WASHINGTON (Reuters) – During the confirmation hearing of US Treasury Secretary Janet Yellen on Tuesday, she nodded at the need for federal debt to at least eventually become a ‘sustainable’ path.
However, her more extensive comments in defense of President Joe Biden’s $ 1.9 billion coronavirus spending plan reflect a steady shift in economists’ thinking about the mountains of government debt in the developed world that has been going on for decades. has in the near collapse of the eurozone.
Forget about the amount borrowed, Yellen, a former chairman of the Federal Reserve, told members of the Senate Finance Committee. Rather, focus on the interest rate paid and the returns it will generate, an approach that argues that the country’s future economic potential today could support more lending and make the approximately $ 26.9 billion in US investment firms less formidable.
“The interest burden on the debt as a part of (gross domestic product) is now no higher than before the financial crisis in 2008, despite the fact that our debt has increased,” Yellen said. “To prevent us from doing what we have to do now to address the pandemic and the economic damage it is causing will probably leave us in a worse place … than to take the necessary steps and do so. through deficit financing. ”
The federal government’s interest payments now amount to nearly $ 600 billion annually, but historically low global interest rates have kept it roughly stable as part of the country’s economic production since the 1990s.
That fact will come to the fore when Congress debates Biden’s spending plan, and in particular it will test whether Republicans are willing to spend more to fight the pandemic now that they control both the White House and Congress to the Democrats. lost.
On top of that, if we borrowed more than $ 3.5 billion to fund the coronavirus response last year, “when do we get to the point where things start to collapse? That’s what really bothers me and no one in any party talks about it anymore, “said Senator John Thune, a Republican in South Dakota, during the Yellen trial.
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DO NOT GO GREECE
In fact, at least among Yellen’s economic peers, there has been a lot of talk since the financial crisis and recession from 2007 to 2009 about the issue, and the problems in the eurozone that followed.
When a group of smaller European countries, particularly Greece, had difficulty repaying their debt in the wake of the global financial crisis, the reaction of larger members of the eurozone and the International Monetary Fund was to insist that the countries would cut government spending deeply. .
Instead of promoting a recovery, that hard dose of austerity helped drive Greece into an even deeper hole and actually exacerbate the deficits.
Afterwards, the IMF said it was wrong. After extensive research, Olivier Blanchard, then the IMF’s chief economist, finally came to the conclusion that government spending could bring exorbitant benefits, especially in times of crisis when total demand for goods and services is weak – as is now the case.
Fast forward a few years. Previously unorthodox ideas, such as Modern Monetary Theory, which sees a broader, stabilizing role for government spending, have begun to receive more attention, and mainstream economists have begun to reconsider their views on debt in more fundamental ways.
Blanchard has somehow argued that if interest rates are lower than the growth rate of an economy – as in many developed countries – it is the case that countries that do not think well should be sympathetic to public investment.
Republican economists like Michael Strain have argued that U.S. lending levels cannot be ignored forever, but that they are a long-term problem that should not hurt a crisis response. Current Fed Chairman Jerome Powell, a falcon when he worked on budget issues at a think tank in Washington, said the same.
Democrats like Jason Furman, who chaired former President Barack Obama’s Council of Economic Advisers, broadened the debate even further to highlight the point Yellen made on Tuesday – it’s borrowing costs, not debt levels, that matter .
“There is no single measure that summarizes our overall fiscal situation, but one measure that I think is useful to keep in mind is the interest burden,” Yellen said. “What we are seeing is that although debt is rising relative to the economy, the interest burden is not.”
Reporting by Howard Schneider; Edited by Dan Burns and Andrea Ricci