Finance

National Debt No Big Deal? More Economists Unconcerned With Trillion-Dollar Government Deficits

More national debt is not ‘bad’ under any and all conditions, and less is not ‘good’ under any and all conditions. It really depends on what you’re doing with the money.

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Although it seems like a lifetime ago, only a few years have passed since the halls of Congress swarmed with self-proclaimed “deficit hawks,” all seething at what they saw as government spending run amok. But the deficit hawk seems an endangered species of late.

The Congressional Budget Office estimates that the federal budget deficit for fiscal year 2019, which ended September 30, was $984 billion. That is about 4.7 percent of the American gross domestic product, and fiscal year 2019 marks the fourth year in a row that the federal deficit increased as a percentage of GDP. Through 2029, if current spending trends continue, the CBO projects that the total national debt will reach $29.3 trillion, or 95 percent of GDP.

That sounds scary to a lot of laypeople. But more and more economists look at those projections, and shrug.

High national debt levels have long been thought to cause interest rates to rise. Investors are supposed to demand higher returns for taking on additional risk, and national debt levels that are too high could stifle growth or trigger inflation. Yet, investors have remained eager to lend to the United States, without seeming to care how much it borrows. It’s been a safe bet. So far, we do not seem to be close to the “too high” threshold.

Olivier Blanchard, an economist at the Peterson Institute for International Economics and former International Monetary Fund chief economist, is among the most prominent industry experts who doesn’t see the U.S. debt as being anywhere near crisis levels. “We clearly can afford more debt if there is a good reason to do it,” Blanchard told The Wall Street Journal.

Blanchard and his ever-growing cadre of like-minded colleagues believe that as long as interest rates generally remain below the economy’s rate of growth, the U.S. should not be reticent in continuing to borrow for socially beneficial projects. An increasingly greying population is thought to act as a more or less permanent brake on interest rates, since older people have more savings and are less likely to take on new debts. As the population continues to age, the demand for credit will fall, keeping the costs of borrowing low.

Some economists, chiefly those who subscribe to Modern Monetary Theory, now believe that the U.S. could safely issue vastly larger amounts of debt. However, most mainstream economists are a bit more cautious, saying only that there is plenty of fiscal space to borrow in light of the tepid inflation in recent years. The concerning part about the latter group is while they are pretty confident we can borrow more, none of them seem to know exactly how much more. Even so, Japan, another stable, aging country, has a national debt twice the size of its economy, and still has had no trouble issuing more debt.

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One thing that is clear: the modern national debt does not function just like a household debt, which is how it was sold as a campaign issue by the deficit hawks who pretended to care about deficit spending before Trump was elected. More national debt is not “bad” under any and all conditions, and less is not “good” under any and all conditions. It really depends on what you’re doing with the money. Try as I might to make it happen though, I don’t think “it’s more complicated than that” will ever really catch on as a successful campaign rally chant.

Not all economists agree on when the next recession will hit. They almost all do agree, however, that when the next recession does come, we will need to counter it with a massive fiscal response. According to many economists, taking on more debt to do this is not going to be a problem.

Jonathan Wolf is a litigation associate at a midsize, full-service Minnesota firm. He also teaches as an adjunct writing professor at Mitchell Hamline School of Law, has written for a wide variety of publications, and makes it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at jon_wolf@hotmail.com.

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