Does Public Debt Restrict Growth?
Joseph Minarik and Bob Pollin debate recent PERI report that debunked economic theory that supported austerity policies
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.
The debate in Washington about what to do about the recession has more or less resolved or focused on one critical point: does more public debt lead to less growth? The Republicans certainly give a resounding yes to that. They would like to see bigger cuts to government spending in order to spur growth, they say.
But critics of President Obama’s approach, which he calls balanced, are saying he’s more or less buying into the same argument, which is: more public debt means less growth. These critics say it may be the other way around. In fact a recent study done at the PERI institute shows, in fact, looking at the Reinhart–Rogoff study, which for those of you that haven’t followed this study [incompr.] study done by two eminent Harvard economists who said that when public debt reaches 90 percent, you have a serious restriction, if not a collapse of growth. The PERI institute study seemed to debunk at least the 90 percent figure, if not more.
So now we’re going to have a discussion, perhaps a debate, about that basic concept: does public debt at higher levels restrict growth or not?
Now joining us to discuss all of this first of all is one of the authors of the PERI institute study, Bob Pollin. He’s also the founder of the PERI institute and codirector. The PERI institute is in Amherst, Massachusetts. He’s a widely published author. His latest book is Back to Full Employment.
Thanks for joining us, Bob.
PROF. ROBERT POLLIN, CODIRECTOR, POLITICAL ECONOMY RESEARCH INSTITUTE: Thank you very much for having me, Paul.
JAY: Also joining us, from Washington, is Joseph Minarik. He’s the senior vice president and director of research at the Committee for Economic Development in Washington, D.C. He was the chief economist of the Office of Management and Budget for eight years under the Clinton administration. He helped to formulate the administration’s program to eliminate the budget deficit, and including the Omnibus Budget Reconciliation Act of 1993 and the bipartisan Balanced Budget Act of 1997.
Thanks very much for joining us, Joseph.
JOSEPH MINARIK, SENIOR VP AND DIR. OF RESEARCH, COMMITTEE FOR ECONOMIC DEVELOPMENT: Happy to be here.
JAY: So, Joseph, I’m going to start with you. Let’s talk about President Obama’s basic economic approach. And the underlying concept there he gives is that this is a balanced approach, that public debt is a problem, it does need to be addressed. He wants a sort of grand bargain with the Republicans to do all of this. Do you think this is a correct approach?
MINARIK: Well, every situation is unique. We are now in an absolutely unique situation, no way you can challenge that, certainly in the living memory of virtually every American, possibly in the history of the republic. We had an economic crisis, a financial crisis of a magnitude and character that we simply had never seen before.
The president’s approach, starting in the beginning of his administration, was to try to reestablish economic growth. To do that, he was willing to increase budget deficits by both increasing spending and reducing tax revenues. I think many economists agreed with that general premise. If anything, looking back, with the wisdom of hindsight, the situation that the president inherited was even worse than we anticipated at the time, and the route of getting out of it has proven to be even more difficult.
In the longer term, when we eventually get to the point where we have reestablished firm economic growth, the president apparently believes—and I personally would agree with him—that we will need to take steps to reduce the burden of the nation’s public debt, so that we can continue to have substantial growth in the long term. The president is in a constrained environment. What he can do in the very near term in terms of legislation is restricted by the Congress with which he has to work. I don’t know that you’re seeing the president’s first choices in very many of the decisions that he’s making, and I don’t know what the outcomes will be.
JAY: Joseph, I guess the underlying question I’m asking you is: do you think increased public debt restricts growth? ‘Cause that seems to be the premise both the Republicans and President Obama accept.
MINARIK: In the longer term—and I’m abstracting from the current period of sluggish economic growth—in the longer term, I do believe that greater debt restricts your ability to grow an economy. The most fundamental reason is, if I’m running the federal government, I would prefer not to have to pay so many of my tax dollars in debt service.
