 Welcome to the next episode of Debt Talks, a series by the Private Debt Initiative of the Institute for New Economic Thinking. I'm Orat Shilrik, I'm a fellow of INET and we have a great panel today to discuss a question that makes the headlines almost every day. A trillion here, a trillion there, fiscal policy is back with a vengeance, austerity is out, it's so yesterday. But we want to ask the question, how much is too much? How much space do we have in terms of with regard to public debt? And we want to talk both about the short run, the short term. We want to discuss how fiscal policy has been a very powerful policy tool to stabilize the economy in the pandemic and to hopefully generate a v-shaped recovery. But we also want to look at the long term, we want to ask the question with interest rates low and the challenges so large, thinking about climate change and digitalization and other changes in the economy. What role should government play and how much space do we have for public investment? And how do we make sure that the public spending ends up in the places we wanted to end up in? To discuss this, we have three, I couldn't be happier to have three amazing panelists. We have Claudia Sam, she is a senior fellow at the Jane Family Institute and a former Federal Reserve economist. Welcome, Claudia. Very happy to have you here. We also have Rudi Gabbachman, the Step on Family College Professor of Economics at the University of Notre Dame. Rudi, thanks for joining us. And last but not least, Ludwig Straub is a professor of economics at Harvard University and all of them together will discuss the question, public debt, how much is too much? We'll start as usual with a short introduction by the panelists that give their opening statements. And at the end of our discussions and the end, we will have a Q&A. I will weave in the questions from both our panelists and the audience into the debate. So please submit your questions anytime by clicking on the Q&A button. But now let's get started. Claudia, the floor is yours. What are your thoughts on the situation here? Great. Thank you for having me today. And I will affirm that this is an absolutely important question for us to be grappling with, what we, the federal debt spending, how much is too much? What should we be doing with it? And it's also a very urgent and lively question, as we all know. Like, this is very much in the policy debate. So where I want to start with my remarks is to underscore how much of a sea change we are undergoing in macroeconomic policy, or at least are poised to undergo. So I started the Federal Reserve in the summer of 2007 on the staff's macro forecast. That was an absolute birth by fire as a macroeconomist in the real world. And what was the most difficult for me as someone who followed consumer spending and household finances was watching the recovery grind on. And in particular, once we got to 2012, 2013, the United States Congress not only shut off, tapered off the aid that was going to say the jobless or to families in general, through tax cuts, they actually threw it in reverse and started to undergo a period of austerity. And I know that was not limited to the United States, but obviously that was as someone covering the US economy that was extremely apparent to me, and I could see in real time what that was doing to families. And so fast forward to COVID times. And I've had the privilege to work a lot with members of Congress advising them on fiscal policy. This is why I left the Fed. You're not allowed to do that as a Fed staffer. And I was so heartened, and I'm not sure everyone can appreciate this, the American Rescue Plan, so the large $2 trillion package that Congress enacted earlier this year, after Joe Biden became president. That was learning the lessons from 2013. That was going big with deficit spending. Now I was part of a very robust debate in the United States among economists as to whether that was too much, if it was not the right time. I argued very forcefully that it was, I mean backed up by data and research, and people can draw different inferences. I don't want to act like I have the crystal ball, but to me that was so important because that was the lesson learned. In the crisis last March, everyone's a Keynesian in a foxhole. It did not surprise me that the large package passed unanimously. It did not surprise me in December when the pandemic surged, that a trillion dollar package was passed. That $2 trillion in March of this year, that was to me the biggest sign we've had so far, that there is a sea change. Now that passed, in part it's being cannibalized right now with some of the unemployment benefits being shut off early, but I do think it's important to move past that package because that was, that's the macro stabilization package. That's likely the last one we will need, God willing, the pandemic gets under control. Now in the United States, there's a big debate about what we're called the American Jobs and the American Families Plan. A large part of this is infrastructure spending defined in many different ways. Then there's a piece that's really investment in families. We have a year of a child tax benefit that is essentially guaranteed income for kids and that could potentially get extended into the next like say five years. I'm not convinced we have a sea change until we see these next packages. I am very much on the side of the number, how many trillions we spend is not the important question. It's what we do with it. I do find the debate about debt frustrating in that it gets very fixated on debt to GDP, debt service to GDP. I think that's asking, I mean it's a question we need to ask, but I don't think that should be the question. I have a lot to say about what we should do with that. I will say last summer I had an opportunity to brief one of the congressional committees, and I came in with a PowerPoint. This was in the summer and I said, okay, five trillion. I had like a trillion for automatic stabilizers, a trillion for more of the, like another round of, not a trillion, but I had all these pieces and one of the Congress members raised his hand on Zoom and was like, that's only four trillion. And I was like, oh, just the other trillion, whatever you want to do. And I don't want to be glib about it, but I think there's so much need to improve the long run growth prospects of the US economy. And I think if you look around the world, there's a lot of opportunities as well. But that's kind of where I stand on this. So I'll leave it there for now. Wonderful. Thank you so much, Claudia. Lots to talk about in just a second, but I want to hand it over to Ludwig and ask Ludwig why this time is different, why this time we can spend more and why our budget constraints are maybe different. You just put out a couple of months ago a fascinating paper with your co-authors. Maybe you can weave that in and tell us if and if