Yellen’s call to “act at sea” reflects much thought on large public debt

WASHINGTON (Reuters) – At a confirmation hearing, US Treasury Secretary Janet Yellen confirmed on Tuesday that she had signaled the need for the federal debt to be put on a “sustainable” path, at least eventually.

However, his broader comments on defending President Joe Biden’s $ 1.9 trillion coronavirus spending plan reflect a steady shift in economists’ thinking about the mountains of government debt in the developed world that have been underway. deployment for a decade and has its roots in the near collapse of the eurozone.

Forget the borrowed amount, said Yellen, a former chairman of the Federal Reserve, members of the Senate Finance Committee. Instead, focus on the interest rate paid and the returns it will generate, an approach that argues that the country’s economic potential can support more lending today and makes about $ 26.9 trillion in US IOUs they seem less formidable.

“The debt interest burden as a share of (gross domestic product) is no higher now than it was before the 2008 financial crisis, despite the fact that our debt has increased,” Yellen said. “To avoid doing what we need to do now to address the pandemic and the economic damage it is causing, it would probably leave us in a worse place … than to take the necessary action and do so by funding deficit. ”

Federal government interest payments are now nearly $ 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.

This will be the focus of attention as Congress debates Biden’s spending plan and, in particular, will test whether Republicans remain willing to spend more to fight the pandemic, now that they have lost control of both the White House and of Congress in front of Democrats.

Coming over 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 fall apart? That really worries me, and no one is really talking about it anywhere, “said Sen. John Thune, a South Dakota Republican, at Yellen’s hearing.

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In fact, at least among Yellen’s economic colleagues, much has been said about this issue in the financial crisis and recession from 2007 to 2009, as well as the problems in the euro area that followed.

When a group of smaller European countries, especially Greece, faced debt repayment problems following the global financial crisis, the response of senior members of the eurozone and the International Monetary Fund was to insist on those nations reducing deeply government spending.

Instead of encouraging a recovery, that harsh dose of austerity helped lead 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 the IMF’s chief economist, finally concluded that government spending could have oversized benefits, especially in times of crisis when overall demand for goods and services is weak – as is now the case. .

Fast forward a few years. Earlier unorthodox ideas, such as modern monetary theory, which see a broader and stabilizing role for government spending, have begun to gain more attention, and mass economists have begun to rethink their views on debt in more fundamental ways.

Blanchard, one, began to argue that when interest rates are lower than the growth rate of an economy – the case in many developed countries – countries should not retain well-designed public investment.

Allied Republican economists such as Michael Strain have argued that US lending levels cannot be ignored forever, but they are a long-term concern that should not diminish any response to the crisis. The current president of the Fed, Jerome Powell, a hawk with a deficit when working on budget issues at a think tank in Washington, said the same thing.

Democrats like Jason Furman, who chaired former President Barack Obama’s Council of Economic Advisers, have broadened the debate even further to frame the point Yellen made Tuesday – it matters borrowing costs, not debt levels.

“There’s not a single value that sums up our overall tax situation, but I think it’s helpful to keep in mind an interest burden,” Yellen said. “What we see is that, although the amount of debt to the economy is growing, the interest burden has not increased.”