Newly redesigned $100 notes lay in stacks at the Bureau of Engraving and Printing in Washington DC. Photo: Mark Wilson/ Getty /AFP.

With a Democrat in the White House, Republicans are worrying about the national debt, even though they didn’t squawk when it swelled by US$7 trillion during the Trump years. Prepare for a torrent of “debt spiraling out of control” rhetoric from the GOP’s debt and deficit hawks.

Until recently, I’ve been something of a debt and deficit hawk myself. In these columns in years past I’ve voiced concern as the debt-to-GDP ratio swelled. I’ve warned farmers and ranchers that fiscal austerity would follow, squeezing farm-program payments.

Last May, I became more dovish. With Covid-19 sabotaging the economy, I argued fiscal stimulus was never more needed and with interest rates approaching zero, the government could afford to borrow big, as debt service would be manageable.

Now two big-name Harvard economists have written a paper that dismisses hawkishness altogether. In “A Reconsideration of Fiscal Policy in the Era of Low Interest Rates,” Jason Furman and Lawrence Summers provide an innovative rationale for pushing the government-spending gas pedal to the floor.

Their argument has many moving parts but central to it is the idea that interest rates are likely to remain very low indefinitely, enabling the government to repay a much bigger debt than today’s without difficulty. They suspect there’s been a structural change in the economy that’s changed government’s challenge from balancing the budget to absorbing the world’s excess savings.

With interest rates at historic lows and likely to remain so, there’s an argument that governments can afford to service a bigger debt. Chart: Jason Furman and Lawrence Summers

Well-designed spending programs, they argue, will more than pay for themselves in faster economic growth. As long as the economy’s growth rate is higher than the interest rate the government pays, the burden of servicing a growing debt will be manageable.

Unsurprisingly, the paper has proved controversial. The authors served under Democratic presidents – Summers as secretary of the treasury in the Clinton administration and Furman as chair of the Council of Economic Advisors in the Obama administration.

To Republicans, the paper just invents complicated rationalizations for doing what Democrats always do – try to stimulate the economy with government spending and hope it pays for itself.

Republicans prefer to try to stimulate the economy with tax cuts and hope they pay for themselves. Or argue, as David Henderson of the right-leaning Hoover Institution did, that instead of the Furman-Summers prescription, “Those like me who want to increase economic freedom should loudly advocate reducing the deficit by cutting spending by enough to also cut taxes.”

Jason Furman speaks during a US House forum in 2017 in Washington. Photo: AFP / Zach Gibson / Getty Images

As a political independent I don’t share Henderson’s small-government bias, but that doesn’t mean I love big government. I’m for good government. Some government programs are well-designed and pay for themselves, like the interstate highway system. Others flop. I would be more supportive of Furman-Summers were I more confident that Congress will mostly fund winners.

I would also be more supportive were I convinced low interest rates really are here to stay. Should rates rise, a national debt that had looked easy to repay could become burdensome, requiring higher taxes, cuts in spending or both.

Has there really been a structural change in the economy that created a savings glut and lowered interest rates? Economist James Galbraith of the University of Texas argues there’s no evidence of a savings glut.

He agrees interest rates will remain low, even if Congress piles on more big deficits, but for a different reason: Federal Reserve Board policy, and the expectation by long-term bond investors that the Fed will continue on its current course.

Fed policy is a much less secure interest-rate anchor than is a structural economic change. If it’s fed policy holding rates down, bond investors could someday get the heebie-jeebies and push rates higher even if the Fed tries to hold them down.

Should that happen, Furman and Summers seem prepared to raise taxes to pay for the increased burden of debt service. “The United States,” they point out, “collects 31% of GDP in general revenue, well below the OECD average of 37% of GDP or the OECD maximum of 57% of GDP collected in Norway.”

The electorate would probably be less prepared to accept a tax hike.

Lawrence Summers, in Beijing, 1916. Photo: AFP: BELGA PHOTO / DIRK WAEM

These doubts aside, the Furman-Summers paper does make important points:

  • If the economy needs stimulus, the only way for the government to provide it is through fiscal policy, by cutting taxes or boosting spending. Monetary policy doesn’t work with short-term rates close to zero; rates can’t be reduced enough to have a stimulatory effect. As the cliche goes, the Federal Reserve is “out of ammo.”
  • While debt is a liability for the government, so is deferred maintenance. When interest rates are low, it makes sense to fill potholes now. Midwestern farmers could make a similar argument for repairing locks and dams.
  • Generally, governments can indulge in deficit spending without worrying about the debt if the spending is on investments with a good rate of return that, over time, increases economic growth. Many infrastructure investments will meet this test, as will at least some investments in children’s health and education.
  • And, yes, governments can afford to take on more debt when interest rates are low. “At interest rates prevailing in 1992, a country with a 60% debt-to-GDP ratio paid about 5% of GDP in interest,” Furman and Summers write. “Today, Japan with a 177% debt-to-GDP ratio is expected to pay 0.2% in interest and the United States with a 107% debt-to-GDP ratio for general government is expected to pay 2.0% of GDP in interest, with the real interest after accounting for inflation being negative or close to zero in both countries.”

What I take from this paper, then, is that Americans should worry less about the national debt and more about whether proposed government programs make sense. And hope – as farmers and ranchers no doubt do – that interest rates stay low.

Former longtime Wall Street Journal Asia correspondent and editor Urban Lehner is editor emeritus of DTN/The Progressive Farmer. This article, originally published February 1 by that news organization and now republished by Asia Times with permission, is © Copyright 2021 DTN/The Progressive Farmer. All rights reserved.