Does U.S. Debt Matter?

Wednesday, May 13, 2020
Lucas Jackson/Reuters

Professor of Practice, Harvard University; Former Chair, Council of Economic Advisers

Vice President for State Fiscal Policy, Center on Budget and Policy Priorities

President, Committee for a Responsible Federal Budget


Senior Global Affairs Analyst, CNN

Speakers discuss the U.S. national debt and potential for an impending debt crisis, particularly given recent multi-trillion dollar COVID-19 stimulus packages, as well as the financial health of state and local entities across the country.

GOLODRYGA: Well, good afternoon, everybody. I’m Bianna Golodryga, and welcome to this discussion on whether debt matters. I am the senior global affairs analyst at CNN. And I just want to let you know we have 670 members joining this conversation, so clearly a lot of people are interested in this particular topic.

And for that we have a distinguished panel that I’m going to welcome now that’s going to be discussing this over the next hour. Just to let you know how things are going to unfold I’m going to be asking questions for the first thirty minutes, and then at 4:30 we’ll open it up to your questions. And with that, let me introduce this panel.

I’m delighted to be joined by Jason Furman. He’s a professor of practice at the Harvard Kennedy School.

Michael Leachman. He’s a senior director of state fiscal research at the Center on Budget and Policy Priorities.

And Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

Welcome, all of you. And let me begin by going down the panel. Let me start with you, Jason. Obviously, we’re experiencing an increase in public debt beyond what anyone thought was imaginable just a few months ago. So my first question—and this may be a softball—but does anyone believe that we have spent too much so far? Jason.

FURMAN: Can I just say no, or am I supposed to say more than that?

GOLODRYGA: Just say no, one word suffice.



LEACHMAN: No. And when it comes to states, much more is needed.



GOLODRYGA: OK. So you’re all in agreement there.

So let’s move on, then, because there’s a lot of uncertainty about the course of the disease, obviously. And let’s assume—God forbid, but let’s assume that we do have a second or even third wave of the virus. How much government spending do you think is warranted? And how much do you think we’ll actually get? Let me start with Jason on that one.

FURMAN: So just stepping back, thinking about the frame, I mean, the issue right now is that throughout our country all sorts of people are liquidity-constrained or even insolvent—sorry, people, businesses, states, localities, and the like. The one entity in our country that can borrow the most easily, the most cheaply, is the federal government. And in effect, what we need it to do is borrow on behalf of all of us. In some cases it will borrow for the sake of a loan and it’ll get repaid. In other cases, it won’t explicitly be a loan but in some sense at some point in the future there will be higher taxes, lower spending, and it will be repaid in that way.

The question, then, is what the size of it needs to be. There’s a fashionable do whatever it takes, there’s no budget constraint, we can borrow, borrow, borrow. I’m not in that school. I think anything that is good we should do. I can be the one to judge the goodness. If you have any questions as to what’s good or not, you can direct that to me. (Laughter.) But in thinking about size, if you think the economy might be 10 percent below where it should be—and that would be very, very pessimistic—that’s $2 trillion a year. We should be able to, on a going-forward basis, be able to do about $1 (trillion) to $2 trillion a year and not have to have a steady-state amount that’s way higher than that. Anything way higher than that I don’t think would cause a short-run macroeconomic problem—we’re having no problem funding our debt—but I’d rather not be left with 175 percent of GDP in debt if we could be left with, you know, only 130 percent of GDP in debt at the end of this.

GOLODRYGA: And, Maya, let me get you to weigh in, again, not only on how much is warranted, but how much you think we’ll actually see, because apparently even from what we heard from Fed Chairman Powell today, he does seem to believe that we do need more. He said additional fiscal support could be costly but well worth it.

MACGUINEAS: Yeah. So I think—I think it’s probably too early to say how much more we’re going to need because we’re still in the middle of this.

So the way I think about it is—first, the way I think about it is that there’s three distinct crises that we’re facing. There’s the health, there’s the economy, and then there’s the one we’re also going to focus on today which is the debt, which is around the corner. It’s not the immediate one, but it’s growing bigger by the minute and will have to be addressed as well.

When I think about how much we’re going to need, I think the most important thing first is to figure out how quickly we’re going to be able to address the health pandemic because everything really rides on that. The more we’re able to do to address that problem, fix that problem, and fight the huge cost of the health-care crisis, the more we’re going to be able to salvage the economy. And so there’s clearly more that we need to be investing there.

There are also other elements of this: the hardship that people are going through and the overall place—parts of the economy that are suffering. In terms of the hardship, we’re going to have to see how much further job loss there is and what we’re going to need to do there. I think we already know, and we’ll probably hear from Michael, the states are going to need more funding. We’re probably going to need to think about more funding for things like insurance. And I think when we go into the recovery period, we’re going to have to think about more funding for how you jumpstart things that have been disrupted. Like, this is the mother of all disruptions, what we’re going through right now, because it is going to really speed up some huge changes in the economy, whether it’s online education or telemedicine or those things. So thinking about how we’re going to make some changes will take further funding.

But what I don’t want to do is say that that means this is kind of an open-ended credit card. While I don’t think we should stop putting money into the economy right now to fight both the pandemic and the downturn, it shouldn’t be an excuse to not target that money, spend that money excessively, or get into a political bidding war which I’m quite certain we’re about to see between both parties sort of fighting over what they want to spend money on and the ultimate deal being everybody just spends what they want to spend on instead of really targeting better, because we have a little more time. So I think targeting it is going to be incredibly important.

And then the final point, to your last question of what we’ll see, my concern is that we’ll see less money put into the economy now than we should have, because you already see kind of the partisanship, the polarization starting to have an effect there. And then, likewise, I’m concerned that once we get through this you’ll see less dealing with the fiscal challenges that we’ll have left behind than we should have. So I’m afraid we’ll get it wrong on both sides.