Right now, interest rates are very low. Once the economy recovers, interest rates will rise substantially. The cost of the federal government’s debt service is going to rise. The dollars that I pay to service the debt do nothing for the economy. There are other things I would like to be able to do. I’d like to invest in infrastructure. I’d like to invest in human capital. Every dollar that I spend on debt service is a dollar that I cannot spend on things that I believe will make the economy grow more rapidly.
JAY: And just quickly, the study of the PERI institute, which many people think have more or less refuted Reinhart and Rogoff’s study, the 90 percent equals collapse of growth formula. You’ve looked at the—I know you’ve had an initial look at the PERI work. Has it changed your thinking on this at all?
MINARIK: One thing that the paper definitely does is it refutes the notion of a cliff at 90 percent of GDP. Personally, I never thought that that cliff was the essence of what I considered to be the important argument. When I look at Bob’s findings with his colleagues, it looks to me like what you have in their results is a relationship where greater debt tends to reduce growth, but not without that cliff effect at 90 percent of GDP [sic].
So if I’m king of the world, I would prefer it to have lesser debt, so that I would have more options to try to make the economy grow more rapidly. What Bob has told me is that I don’t have to worry about stepping off the edge of the mountain at 90 percent. I think that’s true. But I think in the longer term, less debt is better, all else equal.
JAY: Okay. Bob, your take on the basic—it seems the basic debate here is: does more public debt equal less growth? And just respond to Joseph’s comment.
POLLIN: Well, I think Joseph’s saying things that I basically agree with. That is, as a matter of principle, over the long term I totally agree that having public debt is not going to be a favorable thing relative to not having public debt over the long term, abstracting from major recessions. I mean, over the long term, everyone should pay their taxes, their fair share of taxes on April 15. As we’ve talked about before, I think including Wall Street should pay a transaction tax. It could raise, according to my calculations, in the range of $300 billion a year for a modest tax. That would help a lot in financing necessary, important programs. So that’s—I totally agree with that. I think we should cut the military budget, and I think we should be able to spend a lot less on health care over the long term than we spend now, which is roughly twice what other advanced economies spend. So over the long term I have no problem with that.
The issue for today is, as Joseph himself said well: how do we get out of this massive historic crisis that was created by Wall Street hyperspeculation, by deregulation, and if I may say so, by deregulation that the Clinton administration supported very strongly at the time? That led to the financial crisis and the Great Recession.
At the time—and, again, I agree with Joseph—President Obama in 2009 pursued a pretty aggressive program of countercyclical government spending, borrowing money, spending on the economy, cutting taxes. We can debate on the details and the magnitude. I have issues with it. But in principle, overall it was the right thing to do. And that is why our government deficit went up so sharply, starting in 2009, and now why we have high public debt.
Now, the other thing, as Joseph also said: the U.S. government has been borrowing at very low rates, so that even though we have been borrowing a lot, and even though over the long term we should not continue borrowing so much, it happens that our interest burden on the debt now and then for the next few years is very low, is historically low. It’s less than half of what it was on average under presidents Reagan and Bush. So we have a lot of room to pursue further stimulus to get the economy back on a healthy growth path.
JAY: So, Joseph, there seems to be agreement in this long-term view it’s better to have less public debt than more public debt. But the question is now: what is the sense of urgency? And if you look at President Obama’s recent policy decisions, from sequestration, Social Security cuts, his whole grand bargain is not so far out, some of these effects. And you don’t see him out stumping, for example, for increased funding to states and municipalities and such, things that he did do in the first year or two. So, I mean, it seems to me what Bob is saying is that, you know, everybody can agree on the long-term issue, but it’s about—what to do now is where the debate seems to be.
MINARIK: And the president is in an awkward position. I mean, he could stump for a lot of things with a zero percent probability of getting them. So he’s probably making a calculation of where the playing field is and what his live options are.
If I had my druthers, I would begin to talk about making the adjustments we’d have to make to bring federal budget deficits down over the longer term. But I’d want to do it in a prospective and a very carefully phased way, where, you know, the president doesn’t apparently at this point have that option.
