Fed Chair Challenges Apathy About the Debt

Blog Post
Monday, March 04, 2019

With many lawmakers in both parties acting as if the high and rising national debt doesn’t matter, Federal Reserve Chairman Jerome Powell has provided a timely reminder that it does.

Powell delivered that message to Senate and House committees last week. In prepared testimony, he said Fed officials generally “view current economic conditions as healthy and the economic outlook as favorable.”

He also said, however, that the nation faces “important longer-run challenges” that include high levels of federal borrowing. Powell said “it is widely agreed that federal government debt is on an unsustainable path.”

The Fed chief had a blunt response when asked about “Modern Monetary Theory,” which downplays the significance of U.S. government deficits and has been cited by some Democrats to support plans for higher spending.

“The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong,” Powell said. He noted that the national debt is already high relative to the size of the U.S. economy and is growing significantly faster than GDP.

Powell’s conclusion: “We are going to have to spend less or raise more revenue.”

This reflects mainstream economic thought and echoes the conclusions of many other respected analysts both inside and outside the government. Previous Fed chairs have also voiced concerns to Congress about the rising debt.

Unfortunately, many elected officials in both parties seem to have trouble getting the message.

Republicans approved large deficit-financed tax cuts a little more than a year ago, and many of them are talking about more such cuts in the future -- and additional defense spending. Democrats have some ambitious spending plans of their own but it is not clear how these might be responsibly financed.

Meanwhile, total federal debt recently passed $22 trillion and the Congressional Budget Office (CBO) projects that under current laws, annual deficits would add $11.6 trillion to that over the next decade.

The CBO projections show the debt held by the public (the most economically significant portion of the debt because it’s what the government borrows from credit markets) rising from 78 percent of GDP to 93 percent over the next decade. And that is based on the tenuous assumption that Congress and President Trump do not pass spending plans and tax cuts that will require more federal borrowing.

To put our debt path in context, debt held by the public peaked in 1946 at 106 percent of GDP as a result of the massive borrowing needed to finance World War II.

As in the past, Powell emphasized high spending on health care as a key factor in the nation’s unsustainable fiscal path: “We spend 17 percent of GDP (on health care), everyone else spends 10 percent . . . It’s not that benefits themselves are too generous. We deliver them in inefficient ways.”

Among the other long-term challenges facing the country, Powell told lawmakers, is low productivity growth. He noted that productivity growth “drives rising real wages and living standards over the long run.”

He added: “Likewise, in contrast to 25 years ago, labor force participation among prime-age men and women is now lower in the United States than in most other advanced economies.”

Powell also expressed concern about “relatively stagnant incomes for many families and a lack of upward economic mobility among people with lower incomes.”

Such longer-term economic and fiscal challenges are neglected when Congress and the White House spend excessive amounts of time -- as they have in recent months -- arguing over annual funding decisions that involve only a slice of the federal budget.

Elected officials in both parties would do well to heed Powell’s words.

Our representatives in Washington should focus more on holding down the debt while finding ways to promote long-term economic growth by boosting productivity, reining in health care costs, enlarging the labor force and ensuring that hard work is adequately rewarded.