GOLODRYGA: Well, Michael, let me turn to you. Maya brought you up, as well, and teed this up for your end and what you’re focusing on because you’ve projected that the state budget shortfalls from the fallout here could be well over $650 billion, and that’s over three years. Obviously, federal aid has provided a little bit of help, but obviously, that’s not nearly enough. House Democrats, as we all know, have unveiled a $3 trillion relief measure this week that, among other things, offers aid to states and local governments. Republicans are calling it basically a liberal wish list and they want an overall pause on additional funding for now. What are your views on, A, the Democrats’ proposed bill; and the Republican response? Especially now that we seem to have heard support for more funding from the Fed chairman this morning.

LEACHMAN: Yeah. I mean, look, in the next few weeks states are going to be laying off teachers and health-care workers and first responders, and this is exactly the worst time for that to happen. The federal government needs to step up to the plate and makes sure that we don’t make the recession worse by laying off a bunch more people and cutting spending in other ways. That’s—so I think that what the—has been proposed in the House is sort of the right—the right approach. It recognizes the magnitude of the problem, that’s very serious. And as both Maya and Jason have said, we really need to step in now to make sure we keep the downturn from getting much worse.

You know, we’re hearing there’s a bipartisan bill that would provide significant aid. There’s—the National Governors Association has weighed in here. Republican and Democratic leaders at the local level are making clear that additional relief is needed. So I—you know, I think we’re going to get there, and we’ll just see what—how it plays out over the next few weeks.

GOLODRYGA: And, Michael, I laid out a dollar figure, but can you give our listeners just a picture of what’s going on on the ground, what you’re hearing about the fallout thus far? I mean, obviously, in Washington this has turned political quickly—surprise, surprise—blue states, red states. But from what you’re hearing from both Republican—or red state(s) and blue states, what are some of the issues that they’re already facing and some of the pain that they’re dealing with now?

LEACHMAN: Yeah. Well, Congress may be partisan, but the pandemic isn’t.


LEACHMAN: This is—this is hitting the economies of blue and red states alike. In Georgia, the governor and legislative leaders have told state agencies across the board to prepare for 14 percent cuts. It’s going to be really hard for schools there to avoid laying off teachers and other workers, and other agencies to scale back. We’ve seen the governor in Ohio propose already—already impose significant cuts to schools and other services. We’re seeing shortfalls—revenue shortfalls come out in red and blue states that are sizeable—Kentucky 17 percent, Oklahoma 16 percent, for example. The jobs report that came out on Friday showed an extraordinary number of state and local workers have been furloughed or laid off. Almost a million workers for states and localities were furloughed or laid off—most of those furloughed, but if the federal government doesn’t step up, then those furloughs are going to turn into permanent job losses.

GOLODRYGA: Permanent, right, and that does sound grim.

Jason, go back to—step back for a bigger-picture view. Obviously, there’s been a raging debate for years about debt and deficits, and I’m not asking for any of you to relitigate that right now, but how do you think this pandemic will alter the dynamics of that issue?

FURMAN: Yeah. I mean, one thing on debt and deficit is you could argue either side of where the United States was going into this at a federal level. We did have a high budget deficit. We did have high debt-to-GDP. States had balanced budgets going into this. In fact, they had decent-sized rainy-day funds. States have very low debt relative to the size of their economy. There are a few states that have pension issues, but that’s not the cause of the problem that they’re facing right now. So I don’t think anyone was or could have made much of an argument for, you know, a state fiscal problem before this—the states have a pandemic—with the exception, as I said, of a few states which do have some real pension issues. But mostly, they balance their budgets.

For the—oh, Maya, did you—oh.

MACGUINEAS: No, no, I just moved.

FURMAN: For the federal government, I wrote a piece for Foreign Affairs about a year and a half ago—still stand by every single word of that piece, Maya—in which I argued that people have—I’ve seen the political system make two errors on debt. One is everyone in Washington is irresponsible, terrible, they spend like crazy, they cut taxes like crazy. That definitely happens. The other thing is everyone in Washington gets overly worried about the debt and the deficit. They predict fiscal crises that there’s no basis at all for predicting, and they do too little stimulus and too little of what needs to be done. I think right now I’m hearing more people who are overly worried about the deficit than I am hearing people who are irresponsibly under-worried about the deficit, and so tried to write in Foreign Affairs a corrective to what I think is, you know, the standard narrative that the political system always gets it wrong in one direction, point out it gets it wrong in both directions.

Right now interest rates, real interest rates, are negative. When we did the Recovery Act in 2009, you had to pay 2 percent interest rate even after accounting for inflation to borrow for the Recovery Act. Right now you have to pay minus-1 percent interest after accounting for inflation. So the fiscal environment today is even more conductive to borrowing than it was a decade ago, even though the debt is much higher than it was a decade ago. Again, that’s not a free pass, but it gives us, you know, a lot more space than we previously thought both for fiscal expansions now and to take our time and get a fiscal stabilization right after all of this is done.

GOLODRYGA: So is it safe to say your views on this change once and if interest rates start to go up?

FURMAN: Yeah. Yeah. I mean, the difference between me and modern monetary theory is that I’m right and they’re wrong. No. (Laughter.) The difference is that modern monetary theory claims to have discovered a timeless truth. There’s, like, some set of identities or equations or this or that, and they’ve proved something, and they’ve proved it’s always true.

I think right now they happen to be true. A stopped clock is also right twice a day.

GOLODRYGA: Twice a day.

FURMAN: My views are a function of, you know, parameters in the economy that can change over time, and so my views will change over time.

Now, do we want to be completely reckless and make some huge experiment to see if we can get away with this? Of course not. But you know, we take risks in our economy. We have a financial system that says we are going to accept a risk of a banking crisis because we want banks to be able to lend and we think that’s conductive to growth. We never in financial reform say let’s make banks hold so much capital that their risk of a crisis is exactly zero. I don’t think on the fiscal side that should be our standard, either.

GOLODRYGA: Maya, I’m going to let you in.

