Why Economists Don't Care About the Debt

Summary

The U.S. holds the world's largest national debt, yet economists like Larry Summers and Olivier Blanchard argue it may not be as detrimental as traditionally thought. With historically low interest rates, the cost of servicing the debt remains manageable. Modern Monetary Theory and insights from the Great Recession suggest that countries with low rates can afford to spend more without severe repercussions. The Biden administration's economic recovery strategy reflects this thinking, embracing a calculated risk with trillions at stake.

Takeaways

• 💼 The U.S. has the highest national debt in the world, which has reached an all-time high even when compared to the size of its economy.
• 📉 Despite concerns, the U.S. did not experience a spike in interest rates or inflation after significant borrowing and spending post-Great Recession.
• 📉 Interest rates have remained low, suggesting that the cost of servicing the national debt has not increased significantly.
• 💡 Larry Summers and Olivier Blanchard proposed that if economic growth exceeds the interest paid on debt, more borrowing could be beneficial.
• 🌐 The idea that federal debt isn't always detrimental is gaining traction, influenced by Modern Monetary Theory.
• 📊 The focus should be on the interest paid on debt as a percentage of GDP, which has remained low despite increasing debt.
• 💵 Countries with low interest rates, like the U.S., can afford to spend more and run larger deficits without severe negative consequences.
• 🌟 U.S. Treasury Secretary Janet Yellen has testified that the relative interest payments on debt have not increased, suggesting it's a more meaningful metric.
• 🚀 The Biden administration is taking a calculated risk in economic recovery, betting on large-scale spending to stimulate growth.
• 🌐 The global financial system is built around borrowed money, and the current low-interest environment seems to be supporting this approach.

Q & A

What is the national debt?

The national debt is the total amount that a country owes to its creditors, which is the combined sum of all annual federal budget deficits.

Why is the U.S. national debt considered so significant?

The U.S. national debt is considered significant because it is the highest in the world and even when compared to the size of the U.S. economy, the debt to GDP ratio is close to record highs.

What was the concern after the Great Recession regarding the national debt?

After the Great Recession, there was concern that the rapid borrowing and spending by the U.S. government to revive the economy would lead to high interest rates, inflation, and potentially an economic collapse.

Why did interest rates and inflation not spike as feared after the government's spending?

Interest rates did not spike because they actually fell and continued to fall, remaining low. Inflation also did not take off, contrary to initial fears.

What was the criticism after the financial crisis regarding the government's response?

The criticism was that the government had not done enough and should have borrowed and spent more to speed up the economic recovery.

What question did Larry Summers and Olivier Blanchard ask at the 2017 conference?

They asked why not spend more money if the growth generated from borrowing is higher than the interest paid on that debt.

What is the core belief of Modern Monetary Theory regarding federal debt?

The core belief of Modern Monetary Theory is that federal debt isn't always bad and can be managed effectively, especially when interest rates are low.

Why has the cost of paying U.S. debt remained low despite the debt increasing?

The cost of paying U.S. debt has remained low because interest rates have stayed very low, making the debt more manageable.

How does the Biden administration view the national debt in terms of economic recovery?

The Biden administration views the national debt as a calculated risk, betting on large-scale spending to aid economic recovery, based on the premise that low interest rates make it affordable.

What metric does U.S. Treasury Secretary Janet Yellen consider more meaningful for assessing the burden of debt?

Janet Yellen considers the interest payments on the debt relative to GDP as a more meaningful metric for assessing the burden of the debt on society.

How does the current low-interest-rate environment affect the strategy for government borrowing?

The current low-interest-rate environment allows for more government borrowing and larger deficits without severe negative consequences, as the cost of servicing the debt remains manageable.