Policymakers Must Not Ignore the Long-Term Debt Outlook
For Immediate Release
Today, Larry Summers and Jason Furman released a new working paper, A Reconsideration of Fiscal Policy in the Era of Low Interest Rates, which argues for reduced concern over today’s near-record debt-to-GDP levels. We agree with much of what Summers and Furman suggest, including the need to avoid near-term austerity and enact further economic relief, to offset permanent tax cuts or spending increases under pay-as-you-go rules, and to stabilize the debt-to-GDP ratio in part by securing major trust funds.
However, Summers and Furman are overly dismissive of the very real risks and costs associated with a high and rising national debt.
The following is a statement from Maya MacGuineas, president of the Committee for a Responsible Federal Budget:
Debt is now larger than the economy for the only time in our history outside of World War II, and its slated to double over the next three decades. As a result, the Congressional Budget Office has estimated the economy will grow 20 basis points slower each year, income per person will be $6,300 lower by 2050, and interest will be the single largest federal program by the mid-2040s.
The focus right now must be on fighting the pandemic and supporting the economy; now is not the time for austerity. But our current path is clearly unsustainable and cannot continue indefinitely.
Furman and Summers argue against focusing on debt-to-GDP, the metric used by economists and scorekeepers around the world to measure fiscal burden. Yet the alternatives they put forward understate the risk associated with high debt. Even a 1% increase in interest rates, for example, would increase debt by more than $3 trillion over the next decade and almost 70 percent of GDP by 2050. With constant new borrowing and debt roll-over, interest costs can rise quickly, while debt can only be controlled slowly.
Lower interest rates do give us more space to borrow for near-term needs, and we should use that space to combat the current crisis. But the last thing we need to do is give politicians even more excuses to run up the credit card in the coming decades. That would be a recipe for slower growth, weaker standing in the international arena, and fewer resources for true spending needs.
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