not, if we should be worried or how much space there is for us. Great. Well, thank you very much, Moritz, for bringing me on. And I will absolutely do that. I was thinking for my remarks, I would like to take a bit of a broader perspective, thinking of how we got where we are today and how that maybe informs what kind of fiscal policy we might need and what we can afford or not afford. Now, as you mentioned, this is all based on joint work I've done with my serial co-authors, Atif Mian and Amr Sufi, but I don't want to claim to speak for their views. So this is all my own views. So this narrative that we have worked out over a few papers now, it basically goes as follows. Any economy is made out of senders on the one hand and savers on the other. Spenders buy the products, economy produces, savers save, and through that they indirectly finance new investment. And we used to have some kind of balance between spenders and savers. And what was not too much spending or was not too little spending, not too much saving, not too little saving. But what we've seen more and more over the recent decades is that we have started to shift, see this bound shift, more and more and more towards savers. And this happened through many different channels. We highlighted the increase in income inequality in the US and other advanced economies. But you could also have other things that happen. For example, we have less progressive taxation now. We have increased saving more globally due to population aging or due to reserve hoarding by East Asian central banks. So ultimately this means in the world economy, but in the US also especially, there's more saving now than before and less demand by spenders. And to counteract that emerging imbalance, central banks of course have stepped in and they have started lowering interest rates. But guess what? We all know now that interest rates are pretty much as low as they can be. And that's a problem because then we lose the monetary authority in terms of stabilizing the economy very effectively. There's obviously unconventional tools as well, but I'm not going to speak to those, but there's definitely a severe limitation in that. And so this is where I see fiscal policy coming in. And this is why fiscal policy now is a way more prominent and important tool than what it used to be. So how can it mitigate that situation? So I think it can do one of two things. It can either fix the imbalance that caused the problem, or it can take advantage of it. So fixing the imbalance can come in many forms. For example, it can come in the form of more progressive taxation, more redistribution. It can come in the form of leveling the playing field, grading greater equality of opportunity, investing in schools and underserved communities. And a whole host of other projects and programs, some of which Claudia just mentioned, and she has way more expertise on the specific plans that we can use than I do. Now taking advantage of it can come in the form of borrowing at low interest rates. And we can use that borrow money to do all sorts of good things. For example, invest in infrastructure digitization, green technologies, etc. And so I think that then the question is, which of these two approaches do we want to take? And my personal opinion is that I think we probably want to take a combination of the two. But let me point out that we probably can't go all the way at fixing the imbalance and at the same time take full advantage of it. Just because when we fix the imbalance that will naturally already reduce the amount of saving that is done in the economy, and that will naturally bring interest rates back up, which of course reduces fiscal space, but it also increases monetary space. It brings us back to a more balanced economy, something that was maybe more the case a few decades ago before we had these increases and imbalances at these increases in income inequality, for example. So this is where I am right now in my thinking. So it's a more nuanced perspective of the current levels of fiscal space, which are certainly ample right now, because interest rates are very low. And I agree that there are many worthy projects to use it for. At the same time, I think we also need to always think about the imbalance. And I personally wouldn't want governments to rely too much on the imbalance without thinking about ways to actually attack the imbalance itself and reduce inequality and get us back towards a more balanced economy going forward. Thanks. Wonderful. Thank you, Ludwig. I'll pass over to Rudi, who has been active, also very active in the European debate about fiscal space, fiscal policy. Maybe with a question, Rudi, you have your time for your statement, but you had some ideas how we could make sure that maybe the borrowed money ends up in the right places. So maybe if you could weave that in, that would be, I think, very helpful to get the conversation going. But, Rudi, floor is yours, please. Thanks, Moritz. Yeah, I thought I'm going to bring in the German perspective, although I have lots to say to what Claudia and Ludwig said, but we can, I think, do that a bit later. But that's why you, I guess, invited me. So for the international audience, just a little bit of context, there is a federal election coming up in Germany, which is a bit unusual because it is really the first election where the reigning chancellor is no longer basically is no longer on the ballot. So this is a very, I think, the first, actually, for Germany. And so even the governing parties have to come up with new candidates, perhaps new programs. And so one of the debates that's currently raging might be a little bit too much, but they're going on in the policy sphere in Germany, and this will be watched at least, at least in the European context. But I imagine, maybe even in Washington, is what are we going to do with the famous German debt break? So what is that? It's a constitutional rule, which allows Germany only to have a debt deficit to GDP ratio in any given year of 35 basis points. This can be in cases of great calamities, like the COVID recession. This can be waived as constitutional rule with a simple majority, which I recently learned. I always thought it had to be a two third majority, but it's actually a simple majority. It can be waived. And so the question now is, how far is Germany going to go back to that sort of putting that rule back into place? Eventually they have to, unless they change the constitution, which I would say there's zero hope for political majority to do that, because to change the constitution, you actually need two thirds, a two third majority. So the question is now, how fast are we going to go away from this sort of little bit state dependent regime that they built into this fiscal rule, into this so-called debt break? That's a big debate. So the left in Germany would like to ideally get rid of it. That's sort of the ideal