MACGUINEAS: Good, because I would love to relitigate how we were thinking about fiscal policy before this unanticipated crisis came along. And just to put it in perspective, so I don’t think we are in better—in better fiscal health to borrow in some ways, because if you look at where we were after 2009—after the crisis—it would have taken about $2 (trillion) or $3 trillion of consolidation to balance the budget compared to about $7 trillion today. I’m not saying we should balance the budget, but I’m saying the fiscal gap is significantly larger than it used to be. We are not even through this yet, but what that means is that when we get to the third piece of health, economics, debt—and dealing with the debt, the task at hand is so much greater ahead of us. And it is, frankly, going to lead to a lot more difficult and painful policies to get the fiscal situation under control.

But just to take a step back, when we entered this moment our debt was 80 percent of GDP, which was twice as high as when we entered the recession of 2008-2009. The reason is because we borrowed as we should have during the last economic recession, but we failed to do a single thing to improve that during the long economic expansion. In fact, we did the opposite. We signed President Trump and—Congress passed, President Trump signed into law about $4.7 trillion in new borrowing on top of trillions that were already slated to be borrowed. So, instead of being countercyclical, we borrowed during a downturn and we borrowed during expansion, and you can’t do that forever.

And so then I pick up Jason and Larry’s paper, and I read about how there’s an asymmetry where people who are worried about fiscal policy have undue influence, too much influence, and I’m just kind of left scratching my head trying to figure out where—(laughs)—because we haven’t taken any—any—significant measures to really get the debt under control during the upswings of the cycles—the last cycle, as many of us were arguing we should do. And the reason that you should do that is, one, to be prepared for a downturn like this. And just because interest rates are so low, that doesn’t mean everything’s OK. That doesn’t mean that we have sufficient fiscal space. That doesn’t mean that there isn’t cost to all of this borrowing. That doesn’t mean that there aren’t risks—huge risks—that things will change. And it doesn’t mean that if we continue this period of borrowing whether the economy is good or bad we will always be prepared for the next crisis. Clearly, this can’t go on forever.

We are right now in a situation where we are overly dependent on borrowing for our budget, whether it’s good times or bad times, and we are therefore now overly dependent on low interest rates to allow us to continue that borrowing. And that’s a dependency that I think is incredibly vulnerable. And I guess the question I’d have for Jason is: What if you’re wrong? I mean, what if this isn’t OK, and what we’re doing is we’re going to be trying to fight an economic situation and we have all these other potential risks which, because of our debt situation, we’re so ill-prepared to meet those challenges well? To me it seems incredibly risky when we are absolutely able to bring the debt down during the periods of economic health. And so I worry that articles written by Jason and Larry, who are incredibly bright and incredibly influential, lay out an argument that is too soft on worrying about the debt and kind of gives license to politicians who love to jump onto any excuse they can find not to have to pay for the things they want to do in the budget.

GOLODRYGA: So, Jason, let’s pick up on that. Assume we do have a vaccine or a high-quality therapeutic, that people start returning back to some sort of sense of normalcy, and we have a debt that’s 150 percent of GDP. Should we just live with it there, or do we need taxes to help pay it down?

FURMAN: So I had a great conversation in person at CFR about six months ago. One of the panelists was Maya. The moderator, Bianna, was not quite as good as you, as much as I like your husband. And the—you know, I made a shocking statement in that room, which is that if we could stabilize the debt at 150 percent of GDP it was hard to figure out, you know, what exactly would be a problem with it. I think most of the room was shocked to hear a number that high. My prediction is ten years from now the deficit hawks are all going to want to get us to 150 percent of GDP and everyone else will have moved on to a number higher than that.

You know, on—you know, people keep predicting fiscal crises; doesn’t happen. People said if we run a deficit in normal times, when we get into a crisis we won’t be able to borrow, we won’t be able to deal with that crisis. I heard that argument over and over again. Well, we got into a crisis and we could borrow much more easily than the last crisis, which we went into with a debt at around 35 percent of GDP.

Now, stabilizing at 150 percent of GDP is not—would actually take some work, and I can just put some round numbers on that. Let’s say the growth rate is one-and-a-half points higher than the interest rate—so the growth rate’s 4 percent, interest rates are 2 ½ percent. Then we could run a deficit as high as 2.25 percent of GDP, not counting interest, and the fact that the growth rate was a bit higher than the interest rate would offset the deficit and leave your debt stabile.

CBO currently projects that if we let all the tax cuts expire, the debt—the deficit, primary deficit, will be 3 percent of GDP in a decade. So we would need to make—both let the tax cuts expire, because all of the individual ones that were passed expire at the end of 2025—that’s not something we did last time. We need to be willing to do that this time. We’d be—need to make sure that deficit doesn’t keep rising, which would involve a reform to Social Security and Medicare, and we could talk about the ratio of taxes to spending in those reforms. I have opinions. And we’d need to do a little bit more on top of that, and we’d need to pay for everything. If you like paid leave, you like infrastructure, any new permanent program would need to be paid for.

So that’s, I think, a doable thing. That is not going to be easy to do, but it’s not some impossible large adjustment. It does require us, though, to be willing to live at 150 percent of GDP, willing to pay for new proposals, and willing to make adjustments if I’m wrong about the growth rate being one-and-a-half points higher than the interest rate.

GOLODRYGA: Let me bring Michael in and sort of switch gears here because there’s a debate in Congress about whether the assistance programs like the expanded unemployment insurance benefit should be in place for as long as the unemployment rate is elevated instead of ending at a specific time. You support this idea of automatic stabilizers or triggers. I believe Maya does not; correct me if I’m wrong. But Michael—

MACGUINEAS: I do, but with a caveat.

GOLODRYGA: OK. OK. But, Michael, let me get your sense and thoughts on why and how that would be the most efficient way moving forward, in your view.

LEACHMAN: Well, there’s a lot of uncertainty right now, and so tying the state fiscal relief or the unemployment insurance provisions to what happens—what actually ends up happening in the economy makes sense. You’d have them stay on for as long as they’re needed. I’m not sure I want to come back in a few months and have another debate in Congress over what should happen. And if the economy comes back more quickly than we think, then those relief provisions could turn off. So it’s just—it’s just setting it up so that the policy is meeting the need in a very uncertain situation.


