 The era of deficit denial in Washington is over. In 2010, when Erskine Bowles and Allen Simpson were appointed to co-chair President Obama's Deficit Reduction Commission, This deficit and this debt is like a cancer, and it's going to destroy our country from within. The Congressional Budget Office offered two projections on the future of American debt. Either the balance sheet was on course to look like this, or this, and this is what actually transpired. And the CBO's latest projection looks like this. And in 11 years, America has made no meaningful structural reforms to deal with the problem. Congress has doled out more than $4 trillion in response to the COVID-19 pandemic. The U.S. national debt held by the public is currently almost $22 trillion, or about $67,000 per citizen, surpassing the country's annual GDP for the first time since World War II. On the current path, the CBO predicted in March that the debt would grow to 102 percent of GDP by the end of 2021, to 107 percent by 2031, and 202 percent by 2051. But those estimates came before President Biden signed the $1.9 trillion stimulus bill, which made the long-term budget outlook even worse. By 2051, the CBO has predicted that the federal government will be spending more than a quarter of its annual budget just to pay interest on the principle. What is the risk to the U.S. economy? Fiscal hawks have been sounding the alarm about rising debt levels for decades. But their nightmare scenario of runaway inflation hasn't come to pass. How do we know if this time is different? In 2010, midway through the first term of President Barack Obama and on the heels of the Great Recession, the national debt was skyrocketing. It had exploded under President George W. Bush, who engaged the U.S. in two foreign wars and expanded eldercare entitlements, which are the biggest drivers of U.S. debt. Bush had the full backing of Republicans in Congress. Under his watch, the U.S. also bailed out big banks and entire industries. But it wasn't until a Democratic president championed an $831 billion federal stimulus that Republicans said they had finally seen enough. Citing a wave of public concern over debt levels that they said would hinder economic progress and stick future generations with the bill, the Tea Party rose to prominence. Republicans claim to be renewing their commitment to fiscal responsibility post Bush. Tonight there's a Tea Party title wave and we're sending a message to them. After Democrats were walloped in the midterm elections, President Obama established the Simpson-Bowles Commission, which concluded that disaster was inevitable unless we cut spending, raised taxes, and reformed entitlements. It's going to destroy our country from within if we don't face up to it and face up to it quickly. And Washington is learning that, and boy, they are learning it fast. The commission's recommendations were never adopted. Its critics say that that's a good thing. If the Simpson-Bowles had been adopted, we would have been chronically short of demand in the years that followed its adoption. The unemployment rate would have been higher, growth would have been lower. And when we went into the COVID crisis, we would have gone in with a lower inflation rate, lower interest rates, and thus even less scope for maneuver. Economist Jason Furman was chair of the Council of Economic Advisers under President Obama. He also authored a paper with his Harvard colleague and former Treasury Secretary Lawrence Summers questioning the past assumptions about national debt. He says the debt hawks of the 2010s were wrong to worry that America's balance sheet endangered the economy. As the industrialized world racked up debt through the 2010s, inflation and interest rates stayed low, contrary to the warnings of the doomsayers. This situation Furman and Summers say implies that the US government has much more leeway to borrow money, spend it on government projects, and grow its way out of the debt than fiscal hawks have led us to believe. What do you say to the critics who might respond going into the COVID crisis, we are now carrying a much larger debt load than we otherwise would have. So it would have been good to pay it down in relatively good times for when the emergency hits. There was nothing about the US debt level going into the COVID crisis that created any constraint on the resources available to fight the crisis. The United States was able to borrow an enormous amount, not just the United States. Japan, which has a higher debt level, was able to borrow an enormous amount. So I don't think there was any relationship between the debt level you went into the crisis and your ability to handle and manage the crisis. If you wait until the crisis comes, everything is much, much worse. John Cochran is an economist at Stanford's Hoover Institution. He's a fiscal hawk. He acknowledges that his doomsaying has been wrong for the past decade. But he says that doesn't mean he's wrong now. I live in California. We live on earthquake faults. We haven't had a major earthquake, a magnitude nine for about a hundred years. Oh, doomsayers worry about earthquake. Look, it