bliss points scenario for them. They pretty much know it won't be possible. And the conservatives would like to go back to it as fast as possible, if not next year, then certainly in 2023, at the very latest. And so that's the debate. And so the left is trying to come up now with the sort of things, sort of measures or ideas how to soften that blow. The idea that a bunch of things discussed is sort of try to convince the, if not abolish the rule, which again, I don't think is politically feasible or conceivable at this point, but let's keep the state dependent except the COVID regime, if you wish, for a few years longer. If that's not possible, try to create extra budget financing vehicles. Okay, that's legally possible. I mean, well, it's a legal gray zone. It's a constitutional gray zone. But that's what sort of practice and insight is in talking about now. And third, a third measure is sort of add another rule in the constitution or bring it back to so-called golden rule that allows you to increase your debt space whenever it is a government investment. So I see basically all of these ideas come with problems, especially the extra budget vehicles there so that it creates a lot of political and constitutional uncertainty because any person, any representative from a conservative party basically can go to the constitutional court. And as they say, in front of the court, you're on the hand of gods basically. So who knows how that's going to be and whether the constitutional court might then declare individual budget unconstitutional, which for the federal budget, I don't know that you want to have that. So I'm skeptical about that. I'm also skeptical about sort of a golden rule in the sense because it's just very hard to define what a government investment is. And in a sense, I mean, even if you can find the pragmatist definition, just taking what the very statistical agencies use it for, it's not clear that this is what you want for, right? I mean, leftists will make the argument that social spending is an investment in societal peace and societal cohesion. And why not? I don't think there's anything prima facie wrong with that argument. So it's a very dicey operation. And so on the other hand, I also think that the debt break is a bit stupid. It's economically stupid because it's not state dependent. It has a little bit of a state dependence in a building, which I just mentioned, namely the state dependence that when there's economic or other calamities like COVID, you can basically save it for some time. But that's about it. And sort of, so I would prefer, so I think, and Rubik mentioned this, I think economists would prefer a debt rule, if anything, to the extent that you want a debt rule for political economy reasons. And I think there are good reasons why you might want a debt rule is to make it more market dependent, to make it dependent on things like the normal growth rate, the normal interest rates, et cetera. So because it's market prices, the signal, that signal in some sense, the opportunity cost of public funds. And that's all not in the current debt break. And the economists would like to move into that direction. But then again, that sounds like a very complicated rule. And it's questionable that whether you want to write such a rule in the constitution. And therefore, I have come up, and maybe this is a crazy, not very thought out idea. But I've suggested what other economists have suggested previously, though this is not at all original. But I basically said, well, we have solved such a problem before, right? Where we have problems of time inconsistency when we give it to the sort of the short term representatives. And we let other, we hand that over to with a very limited mandate to a technocratic institution, namely the problem of monetary policy. That's exactly what we do there. We do not trust the parliaments to keep our price level stable. And so we hand it over to an independent technocratic institution with that very limited mandate. And I would argue broadly, the Western world has been very successful with that model. And I think we have a similar similar problem there. And so my suggestion was to think about, given that we can't write an explicit market-based rule into the constitution, how much the government would go into debt or into the deficit, the flow value of it, why not have a similar debt commission that basically adjusts the debt break in a market-based way with the things that a monetary policy would also do with a bit of a forward guidance, sort of what they think the deficit will be in the coming years. And then the rest stays with parliament in terms of how much they want to tax, how much they want to spend on what they spend, what kind of taxes. That stays all with the sovereign or the representatives of the suffering. But we have this independent commission that basically would take over what we currently have in the constitution. I thought this might be a centrist compromise in some sense, because we are not going to get entirely, and again, there's no political majority, two-thirds majority in Germany to get rid of the debt break altogether. And so this was an idea of sort of marginally improved the situation in Germany to make it a bit more market-based, a bit more rational. Because my leftist friends in Germany hate that idea too, because they think it's undemocratic and it's again too technocratic. And I'm sympathetic to that argument, but I'm thinking about sort of how can we get a marginal improvement to the current situation. I'll leave it at that. Maybe it's a crazy idea, I don't know. Thanks, Rudy. Claudia, what do you make of these? Rudy ran us through all these ins and outs of the constitutional rules, debt breaks, special purpose vehicles. Don't Americans care what the money gets spent on? Right. And I guess just a follow-up on Rudy's point, because I do think this idea of finding ways to at least align some of the fiscal policy programs, like the size and the timing of them to market conditions, as he said. I think this is an area that economists in conjunction with policymakers and policy experts should keep exploring. So I did quite a bit of work even before COVID on the idea of automatic stabilizers. Now in Europe and particularly Germany, your safety net isn't full of holes like the United States, right? So there are many more stabilizers in recessions that kick on, particularly through employers to keep employees on payroll that we don't have in the US. But the principle being that you kick out extra aid, extra relief through Congress in recessions. And so I had a particular proposal with stimulus checks, like get hundreds of billions of dollars out to people as soon as we think we're in a recession. And this was, I mean, there's a regularity in that as unemployment starts to rise, even just a little bit, at least this is extremely reliable in the United States. I