Fiscal Policy

Even with Low Interest Rates, Deficit Spending Is Risky

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As Congress debates Biden's rescue plan, it should not ignore the risks of rising budget deficits.

As Congress considers whether to pursue the first $1.9 trillion phase of the President’s economic “rescue and recovery” plan this week, our country, and the dynamic economy that fuels its growth, is at a critical crossroads. While the public health dimensions are paramount, the central issue now confronting the Biden Administration and Congress is the size, contours, and funding of an additional economic relief package. On January 14, then-President-elect Joe Biden looked into the television cameras and declared that the U.S. could afford his rescue and recovery plans — (phase 1 “rescue” will cost $1.9 trillion) because “with interest rates so low, we cannot afford inaction.” Biden buttressed his position by claiming that a “growing number of top economists have shown, even our debt situation will be more stable” with this spending.

While it’s clear additional stimulus is needed, there is a good-faith debate as to whether a $1.9 trillion package — on top of the $1 trillion package enacted in December and the $2.7 trillion package passed last Spring (not to mention the trillions he will undoubtedly propose for “recovery”) — is required to fully address the needs of the American people. Regardless of what the final number is, it would be a mistake of historic proportions to decide policy on the assumption that just because interest rates today are historically very low, the “real cost” of this spending is similarly very low.

The weakness of this argument is not lost on most Americans. It was only a little over a decade ago that Americans learned that just because mortgage rates were low, they could not actually afford to buy a mansion. In fact, consider how many millions of citizens lost homes to foreclosure when the interest rates on their adjustable mortgages dramatically skyrocketed beyond the low teaser rates they had been led to believe would last.

If we had 100 years, or 50 years, or even 30 years to pay off our low interest debts, there might be some truth to the President’s declaration about the deficit and low rates. Or, if we were using long-term debt to finance productive long-term assets with bipartisan support, like a national infrastructure initiative or education-expenditures of this size might generate sufficient growth to act as an economic counter-weight. But, to suggest we can keep incurring unlimited debt, regardless of economic need, because it is simply cheap to finance is a dangerous myth.

First and foremost, there is no real market for 50- or 100-year Treasury bonds. When rates dropped early in 2020 as a result of the COVID-19 pandemic, and investors fled into safe Treasury securities, the previous administration’s Treasury Department aggressively explored the issuance 50- and 100-year debt to finance the recovery package and learned that, while investors love U.S. debt, they love it mainly in short term durations.

That is why, of the $21 trillion of U.S. public debt outstanding to the public, as of December 2020, the average duration was 70 months — less than six years.  Bonds (10- to 30-year duration) represent less than 15 percent of all Treasury securities owned by the public. Less than 10 percent of total debt issued in any year (more like 2-5 percent) is 30-year duration. There is not enough demand for 30-year bonds, let alone 50- or 100-year maturities. Arguing that we can finance numerous, multi-million dollar plans with low-cost, sustainable, long-term debt is fantasy.

Earlier this month, at a Peterson Institute conference, three of the Democratic Party’s most respected economic thinkers (former Treasury Secretary Robert Rubin, former Director of the Office of Budget and Management Peter Orszag, and Nobel laureate economist Joseph Stiglitz) warned that low “interest rates … should not be assumed to persist forever.” In an under-reported omission by most mainstream outlets, they maintained that if interest rates rose a mere 0.25 percentage points a year more than the Congressional Budget Office forecasts, annual interest payments (and thus the annual deficit) could rise to $1.2 trillion in 2030, almost four times more than the $338 billion spent in 2020 (and more than double the $664 billion currently projected for that year).

Even before Congress was rightfully required to spend $3 trillion on emergency-pandemic relief to help the American people — the national debt, accumulated under governments of both political parties, represented approximately 107 percent of GDP, a level our country has not seen since World War II.

While Congress must do more to expand access to life-saving vaccines, support struggling families, and reopen our economy safely, no one should delude himself into believing that the costs are irrelevant — or even estimable. To suggest otherwise is dangerous. As Former CEA Chairman Orszag stated, the current “era of low interest rates is teaching many people the wrong lesson.” The fact is the nation needs to carefully consider how it can balance economic relief and financial realities. Otherwise, just like the unwitting families who bought more expensive homes than they could afford with cheap adjustable rate mortgages, the American people will be left wondering why they were never told the truth about the perils of unabashed spending.

Editor’s Note: An earlier version of this article referred to Peter Orszag as a former chair of the White House Council of Economic Advisers. In fact, Mr. Orszag was the Director of the Office of Budget and Management.

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