Debt without consequences: Despite spiraling debt, interest rates are historically low and economic expansion in record territory
- April 1, 2020: Vol. 7, Number 4

Debt without consequences: Despite spiraling debt, interest rates are historically low and economic expansion in record territory

by Paul Fiorilla

With the U.S. economy extending its growth streak past a decade, and recession forecasts getting pushed back to 2021 and beyond, it’s easy to lose sight of potential long-term headwinds. However, that doesn’t lessen the importance of issues such as the rising federal budget deficit, weak productivity and labor force growth, and climate change.

Most economists take a benign view of growth, even as the coronavirus increasingly is creating turbulence in the financial markets. The outlook for commercial real estate, which is dependent on the health of the economy, remains largely bullish although concerns exist about potential headwinds such as retail store closings, a potential slowdown in exports, softening demand for office space and difficulty building affordable housing.

The Congressional Budget Office — reflecting the moderate-growth consensus — projects GDP to rise 2.2 percent in 2020 and continued gains near the 2 percent range for the next decade. Only 13 percent of economists surveyed by the National Association of Business Economics expects a recession in 2020, and half say there will be no recession until 2022 or later.

The CBO is also forecasting that unemployment rates will remain low, climbing from below 4 percent today to about 5 percent in 2025 before gradually dropping again through the rest of the decade. At just over 3 percent, wage growth is at its highest level since 2010 and the biggest gains are coming from workers in the lowest wage segment, according to CBO director Phillip Swagel. The CBO also forecasts inflation to remain very close to the Federal Reserve’s 2 percent target range for the next decade.


So why worry? Persistently high deficits in the federal budget, for one thing. The CBO projects cumulative federal budget deficits of $12.4 trillion between 2020 and 2029, which is “uncharted territory” because the growing deficits are happening during the largest expansion in history, says Keith Hall, former CBO director, now a professor at the McCourt School of Public Policy at Georgetown University.

Speaking on a panel at NABE’s Annual Economic Policy Conference, Hall noted the federal government will spend 30 percent more than the revenue it takes in this year. And it will get worse. The federal government debt as a share of GDP is currently about 80 percent, the highest since World War II, and is projected by the CBO to reach 180 percent by 2050. Under current law, the CBO forecasts that in 2030 federal spending will encompass 23.4 percent of GDP while revenue will be at 18.0 percent. The 5.4 percent gap between outlays and revenue would be the largest ever.

The biggest growth in outlays will come from major health care programs, rising to 7.0 percent of GDP in 2030 from 5.4 percent in 2020; Social Security, rising to 6.0 percent of outlays in 2020 from 4.9 percent in 2020; and net interest on the federal debt, which will grow to 2.6 percent in 2030 from 1.7 percent today. In order to keep the deficit from mushrooming further, both mandatory and discretionary spending programs are likely to be cut, according to CBO projections.

Mainstream economists see the rising deficit as a challenge because it creates constraints on the government to focus on more productive expenditures, that the interest payments will ultimately become burdensome, and that the competition to borrow with private capital will eventually drive up interest rates. “We have to take seriously the trajectory of the federal deficit,” said Douglas Holtz-Eakin, president of the American Action Forum and former CBO director. The deficit is “crowding out discretionary spending and things where we invest in the future.”

Said Hall: “We’re making a choice to not deal with the debt, the deficit ... If not now, when is the right circumstance? We’re waiting for a crisis, then we will have to implement draconian policies.”


Yet there is a growing movement among economists, known as modern monetary theory, to downplay or even dismiss the importance of deficits. Asked about the relevance of deficits as part of a different NABE panel, Stephanie Kelton, professor of public policy and economics at Stony Brook University, said she only views government debt in descriptive terms. “The national debt for me is nothing more than the amount of dollars spent by government and not taxed, currently held in U.S. Treasuries,” she said.

Kelton noted that although economists warned for years that a growing federal deficit would push interest rates higher, rates have fallen as the deficit grows, because rates are controlled more by the Federal Reserve than market forces. Modern monetary theorists such as Kelton advocate that it is more important that the government balance sheet be used to fund stimulative programs than to worry about debt.

Modern monetary theorists have proposed the federal government create a full employment program that funds locally administered jobs. Federal spending would increase in downturns as people lose jobs, but the program would allow them to retain skills and enable the economy to recover more quickly. Kelton said the model for a full employment program predicts that it would increase the deficit by a relatively modest 1.5 percent and could create 4 million private sector jobs.

Speaking on a different NABE panel, Jason Furman, professor of economic policy at the Harvard Kennedy School and former chair of the Council of Economic Advisers under President Barack Obama, took a middle ground on the deficit issue. Furman said that for years he had participated in “pious declarations” that deficits would stifle economic growth, but he noted the experience of the recent past has shown that the truth is more nuanced.

Furman observed that deficits have proven disastrous in some countries, while others have high levels of government debt-to-GDP with seemingly no ill effects. “Modern monetary theory has found a timeless truth — you have to think situationally,” he said. “If [federal] debt stabilizes at 100 percent of GDP, there is almost no conviction anymore that’s a problem.”


Paul Fiorilla is director of research for Yardi Matrix.

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