haven't done all of the rest of the world, but we're in a recession. Like we're in the early months. And so that was part of my proposal to kick off stimulus checks in conversations. And there's legislation drafted for various news stabilizers. You kind of want something to rule them all. So like we do extra jobless benefits. And then those same proposals have a way to taper them off as unemployment gets back towards the recession. So there's a lot of programs you could put to that. I do to Rudy's point, like, okay, so technocrats like at central banks hate the idea of monetary rules, because like, oh, we want discretion, right? So the idea that you're going to be like, oh, but Congress, we're going to take yours, like this is not not going to pass. But I think the way that I have talked about these is that they could be more of guardrails, right? Like you could have certain programs or like Rudy said, this could kind of kick on, we're going to relax those constraints that we'd normally have. But then you governing fiscal body will have to think about, well, what do we do with that? And so I think there's some things in the United States because our safety net is so lacking that one should kick on as guardrails. But every crisis has its own flavor and its own kind of causing device. Recessions have a lot of similarities, but there always is something that the fiscal policymakers could react to. One other thing that I wanted to react to in Ludwig's conversation is it's so important that we get the fiscal policy working, right? I think for far too long, we leaned on central banks to stabilize the economy. And in the past, that was a problem because we know some choices by central bankers say to be extremely vigilant about inflation meant that we never, at least in the United States, got back to a full employment economy and income generates wealth and there are millions and millions of Americans that just don't see that dynamic. And so wealth and equality has risen dramatically in decades. And then now that we're in a low interest rate environment, interest rates falling for decades, the Federal Reserve, central banks in general, have much more limited tools because they push around interest rates, whether it's through explicitly through a Fed's fund rate or buying a bunch of securities. That's the action. And frankly, if you weren't buying something before COVID, it was not about interest rates were too high. So they have limited ability to stabilize. They can't send money out until we change the Federal Reserve Act. They can't send money out. And then in the current environment, some of their tools, the asset-backed purchases, there's research. It's not definitive, but that suggests that actually could be exacerbating some of these wealth inequalities. So I think just to go back to your point, this wasn't entirely your question, but the fiscal, we really got to figure out the fiscal because without it, we are not going to solve the inequalities. We're not going to get really robust recoveries. But I don't think we've figured this out either as an academic research community or politicians messaging this to people because for so long, the debt clock in the United States has been predominant in these discussions. Wonderful, Claudia. Ludwig, this is perfect because I wanted to bring the discussion towards something that Claudia said at the very beginning. You called it a sea change in macro policy. Fiscal policy is back. And I wanted to hear from all of you. Is this the dawn of a new era that maybe the last era started with Milton Friedman's presidential address in 1968, where the idea was that now we don't do stabilization with fiscal policy. It's messy. It's political. It's distributional. It's too late and not targeted enough. And so we went from monetary policy, but now we, to some degree, there are issues. Number one is that interest rates are very low. But also, Claudia mentioned distributional concerns, effectiveness concerns. So is fiscal policy going to be more of a, or maybe even the dominant or the much more important tool going forward? And I want to take one little twist because we have a very active Q&A. And people are asking, especially also about interest rates being low and Ludwig, for you, can we be sure that this is actually not the central bank? So maybe if you can weave it in, is the saving slot not real? Or is it the central banks having an effect on getting interest rates so well? So maybe you can get the sort of twist these two into one answer if you can. And then Rudy, if you'll retract. Yeah, Ludwig, please. Great. So a lot to respond to. So the way I would put it is, in some sense, I hope it's not the dawn of a new era because I hope we actually managed to fix some of the problems that got us here in the first place. And with, say, more equitable growth, pulling us in a direction where maybe interest rates naturally are going to rise because wealth is not so concentrated and savings not so concentrated. But I do fear that maybe the train has left the station and maybe we're not as bold and getting and fixing some of these problems. And in that point, I totally agree with everything that's being said that in that case, it is a bit of a dawn of a new era. In some sense, secular stagnation on steroids where interest rates are low for a long time. I don't think it's the central banks fault that they're low because the way I view the central bank, we have a former Fed economist here, so I'll let Claudia speak for herself on that. But I view the central bank as really, they have a mandate and they try to hit that mandate. And if there's a lot of saving and less spending going on, in some sense, they're forced to reduce and cut their interest rates and keep them low. So in some sense, it's a symptom of these underlying imbalances. Now, I agree with what Claudia said that monetary policy was never perfect to begin with. It does have distribution consequences. And I agree with you, even conventional monetary policy, it does create jobs that maybe help more adults at the bottom half of the wealth distribution, but it certainly also revalues assets that are predominantly held in the upper echelons of the wealth distribution. And maybe in the new era, monetary policy is not going to be so prominent anymore. And maybe we are going to steer towards, and I've thought about things like this debt commission type ideas as well. I agree with Claudia. It's probably hard to get there because for all sorts of constitutional reasons. But it does have some advantages. And I think those advantages are, of course, on the cyclical side, thinking about automatic stabilizers weren't fully aligned with both of you. But it also has advantages for investment. And I think that's going to be really important to see whether in Germany, where I'm not an expert on German economic policy, but what from what I hear is that there's a large investment