Economics is going through an intellectual revolution on public debt – The Washington Post

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“When the facts change, I change my mind. What do you do, sir?” is a witticism attributed frequently but inaccurately to the great 20th-century British economist John Maynard Keynes. Still, his heirs in the economics profession have found it useful over the years, when their theories have bumped up against reality.

Right now, economics is going through a mind-change on public-sector debt that borders on intellectual revolution.

Government debt accumulation was once considered inherently risky: By competing with private investors for investible funds, it would trigger ruinous interest-rate spikes. The new consensus is that debt is, if not quite the proverbial free lunch, then such a good deal that the United States and its fellow industrialized democracies can’t afford not to borrow. And this applies not only to the covid-related crisis but also to the more normal times ahead.

What happened? Mainly, the gap between theory and fact became too large to ignore: The Congressional Budget Office’s 10-year forecast of U.S. government debt as a share of total output grew from a mere 6 percent in 2000 to 109 percent in 2020. Yet in that same decade, real (inflation-adjusted) interest rates on benchmark U.S. government bonds fell from 4.3 percent to negative 0.1 percent, as two top former Obama administration economists, Jason Furman and Lawrence H. Summers, point out in a new paper that’s attracting attention in pre-Biden Washington.

In fiscal 2020, the U.S. government borrowed a staggering 15 percent of gross domestic product, yet the 10-year government bond still pays less than one percent.

The strong likelihood is that low rates will continue well after the pandemic ends, Furman reported at a Dec. 1 virtual conference sponsored by the Brookings Institution. A blue-chip panel including former Federal Reserve chairman Ben S. Bernanke, and Olivier Blanchard and Kenneth Rogoff, former chief economists of the notoriously austerity-minded International Monetary Fund, nodded in agreement.

Far from burdening future generations, governments have a golden opportunity to fund long-standing needs by borrowing for investments in future prosperity — the list includes child care, early education, job training and clean water.

In light of the past 20 years’ experience, the oft-cited metric of total public debt as a share of total output does not truly capture the burden of borrowing.

Rather, the focus should be on annual inflation-adjusted interest payments as a share of annual output; anything under 2 percent should be sustainable, according to the Furman-Summers analysis. At present, the figure is well below that.

Persuasive as it is, this rosy scenario would be even more convincing if economists could say exactly why interest rates are behaving as they are.

For now, the prime suspect is a mismatch between abundant private savings around the world and scarce profitable opportunities for private investment — the latter of which, in turn, partly reflects slow labor supply growth in industrialized countries.

Under such circumstances, holders of wealth see no alternative to parking their money with governments. There’s no private investment to “crowd out”; to the contrary, financial markets are actually signaling that the highest and best use of the funds may be a public one.

A dismal science no longer, mainstream economics now finds itself providing intellectual grist for a borrow-and-spend approach to governance that both Democratic and Republican politicians are likely to find congenial.

The new proponents of greater government debt distinguish between spending money and spending it wisely, to be sure. Relieving Congress of simplistic budget-balancing worries, they argue, does not relieve it of responsibility to vet public investments for their likely impact on genuine unmet human needs and the economy’s future capacity to grow. It’s an entirely valid caveat — whose consistency with the way Congress works is, unfortunately, debatable.

There is also the question of U.S. obligations to Social Security and Medicare recipients, which are for all intents and purposes just as binding as commitments to bondholders and compete with them for future tax revenues.

Congress could gradually modify these structural drivers of federal borrowing, which generally support current consumption rather than enhance productivity — especially Medicare. Its design flaws have long been recognized by both parties and make it both more wasteful and more favorable to upper-income recipients than it has to be.

The chances that anyone will take up this politically thankless task will probably go from slim to none, though, now that economics has debunked the deficit hawks.

Crude as the hawks’ position may have been, it did at least nudge Congress to think — a little — before borrowing, just as the new deficit doves say it should.

All the ramifications of the low-interest revolution in economics may be clear only in the long run, when — as Keynes did say — we will all be dead.

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Read more: Charles Lane: Money didn’t buy love in the 2020 election Eugene Steuerle: This is not your grandfather’s debt problem Robert J. Samuelson: The national debt is out of control Robert J. Samuelson: The Fed gambled — and lost Karen Tumulty: Most presidents build libraries to burnish their legacies. Trump is constructing an alternate universe.

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