MACGUINEAS: OK. So triggers I think have an actually—a really productive role to play in this entire discussion. First—and it’s sort of for a depressing reason—(laughs)—but because I’m kind of giving up on Congress being able to do its job when it comes to hard things. We have seen year after year it’s become increasingly difficult to ask our politicians to do the hard work of tax increases and spending cuts, though they are quite able to do tax cuts and spending increases. And so I think in some ways automating things that are some of those harder decisions or places where they tend to fight, and it’s more about economics than politics, makes an awful lot of sense.

So what I would propose is really—I guess it’s three roles for triggers. The first is, keeping stimulus in place as long as the economy is weak and needs it to be there. And this isn’t a binary trigger. And it’s not just one thing. But it’s triggering different things that are helping to support the economy at different levels and tied to actual economic metrics. The second thing would be when you turn that off. For instance, when your employment is strong enough, you can turn off higher levels of unemployment and scale it back.

But the third thing, again, and this is about the symmetry that I believe needs to happen—because if anything is asymmetric it’s the propensity to borrow versus the propensity to repay your borrowing, or bring you debt down relative to your economy—there really should be another trigger that says the economy is now strong enough to start putting place the measures that would help bring your debt back down. Jason just laid out a number of excellent options, I think, from letting the tax cuts expire, to reforming Social Security, to instilling real PAYGO, where we pay for new things. Back to my favorite article that Jason wrote, I will point out at the time he said we shouldn’t fix Social Security, but we clearly need to. We clearly need to address a bunch of these big problems. And we should do so when the economy’s strong enough.

But I think it might be useful to also have a trigger on that side, which says: Now is the time when the economy is strong enough and we can start putting those things in place. We can even decide them today, but we should phase them in once GDP reaches X, and unemployment reaches Y. So, again, I think our ability to politicize everything from pandemics to economics really argues strongly for putting in place kind of real criteria on the economic side for all sides of this, when you turn things on and off. And I think that could be really useful.

GOLODRYGA: Jason, I’m sticking with the topic of unemployment benefits. I want to ask you about the new study from the University of Chicago and Stanford that suggests that 42 percent of jobs lost in the recent months will be permanently lost instead of just temporarily. If that’s right, how would it change your views on what the right fiscal policy would be moving forward?

FURMAN: Yeah. I think one of the, you know, initial theories that some people had in response to this was that it was what I’d call a stop-start shock. You turn everything off for two months, you turn everything on, the thing you turn on is exactly the same as what you had turned off, and you just need to bridge people and businesses through that period of time.

 GOLODRYGA: Because that’s what people had hoped, right? I mean, that as the initial goal and expectation.

FURMAN: Right. And I think that expectation has collided with three things. One, the virus lasting longer than I think some people optimistically were hoping, at least the impacts of the virus. Number two, a lot of businesses, it’s accelerating something that would have happened. You know, a large department store that was going to go out of business in six years is going to go out of business now because of this. And third, some businesses are going to use this as a justification for, you know what, I didn’t need all those employees. I don’t need to bring all of them back.

And so all of those, most importantly the virus is going to affect travel, restaurants, all sorts of things, I assume, for at least another year, maybe for several years, means there’s a bit reallocation to everything we’re seeing. If you take the eighteen million people who report being on temporary furlough, if every single one of them went back to their jobs the unemployment rate would still be 9 percent right now. So if we discovered a vaccine today, everyone who’s furloughed form Macy’s and every other business went back, the unemployment rate would be 9 percent right now, according to this—the data that the government put out last week. And so I think that’s a—so in other words, I very much agree with the study that you cited.

What does that mean? I think it means, first of all, you want to help people more than you help businesses, because people are going to be there, you need to stick with people. You can’t think that you can preserve every business. Number two, when you help businesses I think you want to do it with generous loans, but I don’t think you want to do it with grants that are contingent on them maintaining 90 or 100 percent employment. To do what we’ve done with the airline industry, where we’re paying for them to have 100 percent employment through September 30, on the theory that on October 1 they can just keep financing that on their own, is nuts.

To go to a large—you know, big-box retailer and say—a department store—and say: You have to come back at 100 percent employment, for some of them you should be thrilled if they can come back at 70 percent employment, because that may be the only way they can become viable businesses. And the alternative is going bankrupt. And so having more flexibility for where businesses end up, a way to make that work is doing more things on the individual side, less programs like PPP, the airline bailout, Hawley, Jayapal, and the like, which I think are just extremely expensive and based on a theory that everything’s coming back the same way it’s been.

GOLODRYGA: I have one more question before we open it up for the broader discussion. And that’s to Michael, because there is—I mean, I’m sure everyone in America would love for people to get as much money as they deserve at this point. But there is a debate now as to whether the $600 in extra unemployment insurance creates some sort of disincentive for people to go back to work. And I’m curious for your perspective on this, specifically since you’re seeing some real hesitation and infighting within states and local cities, and their state capitals, about when to open. And a lot of people suggesting they may need hazard pay. It’s not safe for them to return back to the office. So given all of that and the current dynamics, where do you stand on that debate, or that question?

LEACHMAN: Well, I stand in a similar place to what Jason just said, that helping people is the right thing to do right now. That, you know, we want to make sure that our communities get through this with as much—with as little damage as possible. And so that when the economy does come back, it can—it can come back with—people’s lives haven’t completely fallen apart. So I think that support for workers who have lost their jobs because of the pandemic just makes sense.

GOLODRYGA: OK. On that, Laura (sp), I believe we’re ready for our first question.

OPERATOR: (Gives queuing instructions.)

We’ll take the first question from Neal Goins. Mr. Goins, make sure you press the unmute now button.

GOLODRYGA: Should we move on, Laura (sp)?

OPERATOR: Sure. We’ll take the next question from Matthew Miller.

Q: Hi. Can you hear me?