gap that somehow needs to be closed. My parents still don't have super high speed internet. So if that investment gap needs to be closed and we can't use debt to finance that, that'd be pretty big limitation, I think, of economic policy. So I do hope they somehow find a way, maybe through Rudy's idea, maybe through another idea. Rudy, over to you. And I'm going to weave in another question from the audience to have this as interactive as we can. Namely, why can't the privates... I mean, if you subscribe to Ludwig's analysis of the savings but pushing interest rates low in the government, the public sector, can pick up the tab and use these savings and do useful things with them, why wouldn't the private sector step in? Well, I mean, okay, let me go to that first and then I'll try to kind of iterate backwards. So I mean, because if the description of what Ludwig, for example, said about the German economy is true, then what's missing, a lot of it is missing is classical public investment. So there's just certain things that is going to be difficult for the private sector to do, like high speed, building high speed internet, et cetera, et cetera. So that will be one thing. I mean, that seems to be where the dearth of investment is, although you could argue it's also... And I'll get back to that, that we have a low private investment in recent years. It's not that that is sort of through the roof or anything, but I'll actually get back to that. So the first thing I want to say, I want to totally agree with Ludwig on this idea, this almost a conspiracy theory out there that it's the central banks that because of their expansion and monetary policy, that they screw up the interest rates and that's why we are there. I think it's pretty clear what their mandate is. And if sample bank hadn't done what they had done, they would have not. And we can debate how well they achieved their price level inflation targets, but I think they would have missed much, much more. And I think that's, I think any economic theory I know basically confirms that. So I think this is a bit of a, frankly, almost a horseshoe, almost a horseshoe conspiracy theory brought from the left and the right, that it's the evil central bankers that do all this stuff. So I think the underlying causes are real. I'll question a little bit. Or the question is, so Ludwig emphasized a lot, one reason, namely inequality. Okay. And I'm not denying that. And I think the other reasons why, even if, say, even if inequality has nothing to do with interest rates, it's something we should be worried about for social cohesion reasons, for moral reasons, frankly. So that's all fine. I'm all for fixing inequality. But I think the jury is out and I myself don't have such clear view. The jury is still out. What sort of the main drivers? Is it inequality? Is it there's aging, right? And aging, for example, the government is here, the question is, when he says, let's fix it, the question is quantitatively, the underlying cause is even fixable by the government aging. I don't know. Population policy is mostly hasn't worked, I think in recent years, at least on the upside. Yeah, you can do China. You can, you can kind of suppress fertility, but I don't know that you can. And even China is aging now. So China is aging a lot. So anyway, that's not clear that the government can fix should fix. The other thing is that people side a lot is concentration, different sort of different production functions, right? Where, where sort of non physical capital is, it has become more important and network effects and sort of where we have sort of more natural monopolies. It's sure that the government can think harder about antitrust policy. But what if that is technological, but maybe that's not so easy, right? So again, it's not so clear that this is something the government can so easily fix. So so in that sense, it's, I guess I'm a bit less optimistic about the, the situation that the government that the government's really can can fix all the underlying causes, even if it could fix a little bit the inequality problem, which again, I'm all, I'm all for fixing. And then what was the, I think there was one more question, which I forgot. We talked about central banks. I mean, maybe, yeah, maybe a little bit more general about sort of the return of fiscal policy as a way. So I'm not going to go on the record of saying there's a new dawn for anything, because I'm surely you're going to be wrong about this, right? I mean, I have the, and I love Olivier, don't get me wrong, but I have his, I have his speech at the AA right before the crisis in mind, where he said, the state of macro is good. And, you know, you know, in this ironic situation, everything is peaceful. And, you know, and boom, something hit us big time, right? So I'm not, I'm not going to go into new dawn. I'm also, Claudia mentioned this, what people, especially in Germany is my, especially on the left in Europe and in Germany, that's where I followed the debate the most is kind of keep forgetting. They keep forgetting that Biden is in a sense a president with an extremely shaky parliamentary majority. In fact, he basically doesn't have one. Okay. And so as far as budget is concerned, everything in the United States is just like any other country. I mean, any other democratic country, you have to go to Congress. And, you know, how much of these Biden dreams, these Biden is actually going to go through Congress is completely up in the air. I mean, we had the jitters in the last two days that they had a, they had a compromise on a relatively modest infrastructure proposal, right? And so they had a bipartisan compromise, then Biden gafed a little bit, then all of a sudden it was up in the air. Now it seems to be back on track, but we still don't know whether they have the 10 Republican senators, what is munching on, and even more so with the stuff that they on top of that want to do alone in the fall through reconciliation, it's completely up in the air, whether we're going to get that. And until that is all done, I'm not going to call out a new era. I mean, normatively, I guess you could say that it is, and there I'm in agreement with Paul Ludwig and Claudia, that it probably should potentially, if we can't do the fixing, it probably should be a bit of a new era, but I'm less confident in the capabilities on the functionality of the political system, certainly in the United States. We'll see about Europe, but let's leave that for another day. Claudia, can I ask you, there is an argument in Europe that goes as follows. Fiscal policy has been very powerful in the pandemic, and we have seen what it can do, and large deficit spending actually works as a stabilization tool, and maybe even work better than what we did after the global financial crisis. And maybe we were too careful, but it is the austerity after the global financial crisis that put us in a situation