On Tuesday, as Biden introduced his economic brain trust in Wilmington, Del., Yellen labeled the pandemic recession “an American tragedy” and urged a swift response. “It’s essential that we move with urgency,” she said. “Inaction will produce a self-reinforcing downturn causing yet more devastation.”
The Biden team’s push for government borrowing to fill the pandemic-size hole in the economy also reflects a broader shift in some leading economists’ view of public debt. By cutting interest rates to near zero — and all but exhausting its conventional tool kit — the Federal Reserve has made such borrowing more attractive and left the nation’s fiscal authorities in Congress with a greater role in propping up the economy, they say.
But prominent Republican lawmakers are balking at Democrats’ $2 trillion proposal for additional pandemic relief, saying annual budget deficits that add to the government’s debt bulge must be trimmed.
At stake in the debate are the hopes of millions of jobless Americans for an early return to the workforce along with the economy’s long-term health, economists said. Failure to provide additional government stimulus would probably drag out the recovery, threaten more small businesses with closure and force state and local governments to proceed with major layoffs, economists said.
“We need a bridge to the vaccine, and fiscal stimulus can provide that bridge,” said Nathan Sheets, chief economist for PGIM Fixed Income. “Are there issues in the long term with the level of debt? Yes, but we need to make it through these short-term challenges with the economy intact.”
When the pandemic hit in March, Congress and the administration moved quickly to provide roughly $3 trillion to cushion the blow. But subsequent talks over additional money for extra unemployment benefits, small-business loans, and budget aid for state and local governments have run aground.
Prospects for resolving a months-long stalemate between the two parties may turn on the outcome of two Senate runoff elections in Georgia on Jan. 5. If Republicans win at least one of the two seats, as expected, they will retain control of the Senate, dimming hopes for an additional multitrillion-dollar measure.
“The politics of a divided Washington are going to make it very difficult to agree on much of anything,” said Eric Winograd, senior economist for fixed income at AllianceBernstein in New York. “Republicans in the Senate seemed reluctant to pass more stimulus when there was a Republican president. They are likely to be even more reluctant with a Democratic one.”
Indeed, Sen. Lindsey O. Graham (R-S.C.), slated to chair the Senate Budget Committee if Republicans maintain control of the upper chamber, told reporters after the Nov. 3 election that he wants to “finally begin to address the debt.”
Likewise, Sen. John Thune (S.D.), the No. 2 Senate Republican, said he expects to focus next year on curbing spending on entitlement programs, adding: “I think that’s kind of getting back to our DNA. ... I think spending, entitlement reform, growth and the economy are all things that we’re going to have to be focused on.”
Top Democrats scoff at Republicans’ renewed debt fears after years of their support for Trump’s budget-busting policies. In 2017, for example, every Republican senator voted in favor of the president’s signature tax cut, which added $1.9 trillion to the debt, according to the nonpartisan Committee for a Responsible Federal Budget.
Government spending under Trump, who once crowned himself “the king of debt,” soared to $6.6 trillion in the fiscal year that ended Sept. 30 — up 71 percent from $3.8 trillion four years earlier, according to the Congressional Budget Office.
“It is hard to take the Republican senators seriously,” said William Spriggs, chief economist of the AFL-CIO labor union. “We still have very rough days ahead of us.”
While Democrats such as Sen. Elizabeth Warren (D-Mass.) accuse Republicans of rediscovering their debt phobia only to impede Biden’s agenda, Senate Majority Leader Mitch McConnell (R-Ky.) began flagging government debt as “a matter of genuine concern” in April.
Republicans back a $500 billion package targeted to small businesses and the jobless and resist a blank-check approach because the economy has healed faster than expected, said Brian Riedl, a senior fellow at the Manhattan Institute. The current 6.9 percent unemployment rate is well below the double-digit levels many Wall Street economists initially expected for the end of this year.
“An economy with unemployment below 7 percent requires a different solution than if unemployment stayed above 10 percent,” he said.
Biden this week filled out his economic team with experts who have called for rebuilding the economy first and dealing with deficit concerns later. Among them are all three members of his Council of Economic Advisers: Princeton University economist Cecilia Rouse, the incoming chair; Jared Bernstein, who advised Biden on economic policy during his vice presidency; and Heather Boushey, head of the Washington Center for Equitable Growth. Neera Tanden, president of the Center for American Progress who was nominated to head the Office of Management and Budget, also supports deferring deficit action.