Q: So my question is—and I should say, I’m someone who was a deficit hawk, you know, from way back. Worked at OMB. Motivated by deficit reduction and debt, and respect folks on the panel with whom I’m friendly. But also in the role I’m in now as an investor at Capital Group, in the last six months or so I’ve spent a lot of time studying the MMT lens, and actually find it very useful. And it’s led me to rethink a number of things I thought when I was younger. And I’m surprised that that lens isn’t being treated more seriously at a time like this. The idea that a moment, and generally, the only relevant constraint isn’t an abstract concern for fiscal rectitude but inflation risk, which is what that lens stresses, that the idea that there’s any question of whether we need to, quote/unquote, “fund” the spending that we’re doing by, quote/unquote, “selling bonds” to enable the financing—which I think the MMT camp persuasively argues is just not a right way to think about the plumbing of what happens.

It just seems to me that that’s an important lens at a moment like this, that ought to be part of the debate. And I’m curious if folks on the panel have any thoughts on that, and whether the Council is going to treat it more seriously. Which, at least, some folks, I think, would think is worthwhile.

FURMAN: So, Matt, good to—good to hear from you. It might be that we agree, and I just used a different tone. My stopped clock quip was saying I think it very much is right at the current moment. It says that fiscal policy should be primary over monetary policy. That is absolutely true at the moment. You know, there’s this little tempest in a teapot debate over whether interest rates should go negative. But the difference between interest rates of minus-0.5 and interest rates of zero is just 0.5—(laughs)—so very little left for monetary policy to do. So fiscal policy primary. That they say. That I agree.

Number two, that the constraint on fiscal policy now should be inflation, I mostly agree with that. And by the way, we got the record negative inflation yesterday. And if we ended up with 3 or 4 percent inflation, not only would I be really surprised, I’d be really pleasantly surprised. That would be really good news for the U.S. economy. So that’s a fear I don’t think has any—has even less justification than the deficit fears.

But I do think that there’s two places where it goes wrong. The plumbing point you made, Matt, I think that point is wrong because the way central banking works now is that the Federal Reserve pays interest rate—interest on its reserves. So when the Fed monetizes the debt, it’s buying debt. How does it buy the debt? It buys the debt by issuing reserves. Those reserves pay interest.

So the reserves are just another way of borrowing at interest. The interest rate on those reserves right now is .1. But that’s about the same as the interest rate on Treasurys. So it’s as if we’re effectively shifting our composition of borrowing to very short-term borrowing, and that does leave us more vulnerable to an increase in interest rates. In some ways, I’d rather be doing more long-term borrowing than short-term borrowing right now from a fiscal-smoothing and risk-management perspective.

And so I think on the plumbing, modern monetary theory just makes the mistake that there’s no way around paying interest on the borrowing, whether it’s Treasury bills or reserves. That’s all, basically, different forms of debt obligations that incur interest.

GOLODRYGA: Maya or Michael, do you want to weigh in or should we move on to the next question?

MACGUINEAS: I’ll jump in. Also, hi, Matt. Nice to hear from you. That was not a question I expected from you at all.

I mean, I will admit that with MMT I still always feel like I’m playing catch up because every time I think I understand one of the main points it sort of shifts. But I will—I will say that the notion that you don’t need to worry about debts until inflation shows up is another—it makes sense to me that inflation is not a huge concern right now and borrowing is not an immediate concern.

But it doesn’t do anything, in my mind, to preclude us from the situations where we have borrowed excessively. We have put ourselves in excess of risk and factors change. So if inflation does go up, it becomes very difficult to address that situation when you do once it happens.

I guess—I think there’s so many reasons to be concerned about excessive debt levels and we’ve touched on some of them, how it can have effects on the economy. But there are other things. As we were talking—answering the last question, folks were talking about the big changes that are going to happen structurally in our economy. And, again, this huge downturn is going to speed up a lot of those changes and it means that we’re going to have to have more fundamental structural changes to our economy, to our industries, and to our social contract, as it helps to facilitate those changes.

And so I think having excessive debt then stands in the way of being able to make those changes. I don’t even think we’re having the discussions that we should about what changes from technology are going to mean that we should be thinking about in our budget. I think we’ve delayed that conversation for a decade or more because of excessive debt levels.

And I’m really concerned in terms of why you do need to worry about the debt even when you don’t see inflation is that when we come out of this our recovery is going to be worse because of high levels of debt, and that we’re going to be making a lot of changes that are actually—well, finding ways to grow the economy is going to be really a primary objective.

There are going to be a lot of things that stand in the way of that, and that includes the demographics that we already know we’re facing. That includes a bunch of these changes and the need for more resources in a social contract. That includes some of the things that have come out of this as we’ve seen our dependency on supply chains that make us nervous now, that we’re going to have to shift, changes in how we think about inventories. There are going to be a lot of structural shifts in the economy, many of which could harm economic growth. And I think having too high a debt level, which leaves you vulnerable to more depressed growth and doesn’t help you with borrowing for any of those needs or investments, makes us more vulnerable again.

So what I worry about is saying there’s this one indication, inflation today, and if you don’t see problems of it you don’t need to worry—all the things that that leads to, and having too high a debt, and the damage that does throughout the economy.

GOLODRYGA: OK. Laura (sp)?

OPERATOR: We’ll take the next question from Laurence Meyer.

Q: Thank you very much. This has been a great discussion.

I’m going to follow up a little bit on the last question, and this is directed at Jason but I hope Maya will comment on it, too.

A couple of questions here. Now, we’re talking about all this debt. Does it matter whose balance sheet it ends up on? Does it matter if it shows up on the public’s balance sheet or the Fed’s balance sheet?

And let me ask another question. If there was ever a time for helicopter money, wouldn’t it be now? We’re, certainly—inflation comes from too much aggregate demand. We don’t have to worry about that. So helicopter money is not just about the near-term stimulus. It’s about dealing with the long-run consequences of a very high level of debt.

So we don’t push it back into the market or too quickly, and we don’t get the higher real interest rates and the impact on investment, et cetera, that could be damaging to economic growth. So I have—just earlier this year there was a critique of MMT that came out of mine in business economics. Of course, I like to say that was then. This is now. I don’t like the framework, in general.