to do all this fiscal stabilization policy now. So that was a necessary thing, because otherwise we would have run out of fiscal space. What do you make of this argument? Yeah, it's fascinating. First of all, I would never in a million years have come to this as the conclusion of the recovery, actually not just in the United States. I mean, Europe almost pulled us into a double dip by their mishandling, in my opinion, and the austerity that happened in the 2012-2013. That was pretty scary. But I ran into this argument at a different panel, a very senior German economist, former official, was the lesson from the Great Recession was you need fiscal space going into the next recession. I was like, wow. But we need to engage these arguments. And the thing is with one of the beauties of macro is we are never going to have the definitive proof as we only get to live in one world. We don't get to live in the world where we didn't do the austerity or we spent more. It's tricky to draw conclusions. I will say there was a fairly robust debate about deficit spending that has been really put to the side, I think broadly speaking. And there's a magical debt-to-GDP ratio that after which we're going to start seeing all kinds of problems in the economy. Reinhart and Rogoff were two that were very prominent with this. And frankly, we're well past those thresholds. And we saw some cases in Europe, particularly in Portugal, Italy, where that became such a driver of some of the even more severe austerity programs there. And frankly, that caused a lot more harm and hurt than it did good. And I mean, I was on a podcast with Ken Rogoff. And this was more of last year, we should be spending. He wasn't saying, oh, we're above 0.8 and now all bets are off. And so I think our thinking has evolved in terms of some magical number and that higher can be okay if the situation warrants it. There's still a very robust debate about when we should be bringing that debt back down relative to the size of the economy. And I guess I just say, looking at the Great Recession in the United States, that was a very long recovery. It was a very painful recovery. And it was clear in the moment, and especially afterwards, when we had such a long expansion and then unemployment got down to 3.5%, it was pretty clear that more government spending, especially effective spending earlier, much earlier than the recovery, could have got us back to a good place a lot faster. And there's so much evidence that the long-term unemployed, their careers have permanent hits, productivity look like crap by the time we got through the Great Recession. So I think there's real trade-offs in terms of prosperity and growth. But I hear the concern, like they're they're always trade-offs, right? Like we're economists, there's no free lunch. And the concerns that came about so frankly, vociferously, with the American Rescue Plan and the debates about, well, how much inflation can we handle? Olivia and I have had a robust debate about the quality of the official potential output estimates, right? Like we started pushing into territory that is very uncharted. And I think this is where now we do need to really figure out, can we do this? And this fiscal space argument is a little bit of a sideshow at the point. Like we're still trying to get out of this one, let alone preparing for the next one. So I have a hard time with that argument, but it needs to be engaged because it is out there and it is it's it's running around in Germany. And I'm given the political, the campaign, like this is going to be something that needs to be engaged with very thoughtfully. The last little plug I would put in on my C change comment, actually two little plugs. One is we absolutely in the United States are seeing a fundamental shift in the way monetary policy is done. Like moving to this average inflation targeting framework, which sounds like the most minor of imaginable changes relative to just inflation target. This is a big deal. Like if the Fed sees this through, you move from using forecasts of inflation, like we're getting close to 2%, which was absolutely the mantra in the recovery from the Great Recession. And they have fundamentally elevated the full employment mandate to be on par with the inflation mandate. And this is causing a lot of turmoil. Like this is a big change. Like there's a very strong academic community, even some people who wanted 3% to 4% inflation targets are not happy with the Fed and their current stance. And like it's really new. And it also puts fiscal and monetary policy rowing in the same direction. I do not think Janet Yellen or Jay Powell do anything to put the independence of the Fed at Jeopardy. But those two institutions have not been pushing in the same direction before. So there are risks there. And the last thing is change is messy. And one of my biggest concerns, and some may think I'm a contributor to this problem, is that we don't want to throw the baby out with the bathwater. And there's a lot of infighting about former consensus, new distributional models, more aggressive fiscal pilot, what's monetary, how are private markets handling this? And then we do have some very different ideas like modern monetary theory and proponents of basic income. And it's getting to be a crowded tent. And I'm a little worried that it's going to be last man or woman standing instead of what we need is picking the best of all of it and synthesizing it. But like that's really not how we roll. So I think that's for a successful shift, we have to have more of a collaborative space. So. Great, Rudy wants to come in. Rudy, while you answer, I'm going to ask you, should the ECB, do we need an employment mandate for the ECB pulling up in Claudia? But jump in. Go ahead. That's a difficult question. I'm going to sidestep now, maybe come back later. So by the way, just again, let's see whether the Fed is really going to see this through the average inflation targeting. So again, I'm always skeptical about these dawns of new eras. But anyway, I will say I'm completely with Claudia on European Astoria post-financial crisis. That was harmful. I think that's pretty probably a consensus. There's also a consensus that the austerity or the non, they didn't do enough in the Obama administration, partly because they couldn't, because of Congress, of an obstructionist Congress. I think most economists will probably say that we didn't do enough. I also am not too worried about Europe, right, where things are very different. I also obviously was totally in favor of the March 2000 or April 2020 CARES Act. I will say, though, on the Biden plan, on the Biden rescue package, I part ways a little bit with Claudia. And I think I'm more, I'm increasingly sympathetic to Larry's and Olivia's arguments, simply because we now see at least some of the predicted negative effects of it. I think we see them now. I mean, we have