I hope that when we get down to the point where we’re actually having some serious conversations here in Washington, which haven’t happened yet, that we’ll start thinking in those terms, because it’s going to be important. This is going to be the biggest challenge in macroeconomic policymaking in perhaps the history of the republic. It’s going to be a very, very difficult problem, getting out of the situation we’re in right now.
Let me add just one more point relative to something that Bob said. It is true that debt service costs right now are very low. And for a short period of time, that does give us some flexibility. You want to keep in mind that approximately one-third of the public debt matures within one year. Another one-third matures within between one and five years. So once interest rates go up, there will be a fairly rapid process of debt service costs increasing. And it will increase substantially.
You know, we now have—I haven’t looked today. We now have interest rates on three-month Treasury bills at an annual yield of about 0.2 percent. If we go back to the historical average of the good times in the 1990s, we’re looking at about something like 4 percent. The cost of servicing every individual T-bill is going to increase by a factor of 20, and that change is going to happen very quickly. All of those securities by definition mature within three months. So we’re going to have a quick turnover of the debt. Debt service cost is going to rise very rapidly. That’s part of the reason why we’ve gotten ourselves into such a terrible box right now.
JAY: So, Bob, there’s kind of two points there, the politics, realpolitik of what’s possible. But let’s go to the points—two first, and then we’ll come back to the politics, which is that the cost of servicing this debt is going to rise and this cheap money isn’t going to last forever. So there is a sense of urgency about addressing the public debt. What do you make of that?
POLLIN: Well, of course interest rates will go up, but I’m not sure exactly when. Deficit hawks said the interest rates were going to skyrocket in 2009. Instead, the short-term interest rates, especially the Treasury rates and the federal funds rate, which is the central bank, the Fed’s policy target rate, are at historic lows, the result of which is, again, we’re paying less than half as a percentage of total expenditures in interest than we paid under Reagan and Bush. We’re paying about 6.3 percent. Even the long-term average is around 9 percent. So we’re three percentage points below what the average has been. Now, we will—yes, we will get back up towards that average, but keep in mind that Bernanke has said that he’s going to keep the federal funds rate at zero until the unemployment rate rises to 6.5 percent. So we still have some room here.
And so I don’t disagree in principle with the idea that we need to be concerned. But we also need to be concerned with the fact that we still have mass unemployment. And if we impose austerity now, as we are doing—more mildly than in Europe, but we’re still pursuing it—if we keep laying off teachers, if we keep laying off health care workers, if we keep cutting budgets to state and local governments, we are going to go back into a long-term employment stagnation mode. We’re not going to get out of the crisis. So that to me seems to be the number-one priority now.
MINARIK: Well, interest rates are going to rise when the economy improves. The reason why interest rates are low is because there’s very limited demand for credit, and there’s very limited demand for credit because of the weakness in consumer demand and the corresponding, therefore, limited demand for investment on the part of businesses.
You know, Bob is absolutely right. We do not know the hour when interest rates are going to begin to rise. We ought to be very cautious about putting our foot on the economic brake in terms of macroeconomic policy.
But the time is going to come when interest rates do rise. And when they do, it’s going to be a very difficult maneuver between monetary policy and fiscal policy to begin to make that switch toward a lower budget deficit while at the same time not choking off the economic recovery. So no quarrel, again, on principle.
But, you know, we have put ourselves in a very awkward position right now, and—.
JAY: But there is a quarrel on principle here, it seems to me. I mean, Bob is saying that the focus needs to be on mass unemployment, and you start with that. And you seem to be saying you need to deal more with the problem that interest rates will rise, so focus on the public debt. I mean, those are two very different approaches, aren’t they?
MINARIK: No, I don’t think so. I think we’re both talking about questions of timing. The question is: when do you begin to deal with the budgetary issue? You do not want to have a major fiscal contraction at this time. This is not the right moment for it. The economy is still weak. There are still risks with respect to the situation in Europe, with respect to our own housing market. So we do have to postpone that.