But it comes to some of the same conclusions here. And the monetizing of the debt is absolutely appropriate now to get the most—the maximum stimulus, the maximum multiplier for fiscal policy, and helicopter money might mitigate the long-run consequences of doing it.



FURMAN: Yeah. Larry, great to—great to hear from you.

First of all, I don’t want us to give too much credit to MMT. In 2015, I gave a speech called “The New View of Fiscal Policy” that was defining what I thought was the change in the way people were thinking about fiscal policy, and to some degree, with synthesizing work at the OECD, the IMF, academic researchers, and the like, and arguing we need to overhaul the way we think about it.

At the time I gave that speech, I hadn’t heard of MMT, I confess, and, you know, I had all those thoughts and I had all those thoughts because all those other people that I was synthesizing had those thoughts. So I think we don’t really quite need all this reference to MMT to get to an insight that Keynes had that in a deep recession or depression you want to use fiscal policy.

On, you know, whose balance sheet the debt ends up on, I think, Larry, this is the same point I was making to Matt, which is the Fed can buy all the debt it wants, but if it’s buying it with reserves that are issued at interest, there’s not a whole lot of difference between the reserves outstanding and the debt outstanding. So we could look at the debt held by the public number or we could look at the debt held by the public, subtract the debt held by the Fed, but add the reserves that pay interest, which is almost the entire Fed’s liability—side of the liability balance sheet, and you’d end up at, basically, the same number other than, you know, the trillion dollars or whatever of cash we have outstanding. So I don’t—so I think the—whose balance sheet it ends up on, it’s just not that different in the modern world where it pays interest.

In terms of helicopter money, I think that would be fine. I don’t get as excited about it as some people do. But people like you do. People like Stan Fischer had a paper with BlackRock proposing it. I just would rather the fiscal authority pass whatever it wants, allocate it whatever way it thinks is right, and then the Fed, you know, can do yield curve control or whatever it needs to with interest rates and not make it quite as explicit as helicopter money. I just don’t see why you need to do that or what you gain by it. But I’m open to any money.

MACGUINEAS: I’ll just quickly respond as well and say, first off, I do love speaking at the Council on Foreign Relations because the people who ask the questions are such great people. So it’s good to hear from you, Larry, and really interesting questions.

I mean, because I don’t want to lose my main theme, which is how much the debt does, indeed, matter. I guess I want to point out that I think of this as kind of the sandwich situation, which is right now we’re in the middle of this and this part is not where the debt matters. But I don’t want to lose what would be my main points, and someday I’ll convince Jason of, that it was reckless to come in to a moment like this so overleveraged and that once the economy is stronger a critical priority is going to be getting the debt under control for a number of reasons.

But to this moment, I think one thing that I would emphasize to steer us away from talking about helicopter money but there—it is a polarized environment. It is an overly political and partisan environment and it’s hard to get good policies done, and one of the critical things on stimulative economic packages is that they be credible with the public so that we can do them as much as we need to.

And my big concern—I mean, I think that these packages need to be structured to the three Ts—timely, targeted, and temporary—and I think Congress so far as done a really incredibly successful job, that if you’re doing any backseat analysis it’s easy to say we should have done these things differently.

But it’s been remarkable, I think, the programs that were put together, and I actually slightly disagree. I like the patchwork of focusing both on people and companies because I think a lot of companies that could and should and will stay in business if they have bridge loans over to the time when the economy is strong again, we should focus on keeping those companies strong as well as putting money with individuals so that they are mobile and free and entrepreneurial to start new things as necessary.

But I think it’s really important, as we go forward, that we focus on the targeted because if we are spending a lot of money, and you’re seeing front page stories right now, it’s kind of like earmarks. It’s not the big dollars. But the stories of people who shouldn’t be getting money getting money and taking that money is undermining the confidence in the measures we need to take to shore up the economy, and it is going to leave this country even more angry than it was going into this moment.

So whatever we do, I hope that we are careful in crafting these measures in a way that we share with the public why the choices are being made and how they’re made, and that it is really targeted in the right ways that are alleviating hardships and helping the recovery along and, again, first and foremost, dealing with the health care crisis.

GOLODRYGA: Yeah, you are seeing some of that backlash as we speak.

Laura (sp), let’s move on the next question. I’d love to get Michael in, too. So, hopefully, whoever asks it, Michael, you’re comfortable weighing in. That would be great.

OPERATOR: We’ll take the next question from Carol Flynn.

Ms. Flynn, please select the “Unmute now” button.

Q: I’m sorry. I didn’t mean to ask a question. Forgive me.

FURMAN: Michael, what do you think?

GOLODRYGA: Maybe it was answered already. (Laughter.)

OPERATOR: We’ll take the next question, then, from Esther Dyson.

Q: OK. Hi. Good afternoon. Esther Dyson, Wellville.

So I’d like to beg you to move a little beyond the macro and consider what we spend the money on. I mean, if we just give everybody unemployment money and they sit around, it’s well known people who are unemployed have a really hard time getting their jobs back. They tend to go on disability. They tend to get addicted.

We’re going to have—we talk about this health care crisis. It’s going to last well beyond the virus. You’re seeing record rates of mental stress, domestic abuse, all kinds of long-lasting physical things from coronavirus. And so it seems like this is the time to put in place huge job training programs around health care, childcare, elder care, and sort of turn our economy into more of a service economy because that’s what we’re really going to need.

People don’t need a fourth shirt as much as their kid needs childcare, they need the opportunity to be trained for a new job. I’d love your reactions to that.

GOLODRYGA: Michael, you want to weigh in? And I agree. I mean, I feel like I’m wearing multiple hats here, being a Zoom teacher and working and doing housework and all of that, and I think a lot of families are feeling the same way. I think it’s unsustainable, going forward.

LEACHMAN: Yeah, I think job training is crucial, and I don’t quite agree with the summary of the research around UI. But I do agree that childcare is such a(n) obvious crucial need right now and that we can use this time for job training in very productive ways. This is—this is another reason why state and local fiscal relief is so important.

