“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 L. Yellen, the former Federal Reserve chief and the incoming president of the AEA. “Chronic low interest rates create additional fiscal space.”
Yellen is 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 does not 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 that 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 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 with 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 as the federal budget deficit topped $1 trillion in 2019, pumped up by the Trump administration’s tax cuts and increased spending. It was the first time the deficit had broken the $1 trillion 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 Department report on government debt, released Monday.
Some economists called for higher taxes, especially on the rich, to fund additional spending. And many denounced President 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 H. Summers, the treasury secretary under President Bill Clinton who helped craft the last balanced federal budget.
Many pointed to Japan, where debt is about 250 percent the size of the economy, as a good example of how 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 gross domestic product. It 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 is 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,” in schools and renewable energy, for example.
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 the AEA meeting 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 with prior booms. Summers has dubbed this “secular stagnation.” Trump promised that his tax cuts and deregulation would lift growth, which happened in 2018, but growth slowed to closer to 2 percent in 2019. 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 University’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 probably hurting productivity and growth.
There is also the reality that if another recession hits, the Fed is unlikely to be able to do as much to rescue the economy. The Fed typically cut rates five percentage points during prior recessions. The Fed’s benchmark rate is already just shy of 1.75 percent, leaving little room to goose the economy much.
“We don’t have monetary policy. It’s very limited at the moment,” said Kenneth Rogoff, a Harvard University economics professor who foresaw much of the 2008 financial crisis.
With monetary policy hamstrung, Congress would probably need to spend more during the next recession to help revive the economy, but economists such as Rogoff acknowledge that they are “not at all optimistic” that can be done.
Several economists, including Summers, proposed “automatic stabilizers” for the economy, 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 could 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.”