While Republicans cite the economy’s progress in recent months, Democrats point to a mounting toll of hardship and loss. Existing federal programs, including extended unemployment benefits and a moratorium on evictions, are scheduled to expire at year end. Roughly 3.6 million Americans have been unemployed for more than six months, four times the number at the end of April.
“You’re going to get the recovery starting in April, May, whether or not we get this package,” said economist Adam Posen, head of the Peterson Institute for International Economics. “Whether we get stimulus in December or January is about how much human suffering there is between now and then.”
Democrats’ stimulus push is driven by lessons of the last financial crisis as well as subsequent shifts in the economic climate.
After Republicans took control of the House in 2010, they pressed President Barack Obama to accept spending limits that contributed to the weakest recovery since World War II. Leading Republicans at the time, including then-House Budget Committee Chairman Paul Ryan, warned of soaring inflation and a collapsing dollar if deficits weren’t quickly corralled.
“We’ve gone through this before,” said Sam Bell, policy director for Employ America, a left-leaning think tank. “We didn’t have spikes in interest rates. We didn’t have ruinous inflation. It’s hard to overstate how much the mainstream academic consensus has moved.”
On Tuesday, a pair of prominent Democratic economists — Lawrence Summers and Jason Furman — are scheduled to deliver a new paper that underscores that shift. The former Obama administration officials, appearing at a virtual Brookings Institution-Peterson Institute for International Economics event, will argue that persistently low interest rates require a “revolution” in thinking about debts and deficits.
The implications for government tax and spending policies “are as profound as those that occurred in the wake of the inflation of the 1970s,” wrote Summers, a former treasury secretary, and Furman, who led Obama’s Council of Economic Advisers.
The government’s borrowing spree since the 2008 financial crisis has not had the effects — rising bond yields or higher inflation — that traditional economics would have predicted. Private businesses have not been “crowded out” of bond markets by government agencies or faced higher borrowing costs. Consumers expect inflation even a decade from now to be a tame 1.4 percent, according to the Federal Reserve Bank of Cleveland.
The $21.2 trillion national debt — up from $14.4 trillion on the day Trump was inaugurated — is now slightly larger than the U.S. economy, a nominal milestone that hasn’t been reached since World War II and yet seems to have little real-world impact.
Even the Federal Reserve, normally hypervigilant about potential inflation, has been outspoken in calling for lawmakers to support the economy. Last month, Fed Chair Jerome H. Powell reiterated that the economy requires more government spending to complete its recovery, saying the risk was that policymakers would provide too little help, not too much.
“The consensus view among many economists is that there are limits to how much debt you can take on. But where those limits are and when the constraints start to bite — that’s very much an open question,” Sheets said. “We don’t know for certain if the limit on debt is another 50 percent of GDP or another 300 percent of GDP.”
The Biden team will take office with the government able to borrow for 10 years at 0.8 percent, compared with roughly 4 percent in late 2008.
That explains why even as the federal government is expected to rack up an additional $10 trillion in debt from 2021 to 2028, Washington will pay less each year in interest charges than it paid in 2019, according to the CBO’s latest projections.
At the American Economic Association conference in January, Yellen pronounced the interest burden “manageable” and said low interest rates provided the government with greater fiscal firepower.
“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,” she said, adding that low rates also made “a strong case” for new spending on infrastructure, research, education and climate change mitigation, which could boost the economy’s long-term potential.
Yet, Yellen in recent years also has expressed the concern over government debt that worries liberals who fear it as a justification for cuts in Social Security or Medicare.
“The U.S. debt path is completely unsustainable under current tax and spending plans,” she said during a Feb. 4 Bipartisan Policy Center event.
As the U.S. population ages, Social Security and Medicare are expected to account for a larger share of government spending while tax revenue fails to keep pace. By 2040, rising borrowing costs and increased spending will drive accumulated debt to more than 140 percent of annual output. The government’s interest bill that year will be more than three times as large relative to the economy as it is today and five times as large by 2050.
And if interest rates on federal borrowing are just 1 percent higher each year than expected, interest charges would consume about four-fifths of all projected revenue that year, the CBO said.
“We are incredibly vulnerable to an increase in interest rates,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.