During recessions, typically, funding for colleges and universities gets crushed because it’s a place where states can go for—to cut spending there and raise tuition. But, of course, that just makes the system less accessible, and it’s exactly the opposite of what we ought to be doing. We ought to be increasing our support at a time like this to make sure that people can use this opportunity to get training, to—so that as the economy, as we—when we overcome the virus and the economy starts coming back we have workers who are—who are ready to step in to the—to that economy and be as productive as possible.

FURMAN: I just think that this is a little bit like—job training is a little bit like infrastructure. It’s something we really need but it’s not exactly the thing that is needed instantly for the twenty million people that just lost their jobs, the unemployment rate that, effectively, is above 20 percent. And so the more of it we can do as long as it doesn’t crowd out the immediate disaster response, it’s great. Just like infrastructure. More of it we can do as long as it doesn’t crowd out the immediate disaster response.

And within it, I think, for what it’s worth, if you want to go very micro, I think investments in community colleges are some of the most effective ways to do job training. They’re getting—you know, Harvard is getting smashed by what’s going on with coronavirus. I’m not expecting any federal money for Harvard. We’ll get through. Community colleges play an incredibly vital role in training. You know, they don’t have the endowment that Harvard has. That would be, I think, the number-one priority for my training dollars.

GOLODRYGA: And how do we—

Q: Thanks. I mean, just for—to be clear, my assumption is people are going to be paid to take the training. It’s a way of giving them income but also giving them an asset and investing them at the same time. Sorry.

FURMAN: Yeah. Yeah. No, I think that’s great. I think it’s hard to stand up a new thing very quickly, and a bunch of those people are going to return to the same jobs. So yes. But integrating more of that into UI would be—you know, would be great. It just can’t be done overnight.

GOLODRYGA: And how realistic would that training be if we don’t have effective treatment or a vaccine?


MACGUINEAS: Yeah, I’ll jump in. Because I like the idea, with a couple caveats, and, hopefully, that—(laughs)—someday we will all be going back to jobs again. But even if we’re not, people—a lot of people are going to be training for—and we will be—but a lot of people are going to be training for different kinds of industries. I mean, I think it’s really interesting to look through this moment and see that there are some industries that have benefited, right. Technology and interconnectivity and the ways that it’s helping us, so that is going to grow and that’s a beneficiary of this, and there are some industries that haven’t really changed, been altered much at all. There’s some that will face slow recoveries and some that will never recover at all, and pulling that apart and understanding that data and where the growth in jobs will be and how to redirect people who have moved is going to be really important.

I’d love to get a jumpstart on those ideas of both more worker training and more support for entrepreneurship, which I think there’s going to be a real need for supporting small businesses and startups to replace many. But I would pull it out of the package that is meant to fight the economic downturn and, thus, is borrowed.

So I think there are a lot of things that we have been under investing in for a long time in this country and, like Jason said, infrastructure is another great example. Tons of investment in human capital—we need to be doing those things. But this is not an open-ended credit card moment where every good idea should be charged on the credit card.

What I wish is we had a functioning—you can tell I’m very down on the polarization that is plaguing our government. But I wish it were possible that we could think many of our legislators, lawmakers, could be putting together a program that does more on that right now because there’s so many new needs and we see these big changes happening.

I think what’s discouraging is how hard it would be to come to an agreement on big ideas like that. So I think it’s a great idea. But it does not belong in the category of let’s borrow for that because it’s going to fix the economy. It belongs in the it’s a good idea and if things are worth doing it’s worth paying for, and we need to go back to the period of figuring out how we pay for our national priorities.

GOLODRYGA: OK. Laura (sp)?

OPERATOR: We’ll take the next question from Francisco Martin-Rayo.

Q: Hi, guys. Francisco Martin-Rayo from the Boston Consulting Group.

I think one of the concerns, as we heard Crystallina (ph) say recently, that $2.5 trillion in the emerging markets they had initially anticipated isn’t going to be big enough for the crisis they start to see. We’ve heard in other conversations that we expect to see the greatest humanitarian crisis in a hundred years.

Individually, what do you see, at least for the United States, as your worst-case scenario? We continue to draw this out? We don’t get a vaccine? You continue to see different crisis centers across the country pop up?

MACGUINEAS: Well, you can go really dark really fast with that question. I mean, the longer that this drags out—first, being trapped in the house with two teenagers, I mean, that’s not bad. They’re lovely. But I think everybody’s ready to return to life. I mean, the longer this drags out the bigger the huge changes that we have to make are, and so many of them will be counter to getting growth back on track.

I’m very concerned about growth. It feels to me like we’ve let the bad news come in very incrementally. Usually with—prospect theory says you should do bad news all at once, and this has been we only kind of take in the bad news as much as you can at any one moment and then there’s more and there’s more. And if this were really to drag on to the point where this is many, many months, trying to design a whole economy that can accommodate that and generate the kind of growth that we need is going to be a very tricky undertaking.

FURMAN: I think it’s very likely that the economic problems associated with this crisis outlast the virus, even if we have a vaccine in the middle of next year solves it. As I said, the unemployment rate if we had a vaccine today and everyone was called back from their layoffs would be 9 percent, and there’s a type of economic growth of reconnecting people to their old jobs fast and we’ll see a lot of that maybe this year.

But, you know, that’ll get us—you know, that only gets us halfway out of the hole. The other type of growth of finding new jobs or, even harder, finding jobs in new industries, is something that’s never been fast. That’s going to require a sustained effort. It’s going to require, you know, training, as Esther said, and all sorts of stuff to stay at it. And, yeah, so I think even in a—get the virus—get the vaccine next year scenario we’re looking at a prolonged period of economic pain.

GOLODRYGA: And is that globally, Jason?

FURMAN: Yeah, I was talking about the United States. The question started—

GOLODRYGA: Yes. Yeah. Yeah.

FURMAN: —with the global and then switched.

GOLODRYGA: Right. Right.

