Expected Interest Rate Hike Will Add $2 Trillion to the Deficit
Even after the federal government was piling up massive deficits under Presidents Barack Obama and Donald Trump (and with the approval of both parties in Congress) during the 2010s, there was an emerging perspective among respected economists that challenged the traditional understanding of when the government should borrow and when it should pay down its debts.
Traditionally, during good times like the country enjoyed in the last decade—solid if not spectacular economic growth, relative peace, and historically low interest rates that made it easy for consumers and governments to borrow—policy makers would look to reduce spending and pay off debt. But those low interest rates created a new temptation. Maybe the government should just keep borrowing even when times are good?
“Sorry, deficit hawks: low interest rates are here to stay,” Alan Cole, a former senior economist with Congress’ Joint Economic Committee, titled a post on his Full Stack Economics blog in August 2021. “Countries, especially those that issue their own currency, can take advantage of low yields and borrow much more money at much lower rates than ever before,” he wrote, noting that low interest rates had persisted throughout the 2008 economic collapse and the first year-plus of the pandemic. “This is our new normal,” he argued, and market forces that might cause interest rates to return to levels seen in the 1990s were not likely “at least not in the next few decades.”
Cole was hardly alone. Larry Summers and Jason Furman, top economic advisors to the Obama administration, published a paper in 2020 arguing that deficit concerns had hamstrung the federal government’s ability to accomplish big things. As long as the cost of serving the federal debt remains below 2 percent, they argued, policy makers should not be restrained by the “traditional ideas of a cyclically balanced budget”—the idea that borrowing should rise in bad times and subside in good. Jared Bernstein, then a senior fellow at the progressive Center on Budget and Policy Priorities and now a member of President Joe Biden’s White House Council of Economic Advisers, went a step further. In an October 2020 op-ed for The Washington Post, Bernstein argued that the “new dynamics” of debt opened not only economic opportunities but political ones. Democrats should embrace borrowing as a way to deliver for their constituents, Berns
Article from Reason.com