At some point, we’re going to have to make that transition. It is going to be one of the most difficult transitions in economic policy in the history of this country. I think if you gave the controls, if Bob and I were in a driver’s education car, you know, and we’re sitting with two steering wheels and two sets of pedals, we might make those adjustments at slightly different times.
But I think we’re both saying that now is not the moment for restrictive fiscal policy. That moment will come at some point in the future. It’s a matter of judgment when that moment arrives.
JAY: But at the level of President Obama and the Republicans and the dealmaking going on, we are seeing various forms of austerity.
MINARIK: I can’t speak for the president. However, I would imagine that if the president were philosopher king, his sense of the timing of these issues, the appropriate way to adjust policy, would be very much in harmony with what Bob is saying and what I’m saying, even though it might not be precisely what either one of us would choose to do.
JAY: Bob, the thing still seems to be what to do now. There does seem to me there’s more difference here than perhaps we’re hearing.
POLLIN: Well, one thing I would say is, one, let’s—of course, I’m not a political expert, but I want to speak to the politics of the moment a little bit.
I think that Obama has made a terrible mistake, and I don’t know what’s in his heart of hearts, but I think he’s made a terrible mistake in making concessions, preemptive concessions on Social Security and Medicare. I mean, when he ran for president, he and especially Joe Biden made very clear that we are not going to cut Social Security, period. No Democratic president to my knowledge, very few Democratic policymakers of any kind have ever favored cutting Social Security. And the cut that Obama has proposed, which—it sounds like a technical adjustment by changing the cost-of-living index. It really is a cut, and it really actually is significant for tens of millions of elderly people. And that was the wrong way to go.
I mean, if we are going to say, look, it is absolutely necessary for us to start cutting government spending now, which I don’t believe is the case, but let’s say it is, then Obama should say, therefore we are going to have to cut the military a little more, because we’ve ended two wars. Therefore we’re going to have to impose a tax on Wall Street, like they already have in Great Britain and like 11 other countries in the European Union are now starting to implement. That’s the way to close the budget deficit, whether we do it next week or in 12 months.
But to do it on the backs of elderly people, vulnerable elderly people, is simply wrong in principle, and in practical terms it is not even necessary.
MINARIK: We’re going to have to make a decision about whether we want a Social Security system that—you know, now that we’re getting to that issue, whether we want a social security system that is self-financing and that is sustainable over the long haul. The current system, unfortunately, is not.
The president proposed making several changes in Social Security. One of them has gotten all of the attention. You can do—the president has proposed to make adjustments that would protect low-income seniors and particularly long-lived retirees, for whom that CPI adjustment over the long haul would be most significant. But let’s—you know, we can talk about that. The packaging clearly needs some work.
But the most important point here with respect to Social Security is: do we want a retirement system that is—that finances itself and that can continue operating in the long term on a pay-as-you-go basis? If we decide that we want to do that, we’re going to have to make some adjustments. If we decide that we’re willing to go to general revenue financing, that gives us some other options, but it’s not necessarily what the people of the United States want. That’s a [crosstalk]
JAY: I think the Social Security thing is so much its own discussion. Why don’t we kind of put that to side for a second, other than the fact that it kind of reflection of an outlook.
But Bob raised two other issues. If dealing with debt is so urgent, then what about—why not much more major cuts on the military side? And what about much more revenue on the other side? I know there’s realpolitik about this, about what’s winnable, but isn’t it also a question if President Obama wants to do these things about educating the American public about what needs to be done? I mean, what’s your view on these issue of major cuts to the military and increased revenue like the financial transaction tax?
