Amid all the wild swings in U.S. politics over the past decade, one thing has remained constant: the GOP position on government debt. The party considers high levels of debt an existential threat — if a Democrat is sitting in the White House. If a Republican president presides over big deficits, well, as Donald Trump’s budget director reportedly told supporters last year, “nobody cares.”
So it’s a completely safe prediction that once Joe Biden is sworn in, we will once again hear lots of righteous Republican ranting about the evils of borrowing. What’s less clear is whether we’ll see a repeat of what happened during the Obama years, when many centrists — and much of the news media — both took obvious fiscal phonies seriously and joined in the chorus of fearmongering.
Let’s hope not. For the fact is that we’ve learned a lot about the economics of government debt over the past few years — enough so that Olivier Blanchard, the eminent former chief economist of the International Monetary Fund, is talking about a “shift in fiscal paradigm.” And the new paradigm suggests both that public debt isn’t a major problem and that government borrowing for the right purposes is actually the responsible thing to do.
Why are economists thinking differently about debt? Part of the answer is that we’ve discovered some things about how the world works; the rest of the answer is that the world has changed.
It made some sense, nine or 10 years ago, to worry that the financial crisis in Greece was a harbinger of potential debt crises in other countries (although I never bought it). As it turned out, however, the full list of countries that ended up looking like Greece is … Greece. What briefly seemed like a spread of Greek-style problems across southern Europe turned out to be a temporary investor panic, quickly ended by a promise from the European Central Bank that it would lend money to cash-short governments if necessary.
In other words, those dire warnings we used to hear (and will soon be hearing again) that America faces imminent disaster once government debt crosses some red line were always misguided. We weren’t and aren’t anywhere close to that kind of crisis and probably never will be.
But what about the longer term? Doesn’t debt impose a burden on future generations, who will have to spend money paying interest that could have been put to better uses?
Here’s where it becomes crucial to realize that the world has changed: Interest rates are much lower than they were in the past, and all indications are that they’ll stay low for years to come.
One key indicator is the real interest rate on long-term government bonds — the interest rate minus inflation, which is a better measure of true borrowing costs than the headline rate. The real rate on 10-year bonds averaged around 4% in the 1990s; it has been generally less than 1%, and sometimes negative, for the past decade.
Why are interest rates so low? That’s a longish story, probably mainly involving demography and technology. Basically, the private sector doesn’t seem to see many opportunities for productive investment, and savers who have no place else to go are willing to buy government debt even though it doesn’t pay much interest. The important point for current discussion is that government borrowing costs are now very low and likely to stay low for a long time.
As a result, the burden of debt — which was always exaggerated and was misunderstood in any case — isn’t what it used to be. One measure of how much things have changed: On the eve of the pandemic, federal debt as a percentage of gross domestic product was twice its level in 2000. But federal interest payments as a percentage of GDP were actually down.
The bottom line is that government debt just isn’t a major problem these days. Which brings us back to the politics.
Biden has promised to “build back better,” a slogan that translates into proposals to spend big sums on infrastructure, climate policy, education and more, largely with borrowed money. And that’s very much the right thing to do; business may see only limited returns to investment, but we’re in desperate need of more public investment, broadly defined (for example, including spending on children).
Yet Republicans will surely oppose these proposals. Indeed, if they hold the Senate, they may well do what they did to Barack Obama and try to force Biden to cut spending. And they’ll justify their intransigence by railing against the evils of debt.
So how should we push back against this predictable attempt to stonewall the Biden agenda? It will be tempting to emphasize Republican hypocrisy. But the biggest problem with the debt-scare politics we all know is coming isn’t the hypocrisy or the bad faith; it’s the fact that it’s wrong on the merits.
For given what we’ve learned and where we are, it’s clear that the U.S. government should be investing heavily in the nation’s future and that it’s OK — indeed, desirable — to borrow the money we need to make those investments. That is, to act responsibly, we must stop worrying and learn to love debt.
Paul Krugman, winner of the Nobel Memorial Prize in Economic Science, is an Op-Ed columnist for The New York Times.