WASHINGTON (Reuters) – At the confirmation hearing of U.S. Treasury Secretary-General Janet Yellen noted Tuesday the need for federal debt to be put on a “sustainable” path, at least eventually.
His more extensive comments in support of President Joe Biden’s $ 1.9 trillion coronavirus spending plan, however, reflected a steady shift in economists’ thinking about mountains of public debt around the developed world. which has been underway for a decade and has its roots in the near collapse of the eurozone.
Forget the amount on loan, Yellen, a former chairman of the Federal Reserve, told members of the Senate Finance Committee. Instead, focus on the interest rate you pay and the returns you will generate, an approach that argues that the country’s future economic potential can support more debt today and that makes the approximately 26.9 trillions of US dollars from the IOUs seem less formidable.
“The interest burden on debt as part of the (gross domestic product) is no greater now than it was before the 2008 financial crisis, even though our debt has increased,” Yellen said. “Avoiding doing what we need to do now to deal with the pandemic and the economic damage it is causing would probably leave us in a worse place … than taking the necessary steps and doing so by financing the 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 part of the country’s economic output since the 1990s.
That fact will be the highlight when Congress debates Biden’s spending plan and, in particular, will see if Republicans are still willing to spend more to fight the pandemic now that they have lost control of the White House and Congress to Democrats.
In addition to the more than $ 3.5 trillion borrowed largely to fund the coronavirus response last year, “when do we get to the point where things start to collapse? That’s what really worries me and no one is talking about it in any of the parties anymore, ”Sen. John Thune, a South Dakota Republican, said at the Yellen hearing.
To get a chart on Can the United States “act significantly” on spending?
NO GREEK VOICE
In fact, at least among Yellen’s economic partners, much has been said about the issue since the financial crisis and recession from 2007 to 2009, and the problems in the eurozone that followed.
When a group of smaller European countries, particularly Greece, ran into problems repaying their debts after the global financial crisis, the response of the largest members of the eurozone and the International Monetary Fund was to insist that those nations would profoundly reduce government spending.
Instead of encouraging a recovery, this harsh dose of austerity helped drive Greece into an even deeper hole and in fact worsened its deficits.
In retrospect, the IMF said it was wrong. After extensive research, Olivier Blanchard, then chief economist at the IMF, came to the conclusion that government spending can have excessive benefits, especially in times of crisis when global demand for goods and services is weak. , as is the case now.
It moves forward a few years. Previously unorthodox ideas, such as modern monetary theory, which saw a broader and stabilizing role in government spending began to draw attention, and leading economists began to rethink their views on debt in a way that more fundamental.
Blanchard, on the other hand, began to argue that when interest rates are lower than the growth rate of an economy (the case in many developed nations), countries should not slow down well-conceived public investment.
Allied Republican economists like Michael Strain have argued that U.S. debt levels cannot be ignored forever, but are a long-term concern that should not detract from any response to the crisis. Current Fed Chairman Jerome Powell, a deficit hawk when working on budget issues in a Washington think tank, has said the same thing.
Democrats like Jason Furman, who chaired former Barack Obama’s Council of Economic Advisers, have further broadened the debate to frame the point Yellen made Tuesday: it matters borrowing costs, not debt levels.
“There are no metrics that summarize our overall tax situation, but I think it’s helpful to consider a metric that is the interest burden,” Yellen said. “What we’re seeing is that while the amount of debt relative to the economy is increasing, the interest burden isn’t.”
Reports by Howard Schneider; Editing by Dan Burns and Andrea Ricci