Do U.S. budget deficits matter? Not to today's left or right
Vice didn’t win the Academy Award for Best Picture last Sunday, but one of the quotes from its subject seems to be resonating these days. Back in 2002, Vice President Dick Cheney famously told Paul O’Neill that “Reagan proved deficits don’t matter.”
One definite nonfan of MMT is Federal Reserve Chairman Jerome Powell. Questioned about it during his House Banking Committee appearance last week, he declared, “The idea that deficits don’t matter for countries that can borrow in their own currency, I think, is just wrong.” Moreover, he added, the Fed’s “role is not to provide support for particular policies,” an apparent reference to utilizing the central bank’s balance sheet to finance something like a Green New Deal.
That demonstrably hasn’t happened. Amid great fanfare, the U.S. national debt hit $22 trillion in February, exceeding 2018’s $20.5 trillion gross domestic product. Yet yields on U.S. government debt are near historic lows—roughly 2.5% to 3%, depending on maturity. And the only inflation problem is that inflation has been below the Fed’s 2% target. Meanwhile, the jobless rate hovers around 4%, below what most economists thought was full employment.
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One downside to a high national debt, according to Goldman Sachs economists, is that it may make policy makers reluctant to borrow as much as is necessary during downturns, encouraging them instead to stretch monetary policy to its limits. Once the Fed pushed interest rates virtually to zero, it quintupled the size of its balance sheet under quantitative easing, which is now being unwound.
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