FURMAN: Globally, yeah. I mean, you saw huge capital flight from emerging markets in March. Some of that reversed in April. You have the IMF saying they expect $2.5 trillion of requests. Only a trillion are coming in. And, you know, we’ve talked about the debt here. That’s been a very parochial conversation because interest rates are much higher in emerging markets. They’ve gone up. Some of that stabilized a little bit. And they really need that lender of last resort that they have, which is the IMF.

But the problem is that where does that come from. It comes from global leadership. Who are the two largest shareholders in the IMF? The United States, which is not exactly a global leader right now, and China, which has no practice with—you know, they sort of just started getting practice lending a lot of money. Doesn’t have practice forgiving those loans, restructuring those loans, and it hasn’t been part of the Paris Club and the like.

And so the G-20 has done a little baby step in terms of the debt moratorium for low-income countries. They’re going to need to do a lot more and that’s going to be really hard for that to happen without the type of U.S. and Chinese leadership that has been just completely absent.

MACGUINEAS: One small thing I would also add is I do think the process of automation is going to be sped up through all of this and that we’ve already had a hard time thinking quickly enough to catch up to how to restructure an economy where growing portions are going to be automated very quickly, and I think the longer this lasts the faster that happens.

GOLODRYGA: Laura (sp)—

LEACHMAN: Can I say—

GOLODRYGA: Go ahead. Sorry. Sorry, Michael.

LEACHMAN: Excuse me. We have a system where states and localities are responsible for many of our major national priorities. Ninety percent of our school funding comes from states and localities. States and localities own more than 90 percent of the nondefense public infrastructure in the country.

Most of the—so and we’re looking at a situation where we—some of us are actually considering just not providing additional federal support for states and localities. And so if I go dark, then, you know, you think about what the impact is on our education system if regional colleges have to close or if community colleges really have to scale back, if our K-12 system gets even more unequal and, you know, we have a really hard time finding experienced teachers because we just can’t—we just can’t afford them.

So the kind of long-term effects on our economy of going in that direction are really, I think, severe. You know, we’ve talked about the near-term importance of making sure that all those teachers and health care workers don’t get laid off. But there are also very serious long-term implications of going in that direction.

GOLODRYGA: And I’m covering education in the future there, both K through12 and college, now and it’s clear that it’s not going to be a one-size-fits-all and it’s going to be a state by state and individual decision-making that, clearly, is going to have impacts for millions of Americans and generation to come.

Laura (sp), do you want to open up to one more question?

OPERATOR: Sure. We’ll take the last question from Joseph Bower.

Q: Hello. I want to follow up, I guess, where Maya was and with Michael.

In the last presidential election, about five hundred counties—(audio break)—they produce about two-thirds of the GDP. We are headed into another presidential election. So two-thirds of the economy is, essentially, in blue hands.

Do you have any hope that the way we’re going to spend whatever we do will not be really biased by the political process? We’re heading—this is the most political of the things we do and it seems to me—is there any way we can protect the states and localities? Because from an economic point of view, the most important ones are blue.

GOLODRYGA: Who wants to take this?

LEACHMAN: I’ll say that, you know, I think that the package that emerged from the House yesterday and the kinds of fiscal relief proposals that came out of the—came out of the Senate in earlier rounds have really been designed in a way that gets relief across the country. So the most effective way to do it is to increase the percentage of Medicaid costs that the federal government provides. There’s a provision like that in the—in the House bill and there’s one, a small temporary one, that’s already in place as a, you know, part of an earlier package. And so, you know, that gets distributed based on what states are spending on Medicaid.

Other provisions have the money going out based primarily on population. There’s a couple of proposals that do part of the money going out based on COVID cases or some measurement along those lines.

So, you know, I think that if we can get over the hurdle of, hey, we really—we need to be serious about this and the federal government needs to step up and provide relief, I think the kinds of mechanisms that are available are not partisan in their effects.

MACGUINEAS: Well, as Michael said, pandemics aren’t partisan but, of course, we’re able to make them, and, you know, I think it’s all incredibly discouraging the extent to which I think that is going to grow over time. I will say one of the most egregious things that’s contained in the new Democratic package that just came out as a recommendation yesterday is repealing the cap on the SALT deduction, which is a terrible policy to make the case that repealing that is the right thing for this moment, that it’s going to help the right people, that it’s going to help in the right way. It’s, literally, the poster child for the wrong policy for the moment.

And so we’re going to see bad ideas, horse trading, all these different things and, of course, it’s massively spread out by the presidential election. I was taking—while Michael was speaking to try to think about whether there are—whether there are paths to unify the country. Huge crises are supposed to be unifying moments and they have been for so many times in the past. But, more recently, they have failed to be.

We at the Committee for a Responsible Federal Budget is running a project called FixUS, which is looking at how we got to this moment where things are so divided and dysfunctional and there’s this loss of trust and how we’re going to go forward. And it is—it is a hard path to come up with without a real engagement process across the country and how to do that, and right now people are far more engaged in the partisanship because the election feels so high stakes and people truly have different opinions.

But we don’t have a process in place that we’re able to work those out. And so that continues to be—you can hear my frustration with both the politics of it but also our inability to really wrestle with policies as policies rather than reflections of the partisan politics. And I hope we will find a better way to wrestle with those policies because it’s doing us no good.

I didn’t want to end on a bad note. The other thing is the debt is very troubling and I am very concerned about where we’re headed in it, and I hope that Jason will also join me as soon as we get to a strong economic period to think about a sane and smart package that we could phase in that would address the debt.

GOLODRYGA: Well, as an immigrant, let’s—

MACGUINEAS: (Inaudible)—I’d like to just end there.

GOLODRYGA: As an immigrant—let’s end on a positive note. As my father says, never bet against America. So it may take a while of really challenging months and, hopefully, not years, ahead. But I think this was a really productive and engaging conversation. I know there are probably a lot more questions. But I feel as if many of you know each other. So feel free to reach out to Maya and Jason and Michael.

In the meantime, I want to thank everybody. This has been great. And stay healthy and stay well. Thank you.

MACGUINEAS: Thank you.

FURMAN: (Inaudible)—everyone.

LEACHMAN: Thank you.



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