Note that I label this the return of austerity politics, not economics. Although garments will be rended and dire warnings will be made, this isn’t about the economics of debt. At one level, it’s about blocking Democratic priorities. At a deeper level, it’s about kneecapping a Biden presidency before it has a chance to take off. (Disclosure: I informally advise the Biden campaign.)
This outcome must be avoided and not just because the evolving economics of fiscal debt — one of the most interesting, evolving and inherently progressive areas of economics — says so. The main reason the return of austerity politics must be resisted is its human cost.
The equation couldn’t be simpler: Austerity equals human suffering. Such suffering will not be equally distributed. It will fall on those most vulnerable to the coronavirus and the economic damage it has unleashed.
The new economics of public debt underscores the urgency of this equation. The old argument that public borrowing competes with private borrowing, leading to higher interest rates and slower growth, has lacked empirical support for decades. Right now, we have a historically huge budget deficit of 15 percent of GDP (over $3 trillion) and debt about the same size as the economy. Yet the yield on the 10-year Treasury bill is below 1 percent (its average since the 1960s is 6 percent). More to the point, because these are unusual economic times, interest rates on government debt have been uncorrelated to the magnitude of that debt for decades now, as I discussed in recent testimony on the topic.
In fact, this has been the case in most advanced economies, regardless of debt levels, with Japan as the most notable example (its public debt has long been multiples of its economy). One reason is that these economies have operated below capacity, with both low inflation and excess savings relative to investment putting downward pressure on rates. That dynamic has drawn central banks, like our Federal Reserve, into the mix, trying to close output gaps by aggressively holding down the benchmark rates they control.
Inequality also plays a role. When growth flows disproportionately to those who are already wealthy, they tend to save, not spend, marginal dollars relative to middle and lower-income households. This, too, has boosted savings and lowered interest rates, while restricting the spending and the living standards of lower-income families.
But whatever the reason, the fact of persistently low rates offers new opportunities for near-term relief to those who need it and longer-term public investment to meet the existential challenges we face right now, from climate change to racial injustice.
One strong piece of evidence for this contention of ample fiscal space is that the most recent Congressional Budget Office forecast of what it will cost the government to service its debt has gone down, not up, since its previous forecast. That earlier forecast didn’t include that $3 trillion of new debt incurred to offset the pandemic. How can we have more debt yet pay less to service it? Lower rates, of course.
This doesn’t mean that deficits never matter. They do, not least because when we carry such high debt levels, we’re a lot more vulnerable to an unforeseen spike in interest rates. So piling on wasteful debt is as economically wrongheaded now as it has ever been, which is why the highly regressive, deficit-financed Trump tax cuts were such a mistake. This also implies that the suddenly hawkish Republicans will be guilty of two fiscal crimes: piling on bad debt while refusing to countenance good debt.
But isn’t bad and good debt in the eye of beholder? No, because good debt does three things that bad debt doesn’t: It promotes growth, relieves hardship and advances racial equity. Investing in affordable housing for racial victims of housing segregation: good debt. Cuts in capital gains taxes: bad debt. Enhanced benefits for the unemployed and nutritional support for the millions not able to meet this basic need: good. Tax breaks for profitable corporations: bad.
Still, even with low rates and the ensuing low debt service, it is essential to raise the necessary revenue to pay for permanent measures, such as lasting investments in clean energy, standing up an affordable child-care sector and providing universal pre-K and free college for those of limited means — all of which are Biden proposals. Especially as these programs are both growth- and equity-inducing, paying for them through deficit financing is better than not doing them at all, but to stop there would severely undercut their political sustainability.
Should the election outcome break our way, how can progressives achieve these goals in the face of the forthcoming fiscal flip?
First, we must ignore the phony caterwauling of the deficit chicken hawks. One rule to be aggressively enforced is that anyone who voted for the Trump tax cuts has zero credibility on deficits and should be summarily ignored, if not ridiculed.
Second, we must help politicians with austere muscle memory understand these new dynamics. Here again, that’s not just an economic argument; it’s a political one. If conservatives ignore austerity when they’re in power but Democrats embrace it when they take control, then conservatives will consistently meet the demands of their constituents in the donor class while Democrats consistently fail to meet the needs of their constituents.
That is a not just a recipe for facilitating reckless fiscal policy and wasteful debt. It’s also a recipe for losing progressive support and political power — something no Democrat should want.