MINARIK: Well, if you look at the president’s numbers over ten years, the annual appropriations that he proposed for both the defense part of the budget and the nondefense part of the budget will be reaching—expressed as a percentage of GDP, they will reach the lowest numbers on record by 2017, and from there they will be cut even further. As a percentage of GDP, by the time you get to the last year of the president’s budget proposal, 2023, you have a reduction from that record low defense level of 2017 by another 20 percent, expressed as a percentage of GDP. So in one year you might say that the president’s defense reductions are not that large. Looking over the entire ten-year proposal, he’s going to unexplored territory, both on defense appropriations and on nondefense appropriations.
Now, defense requires a really thorough analysis. We have to decide what we want our defense establishment to do and how we’re going to fund it, how much we’re going to rely on our allies, what current missions we’re willing to throw over the side and decide that we don’t want to do. I don’t believe that we have had that analysis yet. And in that respect, I think Bob and I would agree. We need a very thorough debate on that issue, and we’re probably going to have to make some decisions that a lot of Americans, if they gave their gut reactions, they’d initially say, I don’t want to take that risk. So there is a need for public education on that front.
There’s as much a need for public education with respect to the nondefense activities of government. We’ve got a long, long way to go on both of those issues. And, frankly, if you look at the president’s budget cut numbers over a ten-year period, they’re pretty large.
JAY: Bob, what’s your take on that?
POLLIN: Well, the defense budget as a share of GDP, as Joseph, of course, knows as a major official in the Clinton administration, in Clinton’s last year of office was approximately 3 percent of GDP, and during Bush and then Obama it rose up to 4.7 percent of GDP. So that’s 1.7 percent—percentage point increase. So that’s $260 billion in today’s economy. That’s a lot.
So according to the Defense Department, if we did the sequestration, which we probably are not going to end up doing it at all, and there’s no other wars, by 2017 we’re back at around 3 percent of GDP defense budget. So that’s—you know, the issue of getting the defense budget down by 2017 would—that’s—without having any wars, we’re going to be back where we were at the end of the Clinton administration. Okay. So that is under reasonable control. We could probably get it lower.
But the other point, as I mentioned, raising tax revenues, it’s time to put a tax on Wall Street transactions like is being done in Europe, is already done in the U.K. on stocks. And that can raise about $300 billion per year, as long as we catch all transactions. So that can be a major new source of revenue. It will also discourage somewhat the hyperspeculation that brought the economy down in the first place. And that’s where we need to look.
The other place we need to look is the stranglehold that insurance companies and pharmaceutical companies have on our health-care system. We pay twice as much per capita in the United States as other countries do on health care, and they get better outcomes. So I’m not saying we have to have an exact Canadian style system, but some principle of expanding Medicare for all will enable us to have the kinds of benefits for people as we have an aging population, and not have to break the back of the economy to enable elderly people to live decent lives.
I mean, the—and I know we’re not on Social Security, but we’re about the budget, which is ironic. Why are we—indeed, why are we focused on Social Security when that isn’t the issue for today? The issue for today is the fact that we got this major problem of getting out of the recession. The recession was caused by Wall Street hyperspeculation. It’s time to regulate Wall Street, it’s time to tax Wall Street, and it’s time to refocus on job creation for now.
JAY: Okay. Just finally, let me get this down to one specific question, which maybe deals with the dispute about when one focuses on public debt and when one focuses on unemployment. Joseph, what is your take? Some people are suggesting the only way, one, to get the economy going, the only way really to address unemployment is some kind of massive direct jobs program. Whether it’s done through the cities, the states, it’s going to take federal government funding to do it. But they’re—without a direct, massive jobs program, the situation doesn’t change. What do you make of that idea?
MINARIK: Well, I think Bob and I would probably go about that initiative in a different way. I think we agree that the steps that were taken in 2009 were in the right direction, not necessarily the way either of us would have chosen.
You know, one of the problems with the situation we have right now, one of the reasons why I said that this dance is going to be so hard to choreograph is the fact that we make budgets on a one-year basis. You know, normally when we’re talking about quick reactions in macroeconomic policy, we’re talking about monetary policy. Monetary policy, the monetary accelerator’s flat on the floor. We don’t have any more adjustment there.
