A DEBT TO PAY: "Governments [according to Modern Monetary Theory] do not need to levy taxes in order to spend money. All they need to do to spend money is to print it."(ECONOMICS)

• Author: Jackson, Richard

THE FEDERAL DEBT held by the public already has passed 100% of gross domestic product, up from 35% in 2007 on the eve of the Great Recession. According to the Congressional Budget Office's long-term projections, which do not take into account the recently passed American Rescue Plan Act or other new spending initiatives being debated, it will hit 202% of GDP by 2051, nearly double the all-time record of 106% set at the end of World War II--and there are good reasons to believe that this is a low-ball projection.

At least as startling as the debt projections themselves is the fact that a number of economists seem to be unconcerned. We are not just talking about the adherents of Modem Monetary Theory (MMT), a fringe school of economic thought which claims that the national debt, whatever its size, never is a burden nor poses risks because the Treasury always can print more money to finance it. Even some prominent mainstream economists now are arguing that, in today's low-interest rate environment, the Federal government safely can continue to run large structural budget deficits. Indeed, in a complete inversion of deficit hawks' traditional warnings against excessive indebtedness, they even suggest that not to do so would be to rob future generations.

The truth is that the U.S. is on a perilous fiscal course. While the Federal government now may be able to borrow safely more than most economists once thought prudent, there is no way of knowing how much more. Proposals to up the ante on the national debt rest on a reckless gamble that interest rates will remain at historical lows, that the global appetite for U.S. debt will remain insatiable, and that, if these conditions change, the Federal government can be counted on to act in a timely fashion to rein in deficit spending. The costs of miscalculation are enormous, and could include a global financial crisis, a domestic fiscal crisis, and the long-term erosion of U.S. living standards.

Mainstream economists, including even the most-confirmed deficit hawks, always have acknowledged that there are legitimate and sometimes compelling reasons for the Federal government to borrow. It may make sense for it to borrow to make investments that are likely to yield a long-term return that exceeds the interest rate on the debt issued to finance them, especially when those investments are ones that the private sector is unlikely to undertake. It also may make sense for it to borrow during economic downturns in order to finance stimulus spending, prop up aggregate demand, and push the economy back toward full employment--and it certainly makes sense for it to borrow as necessary during national emergencies. War is the most-obvious example, but a global pandemic clearly qualifies.

Yet, most mainstream economists also caution that a large and growing national debt can pose serious dangers. For one thing, government borrowing can crowd out potentially more-productive private-sector investments in capital markets, undermining long-term economic and living standard growth. For another, rising interest costs can crowd out spending on other priorities, including public investment from the Federal budget.

Capital market and budgetary "crowding out" are not the only dangers, however. If the demands of government borrowing become too great, it may trigger a spike in interest rates, further pulling down economic growth and pushing up interest costs. If creditors lose confidence in the sustainability of U.S. fiscal and economic policy or come to suspect that the government will tolerate higher inflation in order to erode the value of the debt, they may begin to dump it.

Since U.S. government debt plays a critical role in the stability of the international financial system, a large-scale selloff could trigger a global financial crisis. It also could trigger a domestic fiscal crisis if the government suddenly is forced to enact large tax hikes or spending cuts, perhaps in the midst of an economic downturn. One way or the other, it will be future workers and taxpayers who bear the costs in diminished living standards.

In short, conventional wisdom acknowledges that government borrowing has an important role to play in financing public investment, countercyclical spending, and national emergencies, but it also cautions that, beyond a certain level of indebtedness, the costs and risks of additional borrowing begin to grow rapidly. To be sure, that level is not permanently fixed in dollar terms or as a share of GDP, and a larger national debt may well be sustainable when interest rates are low and/or the rate of economic growth is high than when the opposite conditions prevail.

Until recently, though, most mainstream economists erred on the side of caution and counselled against running large budget deficits except during economic downturns or national emergencies--and...