Economists: US Debt Levels Not ‘Catastrophic’

Although the nation’s debt is on the rise, some economists are saying the unexpected: the U.S. shouldn’t be that concerned about it.

According to The Wall Street Journal, annual deficits will rise above $1 trillion starting in 2022, while the Congressional Budget Office has predicted that debt will make up 93 percent of gross domestic product by the end of the next decade.

But some economists say the U.S. deficits don’t matter nearly as much as believed. In fact, it might be worth it to take on more debt for certain programs.

“The levels of debt we have in the U.S. are not catastrophic,” said Olivier Blanchard, an economist at the Peterson Institute for International Economics and former IMF chief economist. “We clearly can afford more debt if there is a good reason to do it. There’s no reason to panic.”

He added that interest rates should stay low in the coming years as the population ages. And when the interest rate on government borrowing is below the economy’s growth rate, the debt is manageable.

Some left-wing economists have even introduced a new fiscal policy concept: Modern Monetary Theory (MMT), which says that policy makers shouldn’t focus as much on the need to find investors to buy bonds that finance deficits. Instead, they need to look at whether new spending could lead to a boost in inflation or a disturbance in the economy, said economist Stephanie Kelton, a Stony Brook University professor and former chief economist for Democrats on the Senate Budget Committee.

If the economy can handle more spending without an increase in price pressures, then there is no need to “offset” that spending elsewhere, she added. If price pressures do happen, then taxes or interest rates can then be raised.

“All we’re saying, the MMT approach, is just to point out that there’s more space,” said Kelton. “We could be richer as a nation if we weren’t so timid in the use of fiscal policy.”

But Alan Auerbach, an economist at the University of California at Berkeley, says the Modern Monetary Theory view “is just silly” and could lead to unexpected inflation.