I would do something on the fiscal side of the budget. I don’t know that I would call it a jobs program. I would probably try to inject spending power into the economy in a more generic way. I would look at assistance to state and local governments because they’re strapped right now and they are laying off teachers and other workers, as Bob said earlier. I would probably also put some money into the hands of consumers in the form of temporary tax cuts.
But, yes, if you gave me my first choice, I would engage in a fiscal stimulus right now. I can tell you you don’t have to be a political wizard here in Washington to know that stimulus has become a dirty word, and the possibility of moving in that direction, unfortunately, is extremely limited if not nil.
JAY: And, Bob, same question to you, in terms of a massive jobs program. And does—and what—if not a massive jobs program, is there an end to this recession?
POLLIN: Well, massive jobs program, absolutely. How we enact one is tricky. I think the easiest way to think about it is as Joseph just said and as I mentioned before. State and local governments in combination are the biggest single source of employment in the economy, directly and indirectly, through the jobs they create through their suppliers. So why would we let the state and local governments’ budgets contract? We need to actually expand them.
So if you want to think about a massive jobs program, we don’t have to build new bureaucracies. We just have to prevent the state and local governments from, you know, contracting education, contracting health care, contracting family services, contracting health and safety. That would be a massive jobs program.
I know, you know, right here in my own university is a public university, and we benefited greatly from the last stimulus program. We would benefit from another one. And so those—and you can expand the UMass story out to every other community that has a major university. So that would be a massive jobs program.
I would also just add, though, as Joseph said, you know, the monetary policy can’t get any more aggressive, because the interest rate that the Fed has set for policy is zero. But as we’ve talked about before, Paul, the problem is that though we have the zero interest rate policy, what is happening is that commercial banks are piling up cash hordes. The commercial banks are holding $1.5 trillian in cash hordes at the Fed. They may also be holding a lot more. They are holding a lot more in short-term bonds, government bonds, U.S., Brazilian bonds. I’m just talking about the amount that they’re holding in cash at the Fed. I have proposed and we’ve talked about and other people have proposed that we start forcing the banks to lend some of that. And the way to do that is to either set a maximum level of reserves that the banks can hold, otherwise they’re taxed, or a direct tax. And that would change the incentives of the banks and getting them reconnected into actually putting money into the economy, especially into the hands of small businesses.
JAY: So, Joseph, just to finish off, you’re saying you’d like to see a stimulus now. But we don’t hear President Obama saying that.
MINARIK: The president hears categorical statements from the other side that there is no interest in a jobs program, no interest in a stimulus program, no interest in anything of that kind. In that environment, you know, you can talk to the wind, but the wind probably is not going to listen. So I think the president is making a calculation of what’s feasible and trying to make the best judgment in an environment that he considers to be less than perfect.
JAY: Bob, final word, then. President Obama can’t do other than he’s doing.
POLLIN: Well, you know, again, I’m not in Washington. I’m not a Washington insider by any means. I do think that the president can make some principled stands that would energize the population. I think, as we said, if he just would say as he said on the campaign, I am never going to cut Social Security, if he said, we’ve just got to stop cutting budgets for educating our kids, we just have to do that, I think he could mobilize—and in the process create jobs, I think he could mobilize people.
Whether he would get the Republicans to move, I agree with Joseph. Again, I just read the news. I’m not in D.C. But I agree that it probably wouldn’t happen.
The one thing that I think could actually feasibly happen is, as I said, to push the money that is sitting in the coffers of the commercial banks into the economy. We’re not talking about pocket change here. We’re talking about $1.5 trillion. We’re talking about—that’s 10 percent of GDP. Even if you got half of that into the hands of small businesses, that would also be a massive jobs program.
JAY: Alright. Thank you both for joining us.
POLLIN: Thank you very much for having me, Paul.
MINARIK: Thanks for having me.
JAY: And thank you for joining us on The Real News Network.
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