people are talking about a labor shortage. I think it's we all, anyone who just walks around anywhere with open eyes sees that there is a certain labor shortage. We can debate exactly how much the quantitative effects of the increased unemployment insurance was, how much the effect of the checks was. And again, I like checks in principle. It's a good, I mean, Ludwig has models, which show us that this is in principle a good idea in theory. And all of that. So there's a lot going on for it. But I think there's convincing evidence that it's not just childcare lack of childcare, which some on the left side is all it's all just lack of childcare. That's why people don't go back to the workforce. There's a there's a substantive amount of retirement. We see you look at the I have been told at least people have looked at that. And I do think that we see an increase in reservation wages, right? And that any model will tell us if that's the case, we will have a higher level of non-employment. Okay. And so people individually completely rational and maybe in the long run, it's a good thing that, you know, people take more time to search better for better jobs and stuff like that. But, you know, we have anyone, I don't buy the argument that we do not also have currently a bit of a supply issue in the United States probably cost. And maybe the, you know, if you don't get it together, this is just the price we have to pay on the other side. But I'm not willing to completely deny these these pieces of evidence. So I'm a little bit at least as far again Europe, I think Europe should go be bold, more bold. And the other thing in the United States is something we haven't said we have not. If I mean, to the extent that we believe and maybe Claudia doesn't believe it, but to the extent that we believe the CBO debt and budget forecasts. And this is an argument that John Cochran has made in this debate. If you believe, if you believe these forecasts, and again, we can debate whether we believe them and the implicit interest rate forecasts that are in them as well, they're not, they're not innocuous, but it's not about our smaller than G, right? It's about primary deficits, massive primary deficits, okay, for years to come in the United States. Okay. And so our smaller than G simply means that you can, depending on other, depending on how big the difference is, you can afford yourself a little bit of a permanent primary deficit. But it doesn't mean that you have an infinite primary deficit at your disposal, or, you know, a very large one. And that is something Riccardo Riccius made this argument on Cochran. And for the United States, I think that is just true because we don't get politically, I don't see where we have things like the debt, in Germany, the debt break is there. So that will take care of it if we don't change it. I think it does too much of taking care of it. But in the United States, we don't have anything like that. And so if the CBO is right, then the R smaller than G debate is completely pointless. I agree. I'm with John Cochran and Riccardo Riccius on that point. Anyway, so I think I'm a bit more in the middle here than Claudia, but it's always easy to say that you're in the middle. Okay. And then ECP, dual mandate. I don't know. I haven't thought that through, so I'm going to punt on that. Perfect. You did not win. And Claudia has some time to collect the arguments. Yeah, but please live with me. Perfect. So this is a super interesting discussion. Let me just give one perspective. And this is based on some recent work that we've done. So I think the underlying discussion between the two of you is basically a question of whether increasing fiscal or using fiscal space today is a substitute for using fiscal space in the future. So do I need to run austerity today if I want to have more fiscal space in the future? And what we have found in our analysis is that it does not have to be a substitute, but that requires relatively low levels of government debt. And I would argue that, especially Germany, was probably in a situation after the Great Recession where it could have done more and without adverse effects on fiscal space during the COVID pandemic. Now, that's probably not true for all European or our Eurozone countries, for some countries that were sort of teetering at the verge of the fault. And so I imagine if whatever Italy had said, well, we're going to go big with a 10% whatever primary deficit in 2011 or 2012, that would have probably not gone over well with interest rates with markets. So I think it's a case-by-case position. And for the US, I think it remains to be seen. Our analysis suggests that we're probably more on the side where there is some substitutability precisely because of the reasons Rudy mentioned that the structural deficit that's expected for the US is already relatively high. Now, that doesn't mean unaffordability. That doesn't mean we're going to crash and we're going to default. It just means that there's some substitutability here that we should think about. Perfect. But, Ludwig, you haven't given us the magical number now. What is the magical number? I'm going to stick with Rudy here. You can look at the paper and there's going to be a range of numbers. I don't want to go on the record now and putting out a number that's certainly going to be wrong. So I think we definitely do have ways to go before we default, right? Anywhere near an imminent default. Claudia is right. There is no magical number. I think if you want to be a serious economist, you do not want to hang your head on a magical number. I think that's obvious. I think the challenge is those economists or policy experts that advise Congress, you got to write a number down, right? So it is a lot of fun when I read academic papers trying to figure out. And when we don't, when the experts don't take a stand, the inference is going to be drawn by people that may or may not understand your models. So just a warning. But setting that aside, I think a couple points, one on the Fed, if you talk to market people, one of their mantras is don't bet against the Fed, right? So the Fed is going to see this through, right? Because they spent years, like there was an introspection that was kicked off under Janet Yellen's leadership that was, we did this wrong. Like if you asked Yellen, lift off in 2015 was a mistake, right? And they really worked through what are the tools they brought in academics, they did listening session, they talked to real people. The Fed is usually frightened of real people. And again and again, they were getting particularly from the community groups, jobs, job, job, jobs, like, you know, that this functioning of the labor market and getting that full employment mandate to be at least on par, J-Pow really took that to heart, right? Like this is, I mean, so the Fed spent a long time thinking about this, and they're going to see this