The Debt Is About to Matter Again
When interest rates outpace growth, very bad things can happen.
By Rogé Karma, The Atlantic
In 2019, Lawrence Summers and Jason Furman, two of America’s most influential economists, published an essay titled “Who’s Afraid of Budget Deficits?” In it, they argued that Washington’s long-standing worries about the national debt had been overblown. Other prominent experts, including the former head economist of the International Monetary Fund, an institution known for imposing harsh fiscal austerity on developing countries, came to similar conclusions. The reason: Deficit hawks had been fixated on the wrong number.
The debt, according to these economists, still mattered. But whether it would become a serious problem, they observed, depended not on how big and scary the number was (about $28 trillion at the time, and today closer to $36 trillion), but instead on a simple formula involving the variables r and g. As long as a country’s economic growth rate (g) is higher than the interest rate (r) it pays on its national debt, then the cost of servicing that debt will remain stable, allowing the government to roll it over indefinitely without much worry. Given that interest rates had been close to zero for a decade, Furman and Summers concluded that the “economics of deficits have changed” and called on Washington to “put away its debt obsession and focus on bigger things.”
