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On Thursday, November 19, Jason Furman joined Markus’ Academy to discuss U.S. debt and a framework for fiscal policy moving forward.

Furman is a Professor of Economics at Harvard Kennedy School, Senior Fellow at PIIE, and Former Chair of the Council of Economic Advisors.

Watch the full presentation below and download the slides here.  You can also watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.

Executive Summary

Even before the pandemic, economic policy in 2018-2019 was extraordinary stimulative and should change how we think about the macroeconomy. A chronic excess in (risk-free) savings relative to investment has required lower rates to clear, so policy looked like it was responding to a recession. This tells us something about how differently the economy is acting today relative to decades past.

Traditional arguments for worrying about the debt are less relevant now, and debt should not be a constraint on the short-term response to the depressed economy. Furman reviews several common arguments for worrying about the debt. He says he’s not concerned about investment crowding out impeding economic growth because capital is not constrained by low rates. Further, negative real rates may imply crowding out is good not bad. He also thinks intergenerational fairness is not a concern, as future generations will be richer. While some argue the U.S. needs to be prepared for emergencies, he notes there was no problem borrowing to fight COVID-19 and that the UK borrowed 250% of GDP to fight World War II. In terms of avoiding a fiscal crisis, Furman says this is a serious issue, but global fiscal behavior matters. To sell its debt, the U.S. just needs to be the “least ugly horse.” Finally, he’s not worried about interest on debt crowding out other spending because interest on debt is currently negative.

Still, the question of how to size stimulus relief remains outstanding. How does the U.S. decide on $100 billion or $100 trillion of stimulus relief? Even if the U.S. can borrow an unlimited amount, it’s still redirecting scarce resources and should do a cost-benefit test for different policies—it just doesn’t need to add an extra “cost” for debt. Bad projects still have some opportunity costs.

Debt to GDP is a misleading metric for assessing the sustainability of fiscal trajectory and policymakers should instead look at real net interest as a share of GDP. Furman walks through several reasons why debt to GDP is a poor metric. First, this measure divides a stock by a flow variable, since debt is a stock, while GDP is a flow variable. Second, it does not reflect interest rates. Third, the metric is backward-looking and doesn’t include what’s coming. Furman says looking at real interest payments as a share of debt is a much better metric as it reflects debt that is inflating away.

Furman’s “tentative framework” for fiscal policy works toward a goal where real interest does not exceed 1% of GDP in the coming decade. Or, by another metric, debt to GDP should be less than 150% or 200%. Furman says anything the U.S. does in the fiscal space needs to be a combination of optimal, understandable, and achievable.