hasn't happened in decades. What are you worried about? Why should we buy earthquake insurance? That's the nature of the danger that faces us. It's not a slow, predictable thing. It is the danger of a crisis breaking out. So I'm happy to be wrong for a while. But that doesn't mean that the earthquake fault is not under us and growing bigger as we speak. The Economist and New York Times columnist Paul Krugman wrote in a December piece entitled Learn to Stop Worrying and Love Debt that 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. Krugman is right that Republicans have been complicit in ballooning the debt going back to the Nixon administration. But scoring rhetorical points about GOP hypocrisy doesn't address the question of whether or not America's debt typically measured as a ratio of GDP is a cause for concern. The US reached these heights only once before at the end of World War II. The US had a hundred percent debt to GDP ratio because we borrowed a ton of money to save the world from fascism. Cochrane says today's situation is different. We stopped spending money. The war was over. And the US after World War II ran steady primary surpluses, actually, whereas right now we're talking about at least three to five percent primary deficits forever, plus stimulus in every crisis, plus Social Security and Medicare when it comes. But Furman and Summers say that if the government spends money borrowed at low interest rates on critical infrastructure, it will more than pay for itself in the long run. If it costs you, let's say, zero to borrow, then something does more than zero it's worth doing. It then needs to do a decent amount more than zero such that when you tax it, you tax only 20 percent of it, it pays itself back. There's a more limited set of things that do that. The clearest and most rigorous academic evidence is a number of investments in children like preschool and children's health. None of the current stimulus payments are going towards things that raise the economy's long run growth path. Cochrane agrees that in theory, government spending on certain projects can boost growth, but he's skeptical of the government's ability to spend the money wisely. And he says most of the money spent on COVID relief won't help the economy's long range prospects. And he's not sure Biden's two point two five trillion dollars for proposed infrastructure spending will either. It's a once in a generation investment. Unlike anything we've seen or done since we built the interstate highway system and the space race decades ago. Our government is not very good right now at investing wisely in things that are good projects. Let me point to the California high speed train, for example, that's going to connect Fresno to Bakersfield at about 60 miles an hour at a cost of 80 billion dollars and not one mile of track has been built yet. That's the kind of infrastructure our government tends to. I don't think our government has a very good capacity for noticing things that need to be built. Money for high speed rail was part of the 2009 $831 billion federal stimulus package. Ferman's co-author Lawrence Summers was Obama's chief economic advisor at the time and he called it a targeted, temporary and timely boost to the economy that would focus on shovel ready infrastructure projects. But the stimulus package failed to stop civilian unemployment from rising to 10 percent, the construction workforce from contracting by more than 14 percent and the economy from shedding more than seven million jobs in Obama's first term. I don't think it can spend money perfectly. Nothing's going to be as good as if I decided it all by myself. I'm just joking. You know, the question is, is it is it pretty good? And I think if you do a pretty good version of a preschool program, that's that's going to be worth it. I think if you do student loan debt relief, that's going to have a much harder time being worth it. Some economists, including Paul Krugman, said the 2009 stimulus didn't work because it was too small. Today's four point one trillion dollars in pandemic related spending is a test of this theory. It is an unprecedented sum. In current dollars, it is equivalent to what the federal government spent to both land a man on the moon and to build the entire interstate highway system multiplied by five. And that doesn't include the additional two point two five trillion dollars the Biden administration is proposing on new infrastructure spending. But recently, Ferman's co-author Lawrence Summers expressed concern that inflation actually could be a problem after the US spends trillions on fiscal stimulus. There's a real possibility that within the year, we're going to be dealing with the most serious incipient inflation problem that we have faced in the last 40 years. The stimulus was more money in 2021 than I think was warranted. I would have liked to have seen it spread out over time. I think the number could have been even larger if it had been spread out over time. I think it creates some risks, but I don't think that those risks are huge. And I think on balance, it's more likely that the