keep Uncle Sam’s borrowing from “crowding out” the private sector, stoking inflation, and increasing interest rates. The loss of dollar dominance, bond vigilantes, and inflation spirals: These were prevalent fears as recently as the last recession.
Not so much today. Right now, the bond markets cannot get enough U.S. debt, so much so that the government often borrows for free, after you adjust for inflation. There are few signs of the dollar getting ditched as the global reserve currency, even as its relative value ebbs and flows. The U.S. is experiencing low growth, low productivity, and low interest rates. Given those dynamics, the government is highly unlikely to squeeze out private investment, Larry Summers, the former Treasury secretary and one of the thinkers propelling that paradigm shift in public economics, told me. Indeed, government spending has become necessary to drive GDP in an era of “secular stagnation,” as Summers has famously described it.
Many others agree with him. “I wouldn’t counsel throwing out the rule book and saying, We’re off to the races; spend what you want; debt doesn’t matter at all,” Mark Zandi, the chief economist at Moody’s Analytics, told me. “But we’re in a period where it’s important for governments to be expansive with fiscal policy. We’re not going to get into a death spiral with investors jacking up interest rates because we’re spending more.”
A second, related point is to forget about the national debt as a share of GDP. This is an argument made forcefully in a new white paper from Summers and Jason Furman, a Harvard economist who led President Barack Obama’s Council of Economic Advisers.
After the Great Recession, many on Capitol Hill and in academia worried about the size of the debt relative to the size of the economy, a concern stoked by groups such as the Peter G. Peterson Foundation and supercharged by a 2010 paper by the economists Carmen Reinhart and Kenneth Rogoff. That paper, “Growth in a Time of Debt,” showed that economies start ailing when public debt exceeds 90 percent of their annual economic output. Even as Reinhart and Rogoff themselves counseled against the dangers of withdrawing stimulus too soon, ballooning debts were described as “the most significant vulnerability” and “the next crisis” soon after the recession.
In retrospect, the fears were overblown. The United States posted huge deficits during the Trump years, before the coronavirus recession, in part due to the passage of $2 trillion in tax cuts. America’s debt swelled to 70 percent of GDP, then 75 percent. This year, it blew past 90. Yet interest rates remained low. As the new paper by Summers and Furman notes, the yield on U.S. 10-year indexed bonds dropped four percentage points between 2000 and 2020, “even as projected debt levels went from levels extremely low by historical standards to extremely high by historical standards.”
Given those dynamics, Furman and Summers suggest focusing instead on debt-servicing costs as a share of GDP—that is, how much the United States needs to pay its creditors in a given year, relative to the size of the economy. Because money is cheap right now, the country has much more capacity to spend its way out of the current crisis and to make investments to bolster growth in the future.
That gets to a fourth point: Use deficits to fuel growth. “Before this period of sustained low rates, we had this approach of emphasizing the measure of the national debt and the budget deficit, and the burden it was placing on future generations,” Summers told me. “But right now, the policy debate needs to be about the composition of fiscal policy, not the level of the deficit or surplus.”
This means taking a close look at what the United States is spending money on, and figuring out how to get more bang for the government’s buck. In the short term, that means pouring money into proven forms of stimulus to keep the recovery going: food assistance, unemployment-insurance payments, and aid to state and local governments, not write-offs for business meals, tax breaks, and the like.
In the longer term, Washington needs to invest more in physical infrastructure and the country’s human capital. Crumbling ports, falling bridges, fire-prone electrical systems, carbon-belching utility operations, dismal public-transit options, outmoded and patchy broadband networks: The United States needs an additional $2 trillion in spending to fix them, experts estimate. With that kind of outlay, “you’re not making the budget deficit worse; you’re making demand in the economy greater,” Summers said. “You’re increasing the capacity of the economy down the road.” Investments in people do the same. Ending child poverty, stopping the opioid crisis, improving child nutrition, providing a high-quality public education to students, ending the racial wealth gap: These kinds of policies would boost the economy, too.
One final lesson: Don’t listen to Republican hectoring on the debt. Earlier this year, Mick Mulvaney, the former White House budget director, described the GOP’s position candidly. “My party is very interested in deficits when there is a Democrat in the White House,” he told a crowd in Oxford, as reported by The Washington Post. “The worst thing in the whole world is deficits when Barack Obama was the president. Then, Donald Trump became president, and we’re a lot less interested as a party.” Expect those same dynamics to come into play when Joe Biden takes office. All of a sudden, spending rates will become “unsustainable,” the White House will be profligate, and the debt will be a multitrillion-dollar burden on our grandchildren. Republicans will insist on cutting spending, which would hurt the economy and hurt Democrats electorally.
The things to watch are whether the country’s borrowing costs are rising, whether its budgetary allotment for payments on the debt is increasing, and whether it is spending on good priorities. Those big, scary debt numbers are not as big and scary as they used to be. What counts as fiscal responsibility has changed in the past decade, and especially in the current crisis, Washington should use its spending power to make the country faster-growing and more equitable for everyone.
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