The Great Debt Debate

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. 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.” (…)

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.

Though open to these doubts, 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.

Urban Lehner can be reached at

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