through, right? So the, I mean, but if inflation, like they're going to adjust, right? They're not like, they, you know, they're, we're data driven, like that's a real thing. But this, again, this shift from like, we have to see the conditions from we're forecasting them, that's huge, right? So the Fed is going to like, they're for real, right? On this one, there's still going to be a lot of battle and discussion. And we've already seen that. These Reserve Bank presidents, they're very colorful. They do not have the votes, right? So just, you know, just kind of, they're entertaining, but that's about it. And we need dissent. I don't want to be dismissive of that, because we need to debate these things. I, actually, there were a few more things I wanted to say. I just, goodness, I really want to make that point about the Fed. Oh, I know what it is. So this, okay, two more. One, the CBO, the official estimates of potential output, which have been very important. And like, like, how much space do we have before there's crowding out? And then like, it was all pointless, the money. I, on the encouragement of a, another economist, I looked in the technical appendices of the Congressional Budget Office potential output, they assume that 2015 was full employment in the United States. And in those assumptions, the black unemployment rate of 10% is considered as best we can do, right? And that is not, like they just have an update. I mean, CBO's got a lot of things going on, right? But even if you brought it to like the 4% national unemployment that we saw in like 2018, 2019, that is a huge revision to potential output. Like that's huge. So I think we have to really like look at our tools. I mean, Art Oaken in the 1960s created potential output, right? Like it could use a refresh, or at least a discussion. So there's that. And then the last thing is, I want so much for G to be higher, right, that growth rate. And I think that's where I wish fiscal policy would do the most, like macro stabilization has been like a huge thing, whether it's monetary or fiscal, it's like, gosh dang it, we need that growth. And so that's why I said in the very beginning, like, how much is too much is really the wrong conversation. I really, in my opinion, I want us to see how do we get growth up? How do we get productivity up? How do we get an economy functioning? Like I don't know all the answers, but I know if we don't do that, like, all the rest of this is kind of beside the point. Thank you, Claudia. We have to unfortunately look at the time we are almost up with the we have two more minutes remaining. I'm going to give you all a very quick chance to give your thoughts about things that have come up and two points that have come up in the in the Q&A. One is, but what if rates go up again, and B, what about inflation? Please shoot. Maybe Ludwig, Rudy, Claudia, we have two minutes, please. So I don't see the structural changes that are supposedly might have happened during COVID that would push rates on a persistent level up. I mean, maybe Larry's right, and we're going to see the shift in inflation expectations. I guess the jury's still out. I'm a bit more on the side of Claudia here that I think the structural things like inequality, aging, etc., they're all with us. So I don't think that's going to go away. But certainly inflation expectations, we still need to see what happens and whether that increase in inflation that we see now translates into those. That's why I don't think rates themselves are going to go up very dramatically. But again, economists are wrong all the time. This is my current, what I would currently think, but I'm happy to be convinced otherwise. Okay, Rudy, inflation. I mean, as far as interest rates is concerned, well, I mean, first of all, I agree with Ludwig. I don't think that the structural factors are there. But if you're worried about, I mean, there is an easy way to test the markers, right? Increase the debt-majority structure. I mean, no one says that you need to have, I don't know where we are currently, seven, eight years, or even lower. I don't know. It's a low number anyway. It's not, why not go more with 30 years? Why not do consoles, etc.? I mean, there's so many debt instruments that you could use. And to test the market, really, the market will tell you how they feel about that after these operations. So I think that can be managed. Inflation, yeah, I think a lot of, indeed, a lot of the inflation, we currently see that is indeed something that is more or less a smoke screen. I don't necessarily see that as a harbinger yet of persistent inflation. Certainly, I don't fear it for Europe yet. I don't see any indication. In the United States, the jury's out. I mean, we will see. I think policy-dependent. I mean, the more Biden does, and for good reasons, you know, and the more this will, whatever Biden does, will actually also have supply side effects. That's what ultimately Claudia is talking about. I don't know if we do what they plan for the families say, and that would massively increase the labor supply of women further, of mothers further. Boom. All of a sudden, you have a bigger pie, and inflation is not... So I mean, that will depend. I guess the last thing I want to say to Claudia is that we all like G. We all like big G. And then the question is, where do we believe it's coming from? And there are still some of us who believe it's coming, indeed, from the supply side, and not just from the government, trying to engineer these things in the long run, not necessarily significantly. So I'll give my 30-second view. One, policy makers have done nothing yet that will reverse structural trends and problems in the U.S. economy, at least. They could. They may be doing it, like with the infrastructure, with these other investments, which I agree with Rudy, are just like pushing the private sector. They're not going to carry us home, but we haven't even seen it start yet, in that sense. And the other one, on inflation, I have given hundreds of hours of interviews on inflation, lovely topic, in just one sentence. We are in the 2020s, not in the 1970s. So I think we've got to get moving to these infrastructure investment discussions. And inflation, like Rudy said, I think that's a cost we had to pay to get this recovery on hyperdrive. So that's my two cents. Wonderful. Thank you so much. Thanks to our presenters. This hour passed by so quickly. But we have to conclude this Aynet-DeadTalk conversation. Thank you so much to the speakers and the audience for joining us today. To view past episodes of the DeadTalk series, please click on Watch All Episodes to the right of this video, or visit the website at aynet-economics.org. Please follow Aynet Life at Aynet Economics to hear about new episodes and information on upcoming events. See you next time, and have a great summer, everyone. Thanks so much. Great. Thank you. Thank you. Bye-bye.