WASHINGTON (Reuters) – At the confirmation hearing of US Secretary of the Treasury Janet Yellen on Tuesday, she nodded to the need to put federal debt on a ‘sustainable’ path, at least eventually.
However, her more elaborate comments in defense of President Joe Biden’s $ 1.9 trillion spending plan for the coronavirus reflected a steady shift in economists’ thinking about the mountains of public debt in the developed world, which has been going on for a decade and its origins. finds in the near collapse of the eurozone.
Forget the loan amount, Yellen, a former Federal Reserve chairman, told members of the Senate Finance Committee. Instead, focus on the interest rate being paid and the returns it will generate, an approach that claims the country’s future economic potential could borrow more money today and seems less formidable about its roughly $ 26.9 trillion in U.S. IOUs .
“The debt interest burden as a share of (gross domestic product) is now no higher than it was before the 2008 financial crisis, despite our debt escalating,” said Yellen. “To avoid doing what we need to do now to address the pandemic and the economic damage it is causing would probably leave us in a worse place … than taking the necessary steps and doing that through financing with a deficit. “
Federal government interest payments are now close to $ 600 billion a year, but historically low global interest rates have kept them roughly stable as a share of the country’s economic output since the 1990s.
That fact will be central when Congress debates Biden’s spending plan, and in particular will test whether Republicans remain willing to spend more to fight the pandemic as they take control of both the White House and Congress to the end. Democrats have lost.
On top of the more than $ 3.5 trillion largely borrowed last year to fund the coronavirus response, “when do we get to the point where the thing starts to collapse? That’s what really worries me and nobody really talks about it in either side anymore, ”said Senator John Thune, a South Dakota Republican, at the Yellen hearing.
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In fact, at least among Yellen’s economic peers, there has been much talk of the issue since the financial crisis and recession of 2007 to 2009 and the troubles in the eurozone that followed.
When a group of smaller European countries, notably Greece, faced difficulties in repaying their debts in the aftermath of the global financial crisis, the larger members of the eurozone and the International Monetary Fund responded that those countries would make significant cuts to the government spending. .
Rather than driving a recovery, that hard dose of austerity helped drive Greece into an even deeper hole, and in fact exacerbated its deficits.
In retrospect, the IMF said it was wrong. After extensive research, Olivier Blanchard, then chief economist of the IMF, came to the conclusion that public spending can generate disproportionate benefits, especially in times of crisis when general demand for goods and services is weak – as is the case today.
Fast forward a few years. Previously unorthodox ideas, such as modern monetary theory, which see a broader, stabilizing role for government spending, received increasing attention, and mainstream economists began to rethink their views on debt in more fundamental ways.
For example, Blanchard began to argue that when interest rates are below the growth rate of an economy – is the case in many developed countries – countries should not stop with well-thought-out public investment.
Republican economists like Michael Strain have argued that US credit levels cannot be ignored forever, but are a long-term problem that should not be detrimental to a crisis response. Current Fed Chairman Jerome Powell, a deficit hawk when he worked on budget issues at a Washington think tank, has said the same.
Democrats like Jason Furman, chair of former President Barack Obama’s Council of Economic Advisers, have broadened the debate even further to frame the point Yellen made Tuesday: It’s about the cost of financing, not debt levels.
“There is no single measure that sums up our overall tax situation, but one measure that I think is useful to keep in mind is interest expense,” said Yellen. “What we’re seeing is that while the amount of debt to the economy is increasing, the interest burden isn’t.”
Reporting by Howard Schneider; Editing by Dan Burns and Andrea Ricci