During the 1920s, real interest rates were fairly high. Then during the period from 1933 to the 1950s, both nominal and real rates were fairly low. Then nominal rates rose in the 1960s, and somewhat later the real interest rate also increased. Since 2000, both nominal and real interest rates have fallen to very low levels.
What lesson can we learn from this historical pattern of ups and downs? If you believe most of the pundits that I read, the proper lesson is something like the following:
“No need to worry about the unprecedented budget deficits that are pushing the debt to GDP ratio steadily higher, because interest rates will never go back to the levels seen in the 20th century. The debt will never become a burden, because it is not a burden at the moment.”
Maybe. I also expect rates to stay low for a substantial period of time. But don’t these same pundits insist that the lesson of 2008 is that we need tougher “regulation” of big banks? That we need to worry about “black swans”? That we need to have annual “stress tests” to make sure that banks can survive an unexpected bad shock?
So why doesn’t this sort of precautionary principle apply to government financing? Suppose the national debt were to eventually hit 200% of GDP, and then interest rates rose back up to 5%?
PS. Until 2016, the budget deficit got bigger during recessions and then recovered somewhat during long expansions:
It feels good when the government gives the voters lots of goodies, while at the same time cutting their taxes. Perhaps too good to be true?
PPS. Here’s a recent headline from The Hill:
Trillion-dollar deficits as far as the eye can see, and hardly a voice of caution to be heard
What could go wrong?
READER COMMENTS
robc
Dec 2 2019 at 4:24pm
The headline is wrong, there are plenty of cautionary voices. They just arent listening to those people.
nobody.really
Dec 2 2019 at 6:43pm
The graph shows us that the two biggest predictors of an increase in the deficit are 1) a recession and 2) a Republican administration.
Scott Sumner
Dec 2 2019 at 8:57pm
That’s right.
Brian Donohue
Dec 3 2019 at 8:26am
Actually, the deficit bottomed out in FY 2015 at $441 billion, increasing to $665 billion in FY 2017, under a Democratic administration. The recent tax cut increased the deficit, but the trend of larger deficits was already in place.
It seems to me that DIVIDED GOVERNMENT is the best way to restrain the deficit, and the American people understand this, but the idea is distasteful to partisans of all stripes so it never gets any oxygen.
Through 1968, America typically voted in a unified government (61 of 90 Congresses through that point (68%) governed with one party in control of House, Senate, and Presidency).
In the 26 Congresses since 1969, only 8 have been under unified government (31%) — Carter’s four years, Clinton’s first two years, Bush II’s first six years, Obama’s first two years, and Trump’s first two years). From a deficit (and general governance) standpoint, these have been much worse than the 18 Congresses (including the entirety of the Reagan/ Bush I era and the last 6 years of the Clinton and Obama administrations). Bush II was arguably our worst President ever, maybe because he had too much rope, especially after 9/11.
The only decent effort a tackling the deficit this century was in 2013 under divided government.
Alan Goldhammer
Dec 3 2019 at 8:59am
“It seems to me that DIVIDED GOVERNMENT is the best way to restrain the deficit, and the American people understand this, but the idea is distasteful to partisans of all stripes so it never gets any oxygen.”
I’m not sure this is correct. In the first two years of the Clinton Administration with a unified government, a tax increase was passed that was designed to cure the lack of revenue. This led to increases in Federal revenue and budget surpluses for the final two years President Clinton was in office. This continued for a short period of time until the Bush II tax cuts reversed this trend. The Great Recession caused things to really crater and we’ve all seen how the magical thinking of the Trump tax cuts have performed. Maybe Larry Kudlow can get on the news more often and make us all feel happy as we head into the next recession.
TMC
Dec 3 2019 at 7:44pm
“This led to increases in Federal revenue and budget surpluses for the final two years President Clinton was in office. ” You can thank Newt Gingrich for that. Clinton’s budget did not have a surplus, until Gingrich got done with it.
Scott Sumner
Dec 3 2019 at 12:23pm
Brian, You said:
“Actually, the deficit bottomed out in FY 2015 at $441 billion, increasing to $665 billion in FY 2017, under a Democratic administration.”
So you agree with me.
Brian Donohue
Dec 3 2019 at 2:01pm
Technically, yes, but your phrasing (“Until 2016”) invites the interpretation “Until Trump” among those who don’t know better, an erroneous impression I suspect you are happy to propagate and I am happy to clarify.
The increase in the deficit under the unified GOP government of 2017-2018 is big enough without tacking on a couple extra years or ignoring the trend already in place.
Brian Donohue
Dec 3 2019 at 5:25pm
Alan and Scott,
Fair enough, the GOP is more likely to produce larger deficits because they are more likely to cut taxes.
Havng said that, I can hear Uncle Miltie in the back of my head telling me the real variable to keep your eye on is the share of national income that the government spends. On this score, the Dems probably come out worse and divided government is almost surely best. (Sorry if this comes across as moving the goalposts, but I do concede the narrower point.)
Scott Sumner
Dec 4 2019 at 1:38pm
I’m never “happy to propagate” erroneous perceptions.
Thrawn
Dec 3 2019 at 12:16am
Is the premise that with a high debt we’ll somehow run out of currency? Or is it that not running out of currency would cost us an inflation rate that wouldn’t be able to be controlled?
Scott Sumner
Dec 3 2019 at 12:22pm
No, the US will never “run out of currency”.
Matthias Görgens
Dec 4 2019 at 9:50am
Another view: at any current level of technology, there’s only so much real gdp the nation can produce.
Leaving the spending (and thus consumption) decisions in private hands, tends to produce more utility.
That’s independent of the notion that the government can tax or inflate (or even default) its way out of debt.
Michael Sandifer
Dec 3 2019 at 12:57pm
I’ve long thought many Republicans were closet socialists in self-denial. I’m more convinced of that than ever. If not for various forms of bigotry, they’d openly favor a greatly expanded welfare state. If not for cultural conservativism, they’d be leftists.
robc
Dec 3 2019 at 9:03pm
We didnt run a surplus under Clinton, it was close but slightly negative his last 2 years according to the treasury dept. Last surplus was during Ike’s first term.
robc
Dec 3 2019 at 9:05pm
Clinton’s last fiscal year ran a $18B deficit, which is tiny, but not a surplus.
robc
Dec 3 2019 at 9:07pm
And with GAAP accounting, it didnt even come close.
Comments are closed.