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Does the Deficit Matter? Congress Asks Four Top Economists

Yuval Rosenberg, Michael Rainey

Wednesday’s impeachment hearings will rightly dominate headlines given the bombshells in Ambassador Gordon Sondland’s testimony, but they weren’t the only hearings happening in Congress. The House Budget Committee hosted four noted economists for a discussion titled “Reexamining the Economic Costs of Debt.”

Committee Chair John Yarmuth (D-KY) opened by suggesting that we’re in a new economic era — one in which many of the threats of persistently high deficits and national debt predicted by traditional economic theory have failed to emerge. Investors haven’t fled U.S. debt markets or demanded higher yields on U.S. Treasuries. Interest rates remain low and inflation has yet to spike. In short, there is no imminent debt crisis on the horizon.

That doesn’t mean that deficits don’t matter. None of the economists argued that the government can run up debt unchecked over the long run without consequences. The consensus, to the extent that there was one among the economists testifying, was that debt and deficits do matter. But several of the economists said that it’s key to differentiate between good deficits — those that contribute to economic growth and productivity — and bad or wasteful ones.

Jared Bernstein, a senior fellow at the left-leaning Center on Budget and Policy Priorities and former adviser to Vice President Joe Biden, noted that non-defense discretionary spending is expected to fall to historical lows as a percent of gross domestic products. “Precisely the area where we should be investing is where we’re doing the least,” Bernstein said.

Olivier Blanchard, a senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund, agreed. “The deficits as they are now are not used for the right purposes. There’s a number of programs and measures which could increase growth, decrease inequality. They would be a much better use of these deficits than is currently the case.”

Below is a summary of the arguments made by committee leaders and the four economists testifying. You can watch the full hearing here.

House Budget Committee Chairman John Yarmuth (D-KY): “In our hearing last week, Federal Reserve Chair Powell made it clear that the fiscal challenge we face is a long-term one, not an immediate crisis. Our aging population and growing health care costs have put our debt on an unsustainable path. We will need to take steps to address this issue over the next several decades. But in the meantime, persistently low interest rates have made reducing deficits in the near-term less urgent – even counterproductive given the risk to economic growth. It has also increased Congress’s fiscal space, empowering lawmakers to make responsible investments now that will improve our future economic outlook. …

“Deficits – and what they’re used for – matter. Failing to tackle severe and persistent infrastructure, education, and health gaps is arguably more damaging to our economic and fiscal outlooks than the risks posed today by higher debt. … On the other hand, deficit-financed tax cuts for the wealthy and big corporations are clearly an irresponsible use of deficits. The Republicans’ 2017 tax law is the poster child for wasteful deficit-financed policy: It has failed to provide any meaningful boost to the economy but increased our debt by $1.9 trillion and counting, worsening our already serious revenue problem. …

“[D]espite critical differences, both mainstream and alternative schools of thought increasingly agree that government debt appears to be less risky, less costly, and less urgent than traditional economic thought suggests.”

Ranking Member Steve Womack (R-AR): “Simply put, the debt is on a completely unsustainable trajectory. The national debt is $23-plus trillion and is projected to grow to more than $34 trillion within a decade. Soon thereafter, on our current path, the federal debt will reach the highest level in American history as a percentage of the economy. … Not only is the way we’re doing business fiscally irresponsible and unsustainable, CBO also found that a growing federal debt has a negative impact on business investment, productivity and economic growth. … I certainly don’t want my grandkids to see the crisis scenario in which the interest rate on the debt will skyrocket abruptly because investors will no longer have confidence in our government’s ability to pay its bills. That’s why I’m seriously concerned that it seems today as though many lawmakers have shifted from a willingness to address the debt with real bipartisan solutions and instead are buying into this Modern Monetary Theory, which tells us that the debt doesn’t matter because we can essentially just print more money. This notion is absurd.”

Olivier Blanchard, senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund: “Deficits, running at more than 5% of GDP, are large. Unless they are used to finance an ambitious and credible public investment plan, they should be decreased. Decreasing them too fast would be risky however, as there is little room for the Fed to decrease interest rates. The reduction in the deficit should be contingent on the strength of private demand. … In short, judicious use of deficits as a way of simultaneously sustaining demand and output in the short run and financing public investment and increasing output in the long run appears today to be the best strategy.”

L. Randall Wray, a leading Modern Monetary Theory economist, senior scholar at the Levy Economics Institute and professor of economics at Bard College: “I argue that federal deficits and debt are not so scary. Neither is on an unsustainable path. Rather, persistent deficits and rising debt are normal. They’re not due to out-of-control spending, now or in the future. They serve a useful public purpose. They’re largely outside the control of Congress. And it’s hard to imagine a scenario in which they create a financial crisis, lead to insolvency or high inflation or trigger an attack by bond vigilantes.

“So what do I recommend going forward? I actually agree with a lot of the comments made. We don’t need tax hikes or spending constraint now when growth seems to be moderating and there’s no inflationary pressure. Indeed, doing that now might depress growth so that the deficit would actually increase, as it always does in recession. The time to rein in the deficit will be when growth booms and inflation threatens.”

Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities: “Current deficits are unusually high for this stage of the economic recovery and yet these deficits are not pushing up interest rates or inflation. If the increased flow of deficits and the resulting higher stock of debt are not having obvious negative economic consequences, does that mean deficits don’t matter and policymakers should blithely put all of their preferences on the national credit card? My answer is no.

“The evidence does not relieve policymakers of budget constraints. ... But the evidence provides a more nuanced, far less cramped understanding of the economic cost of budget deficits and the potential benefits from investing in people and places who have long needed the help. ...

“These facts should push strongly against knee-jerk, austere fiscal policy. But they should not obviate concerns about our persistent fiscal imbalances. First, interest rates could eventually rise, such that we’d be servicing a much larger stock of debt, thus devoting a larger share of national income to debt payments ... Second, financing more of our public debt with foreign capital has led to an increasing share of our GDP ‘leaking out’ through debt payments abroad. ... Third — and this is the concern I find most worrisome — is the lack of ‘perceived’ vs. actual fiscal space. ... Were Congress to take insufficient action to offset a downturn, it would be a fateful mistake, one that would disproportionately harm those who are already economically vulnerable, and who are least insulated from recessions.

John Taylor, professor at Stanford University and senior fellow at the Hoover Institution: “At previous hearings of this committee at which I testified, including a 2015 meeting entitled ‘Why Congress Must Balance the Budget,’ I showed that basic economic theory, grounded in real world data, implies that high federal government debt has a cost: It reduces real GDP and real income per household compared to what these would be with lower debt levels. ...

“With the Congressional Budget Office’s currently projected increase in the deficit and federal debt in the United States, this reexamination implies the need for a credible fiscal consolidation strategy. Under such a strategy spending still grows, but at a slower rate than GDP at least for a while, thereby reducing both spending as a share of GDP and debt as a share of GDP compared with current projection. Such a fiscal strategy would greatly benefit the American economy. It would also reduce the risk of the debt spiraling up much faster than is currently projected by the CBO.”

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