higher inflation is good than that the higher inflation is bad. Ferman in Summers paper also expresses concerns about debt projections beyond 2030 absent social security and Medicare reform as baby boomers retire on mass. Simpson and Bowles recognize that the bill on elder care would eventually be the item to bust the budget. Every day, 10,000 people turn 65. Wake up. I think all else equal addressing entitlements sooner is better than addressing entitlements later. I'm comfortable doing it on the tax side. I understand others probably want to do it on the benefit side. And if I were them, I'd want to get started sooner too. Does advocating for more government spending and debt help economists gain access to power? The libertarian economist Murray Rothbard once wrote that when economists started telling politicians that it was the government's moral and scientific duty to spend, spend, and spend, they went from being the grouches at the picnic to in-house yes men. But Ferman says that unlike advocates of modern monetary theory, which posits that near unlimited government money creation and spending is possible without dire consequences, he recognizes that there are limits, but we're using the wrong metric to gauge the magnitude of the problem. I don't believe in MMT. I think there's a budget constraint. I completely agree with John about that. The question is where do you want to stabilize the debt? People used to think it should be 30% of GDP. Is that what we need to do in order to be safe? And I think if you're asking that question without looking at interest rates, then you're in danger of a very incomplete answer. Most people acknowledge that there's limits, but they envision slow, steady warnings that, you know, you'll see the problem coming and you'll have plenty of time to fix things. And I look through history and I notice that when things go wrong, they go wrong in a big crisis. Cochrane says he's worried that debt will be a drag on economic growth, but he's especially concerned that the U.S. could face a scenario similar to the sovereign debt crisis that hit Greece in 2010, which caused its economy to shrink by a quarter and unemployment to climb to 25%. Greece's fiscal position was admittedly different, but the country's meltdown shows the social and political consequences of a fiscal crisis. The state seized assets, banks limited ATM withdrawals, and there were food lines, anti-austerity protests, violence, and extremist political parties gained ground. A debt crisis that hits the U.S. would be an unimaginable catastrophe because Greece at least had Germany to bail them out and there is no one to bail the U.S. out. Governments that are undergoing a debt crisis grab money everywhere they can, so watch your wallet. Basically, the government will grab every scrap of wealth it can. It involves an economic catastrophe, of course. All those things that you count on coming from the government disappear all of a sudden. Taxes go up very sharply all of a sudden. Basically, say goodbye to your wealth and the economy collapses and the financial system collapses. Cochrane says it's not too late to avert a potential crisis. Lots of other countries are able to do this. Sweden recognized its socialism wasn't working and became a fairly hard-nosed country and the 1990s started growing. They reformed their welfare system. It's straightforward to do as economics. Functioning democracies are able to get together and see problems coming and fix them. We have been able to do so in the past. Let us hope that we can do so before it's too late. Cochrane says that in the meantime, if there's no political will to cut spending and slow down on borrowing, Treasury Secretary Janet Yellen should at the very least borrow long by taking a slightly higher interest rate for a longer-term loan. Then in the event of trouble, we don't have to pay more interest on the outstanding debt and that really diffuses the crisis mechanics. Are you going to be so greedy that you're not going to pay 1.5% interest rates in order to get rid of the possibility of a debt crisis for a generation? Seems like cheap insurance to me. Is there a point where taking on too much debt is an unacceptable risk? The United States isn't going to default on its debt. We borrow in our own currency, so there's zero default risk. There is definitely inflation risk if you borrow too much and can't pay it off. But it's not like you go from 1.5% inflation to hyperinflation in the blink of an eye. There's a lot of steps between here and there. And in the event that that risk materializes, we will have to very quickly sit down and figure out how to raise taxes or cut spending. Things always go boom all of a sudden. And so the key to fiscal management is to keep some dry powder around. Imagine if World War breaks out and we've already borrowed the 100% debt to GDP ratio that we ended World War II with. Once we're at 100, 150, 200, our ability to meet that next crisis with borrowing is gone. And then that next crisis is a catastrophe. These are investments we have to make. We can afford to make them. We put another we can't afford not to.