FACULTY Q&A

The COVID-19 pandemic prompted a $2 trillion federal financial rescue package, and negotiations have carried on about another round of relief—though its prospects aren’t clear before next month’s election.

Plenty of experts, including economists and monetary policymakers, say the economy and populace need an additional financial boost. But even without it, all the spending has also helped to boost the federal debt to levels not seen in generations.

Is ballooning debt sustainable or dangerous for the U.S. economy? What about historically low interest rates? Betsey Stevenson, a University of Michigan professor of economics and public policy, moderates a discussion Wednesday afternoon with Lawrence Summers, former U.S. Treasury Secretary, and Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

The conversation is part of the Ford School of Public Policy’s Policy Talks series. Stevenson, who served as the chief economist of the U.S. Labor Department from 2010-11 and a member of President Barack Obama’s Council of Economic Advisers from 2013-15, discussed the issues beforehand with Michigan News.

Let’s start with the basics: What’s the difference between the deficit and the debt?

The deficit is the difference between what we bring in in revenues in a given year and what we spend as the government. It’s about the flow of government spending and revenues. When we take in less in revenue than we spend then we have a deficit and that adds to the total amount of debt—the total amount of money that the government owes. The deficit is what happens in a given year and the debt is the long-run picture.

It’s hard to conceive of the sheer size of that debt. People can relate to a family budget: You don’t want to spend more money than you have. Why does the government spend more money than it has?

The government is not like a family. We don’t want to compare the government’s budget to a family. For one thing, the government lives forever. A family might like to leave some money to their kids and help out other members financially, so there are some transfers across generations, but families are finitely lived. We don’t pass all of our debt or all of our wealth onto our children. The federal government, on the other hand, never needs to pay off all its debt because it is infinitely lived. The government debt is money owed by Americans to other Americans and that includes future Americans. As the economy grows, the debt becomes a smaller share of output, so for future generations the debt we are accumulating today will be a small share of national output. And that higher national output will be partially because of the spending the government has done—like on infrastructure and education.

The other difference is the federal government spends a lot of money on people. We’re not quite taking in the revenue that we need for all that money we spend but in terms of our lifetime, the federal government is going to spend a lot more money on future generations than they will be asked to spend to pay off the debt. Another way to say that is that it would not take a big adjustment to repay the debt.

How does the current deficit and debt compare with other periods of history?

The reason people are so concerned is the last time we saw federal debt hit this ratio of gross domestic product was back in World War II. We paid it back then, we paid it back through really rapid GDP growth. The economy boomed out of that period and we were able to bring the debt-to-GDP ratio down.

The challenge we have now is that we may not have that kind of rapid economic growth coming out of this particular period. Also we have commitments we didn’t have back in World War II to pay Social Security and Medicare benefits to an aging population. And there are other things that people want the government to spend money on.

When you think about government budgets and debt and deficits, it can sound a little boring. But the reality is it’s really a debate about what our priorities are as a nation. What do we want to spend money on? How do we want to fund it? Who should be kicking in? If we are building infrastructure that’s going to last many generations, how much should other generations pay for that? If we’re going to be borrowing to invest in the current generation’s education, they’re going to be better off for it. Should they pay some of that through debt service payments? These are the kinds of debates we should have.

Did the government’s $2 trillion financial rescue package have a dramatic impact on the deficit and, ultimately, the debt?

The spending the government had to do in the wake of the pandemic really is so much larger than anything we’ve had to do in the past. But we’ve also seen that it really worked. We saw household spending fall off a cliff in March and April. As those government payments went out household spending rebounded. By May, the worst of the economic recession was over even though the worst of the pandemic was not over. That’s a reflection of what the government did. Even though it’s spending a lot and that spending ultimately needs to be paid back, it’s also ensuring we have an economy large enough to be able to pay that debt back. If we hadn’t spent that money back in March and April, we wouldn’t have that debt but we’d also have a smaller economy, meaning less income overall.

So on the one hand, we’re incurring some debt obligations, but on the other hand we’re ensuring that our economy can be as close to potential as soon as possible. That means we’re probably going to need to spend a lot more money over the next few years as we get our economy back on track. Even though that money is going to add to the debt, it will ultimately leave us better off as a nation.

What else is important to know about the current state of monetary policy in the United States?

I think one of the things you’re going to hear in the Ford School Policy Talks session and beyond is a discussion about how long interest rates will stay low, and what those low interest rates mean for government borrowing. Right now is a very cheap time for the government to borrow and it’s a time when government spending is going to give us a really large return on that spending. It’s a great time for the government to spend. The real question is how long will we be able to maintain really low interest rates and what does that mean for how much we should borrow over the next few years.