Former Fed chair Janet Yellen thinks it’s OK if the government adds to its $23 trillion debt load – although there are strings attached.
“Even under current conditions, I think we can afford to increase federal spending or cut taxes to stimulate the economy if there’s a downturn,” said Janet Yellen, the former Federal Reserve chief, at the annual meeting of the American Economic Association, according to the Washington Post. “Chronic low interest rates create additional fiscal space.”
Yellen said that gives policymakers more room to embark on ambitious spending that could juice the nation’s long-term economic development right now.
“In a world of low real rates, there’s also a strong case for programs to invest in infrastructure, education, research and development, climate change mitigation – namely investments that would elevate potential growth,” Yellen said, according to the Post.
It marks a shift in Yellen’s previous thinking about the national debt and the future budget outlook. In 2017, when the debt stood at $20 trillion and Congress debated the GOP tax cut legislation, she said mounting level of federal spending “should keep people awake at night.”
The former Fed chair forms part of a growing collection of economists who believe that targeted spending in programs – even if it adds to the debt – may not be so harmful if it spurs growth in the long run, especially in a competitive global economy. However, they do believe that type of deficit-spending should be paid back eventually.
It underscores an evolving view of federal spending as low interest rates make it cheaper to finance government initiatives. Currently, the Fed’s benchmark interest rate stands around 1.75% as it was cut three times last year.
Some criticized the Federal Reserve for hiking rates prematurely in the 2010s after the recession and holding back economic growth.
The deficit in fiscal year 2019 neared $1 trillion, a 26% jump from the year before, swelled by the 2017 Republican tax cuts and rising government spending. The Congressional Budget Office projected last year the deficit will continue growing between 2020 and 2029.
Some progressive economists, such as Gabriel Zucman and Emmanuel Saez of the University of California at Berkeley, have called for additional taxes on the rich to pay for hefty spending programs in healthcare and education.
Both consulted with Sens. Elizabeth Warren and Bernie Sanders in designing their plans for a wealth tax on the most-affluent Americans.