Tuesday, December 8, 2020

This Is More Important Than You Think

The deficit hawks, as noted here previously, will be back the microsecond Biden occupies the White House. And there is a real danger that austerity madness could return, as it did under Obama. But there is an important difference this time around. Obama-era madness was aided and abetted by the mainstream of center-left economics which had not yet moved away from its phobia of deficits and debt. But that has now changed, so Republican obstruction and opportunistic deficit-hawkery will lack the valuable ally it once had for stampeding the media and "responsible" opinion in its favor. That may make a real difference. Note that this write-up is by Charles Lane who typically strenuously mainstream in his opinions.
“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....
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."

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