DENVER- Economists are divided about when the next US recession will arrive, but they largely agree on this: the country will need to fight it with a massive fiscal program, and be ready to swallow deficits that may eclipse the trillion-dollar shortfall run by the Trump administration this year.
Past discussion has focused on the Federal Reserve as the more powerful first responder, and how rising US debt carries its own risks. Now talks are about how much money ought to be spent and where it should go – whether to infrastructure, programs to counter climate change or direct payments to households.
In the next recession, the United States should contemplate “a pretty generous package,” of perhaps as much as $1.7 trillion, double the amount approved for recession fighting in early 2009 during a steep downturn, Karen Dynan, a former Fed and Treasury official now at the Peterson Institute for International Economics, said in a recent discussion of the world economic outlook.
“We do have fiscal space,” she said.
This pro-debt attitude finds broad agreement among corporate economists, academics, think tank analysts, and private forecasters alike, and not just in the United States.
Japan, with debt twice the size of its economy, has had no trouble issuing more. While Japan’s situation is unique in some ways, even Europe’s more debt-wary nations may be opening to the idea that there are good reasons to borrow, particularly to meet emerging commitments to reduce reliance on carbon-based fuels, said Jean Pisani-Ferry, a senior fellow at Bruegel, a European think tank.
Fighting climate change “may be an excuse for fiscal action” in countries that would be wary of spending just to boost short-term consumption, he said.
The shift in tone on government debt comes as Europe is facing a possible recession, China’s economy has ebbed, and concern is rising about a possible US slowdown. An ongoing US-China trade war, meanwhile, may lead to a long and costly adjustment to a less globalized system.
The consensus that major world governments can borrow more is driven by a simple fact: over a period of time when the United States was running up a trillion dollar deficit, the Fed was tightening policy and the US economy was growing faster than expected, interest rates on US Treasury bonds remained low – and even notched some new records.
That has led to a broader rethink about how much debt countries like the United States can safely take on, particularly now that long-term trends such as population aging are thought to be a permanent anchor on interest rates. Since older people save more and are more averse to debt, the argument goes, the supply of global savings will rise and demand for credit will drop, thus lowering the cost of borrowing.
Couple that with tepid inflation – and the fact that trillions of dollars in central bank bondbuying in recent years failed to generate much of it – and there seems little reason to think the United States is facing any imminent “fiscal cliff.”
“This is the demographic point. We are going to be close to the zero lower bound (on interest rates) forever,” a fact which gives central banks less room to boost the economy through traditional rate cuts, but also gives more room for government to borrow, said Julia Coronado, a former Fed staffer and founder of Macropolicy Perspectives consultants.
US debt in relation to the size of the economy “is going up no matter what…You can see politically it is going to happen,” she said, with no strong constituency in either major party arguing for aggressive short-term spending control. When the United States saw its spotless credit rating downgraded amid a political impasse on the debt ceiling in 2011, and interest rates still fell, “a bunch of light bulbs went off in a bunch of politicians’ heads…It is like magic money.”
