In retrospect, the fears were overblown. The United States posted huge deficits during the Trump years, before the coronavirus recession, in part due to the passage of $2 trillion in tax cuts. America’s debt swelled to 70 percent of GDP, then 75 percent. This year, it blew past 90. Yet interest rates remained low. As the new paper by Summers and Furman notes, the yield on U.S. 10-year indexed bonds dropped four percentage points between 2000 and 2020, “even as projected debt levels went from levels extremely low by historical standards to extremely high by historical standards.”
Given those dynamics, Furman and Summers suggest focusing instead on debt-servicing costs as a share of GDP—that is, how much the United States needs to pay its creditors in a given year, relative to the size of the economy. Because money is cheap right now, the country has much more capacity to spend its way out of the current crisis and to make investments to bolster growth in the future.
That gets to a fourth point: Use deficits to fuel growth. “Before this period of sustained low rates, we had this approach of emphasizing the measure of the national debt and the budget deficit, and the burden it was placing on future generations,” Summers told me. “But right now, the policy debate needs to be about the composition of fiscal policy, not the level of the deficit or surplus.”
This means taking a close look at what the United States is spending money on, and figuring out how to get more bang for the government’s buck. In the short term, that means pouring money into proven forms of stimulus to keep the recovery going: food assistance, unemployment-insurance payments, and aid to state and local governments, not write-offs for business meals, tax breaks, and the like.
In the longer term, Washington needs to invest more in physical infrastructure and the country’s human capital. Crumbling ports, falling bridges, fire-prone electrical systems, carbon-belching utility operations, dismal public-transit options, outmoded and patchy broadband networks: The United States needs an additional $2 trillion in spending to fix them, experts estimate. With that kind of outlay, “you’re not making the budget deficit worse; you’re making demand in the economy greater,” Summers said. “You’re increasing the capacity of the economy down the road.” Investments in people do the same. Ending child poverty, stopping the opioid crisis, improving child nutrition, providing a high-quality public education to students, ending the racial wealth gap: These kinds of policies would boost the economy, too.
One final lesson: Don’t listen to Republican hectoring on the debt. Earlier this year, Mick Mulvaney, the former White House budget director, described the GOP’s position candidly. “My party is very interested in deficits when there is a Democrat in the White House,” he told a crowd in Oxford, as reported by The Washington Post. “The worst thing in the whole world is deficits when Barack Obama was the president. Then, Donald Trump became president, and we’re a lot less interested as a party.” Expect those same dynamics to come into play when Joe Biden takes office. All of a sudden, spending rates will become “unsustainable,” the White House will be profligate, and the debt will be a multitrillion-dollar burden on our grandchildren. Republicans will insist on cutting spending, which would hurt the economy and hurt Democrats electorally.
The things to watch are whether the country’s borrowing costs are rising, whether its budgetary allotment for payments on the debt is increasing, and whether it is spending on good priorities. Those big, scary debt numbers are not as big and scary as they used to be. What counts as fiscal responsibility has changed in the past decade, and especially in the current crisis, Washington should use its spending power to make the country faster-growing and more equitable for everyone.
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