Yellen’s call to ‘act big’ has long reflected a rethinking of the government’s huge debt

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

His more extensive comments in defense of President Joe Biden’s $ 1.9 trillion coronavirus spending plan, however, reflected a constant shift in economists’ thinking about the mountains of government debt across the developed world that is in a decade ago and has its roots in the near collapse of the eurozone.

Forget the amount being lent, Yellen, a former Federal Reserve chairman, told members of the Senate Finance Committee. Instead, focus on the interest rate being paid and the returns it will generate, an approach that argues that the country’s future economic potential can support more loans today and makes it around $ 26, 9 trillion US IOUs seem less formidable.

“The debt interest burden as a portion of (gross domestic product) is not greater now than it was before the financial crisis in 2008, despite the fact that our debt has increased,” said Yellen. “Avoiding what we need to do now to tackle the pandemic and the economic damage it is causing would likely leave us worse off … than taking the necessary measures and doing so by financing the deficit.”

Federal government interest payments are now almost $ 600 billion a year, but historically low global interest rates have kept them virtually stable as a share of the country’s economic output since the 1990s.

That fact will be in evidence when 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 the White House and Congress to Democrats.

Adding to the more than $ 3.5 trillion borrowed in large part to finance the response to the coronavirus last year, “when do we get to the point where it starts to collapse? This is what really concerns me and no one is talking about it in either party anymore, ”Senator John Thune, a Republican from South Dakota, said at Yellen’s hearing.

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In fact, at least among Yellen’s economic peers, much has been said about the issue since the financial crisis and recession of 2007 to 2009, and the problems that followed in the eurozone.

When a group of smaller European countries, Greece in particular, struggled to pay their debts after the global financial crisis, the response of the larger members of the eurozone and the International Monetary Fund was to insist that these nations make deep cuts in government spending. government.

Rather than promoting a recovery, this severe dose of austerity helped push Greece into an even deeper hole and, in fact, worsened its deficits.

In retrospect, the IMF said it got it wrong. After extensive research, Olivier Blanchard, the then chief economist at the IMF, concluded that government spending can have exaggerated benefits, especially in times of crisis when general demand for goods and services is weak – as is the case now.

Move forward a few years. Previously unorthodox ideas, such as Modern Monetary Theory, which see a broader and stabilizing role for government spending, began to receive more attention and mainstream economists began to rethink their views on debt in more fundamental ways.

Blanchard, for example, began to argue that when interest rates are lower than an economy’s growth rate – the case in many developed countries – countries should not contain well-designed public investments.

Economists allied to the Republican, like Michael Strain, have argued that US debt levels cannot be ignored forever, but are a long-term concern that should not undermine any response to the crisis. Current Fed Chairman Jerome Powell, a deficit hawk when working on budget issues at a Washington think tank, said the same.

Democrats like Jason Furman, who chaired former President Barack Obama’s Council of Economic Advisers, further expanded the debate to fit Yellen’s argument on Tuesday – what matters is the costs of borrowing, not debt levels.

“There is no single metric that sums up our overall fiscal situation, but one metric that I find useful to keep in mind is the interest burden,” said Yellen. “What we are seeing is that, although the value of the debt in relation to the economy is increasing, the interest burden has not increased.”