EC Time To Worry Less About Federal Budget Deficits?

Jason Furman and Lawrence Summers are prominent Democratic-leaning academic economists, but not among those whose names have been put forward for prominent economic policy positions in a Biden administration--which leaves them free to be a little iconoclastic. Yesterday, they presented a "Discussion Draft" of "A Reconsideration of Fiscal Policy in the Era of Low Interest Rates" in an online event hosted by the Hutchins Center on Fiscal & Monetary Policy and the Peterson Institute for International Economics. Video and slides from of their presentation together with discussants are available here. Furman and Summers have been ruminating along these lines for some time: for another example, see their essay "Who’s Afraid of Budget Deficits? How Washington Should End Its Debt Obsession" in the March/April 2019 issue of Foreign Affairs.  

Furman and Summers begin by noting that not only have interests rates been very low for more than a decade but that according to the forecasts embedded in financial market actions (like the willingness to investors to put their money in long-term bonds that pay a low interest rates for decades into the future), interest rates seem likely to remain low for years or decades into the future. Here's, I'll list three main implications they draw for fiscal policy and offer some thoughts about each one. 

Implication 1: Active Use of Fiscal Policy is Essential in Order to Maximize Employment and Maintain Financial Stability in the Current Low Interest Rate World

The basic idea here is that with interest rates already very low, the Federal Reserve is not going to be able to respond to recessions by cutting interest rates by, say, 5-6 percentage points to stimulate demand. Even if the Fed was to move its benchmark policy interest rate slightly into the negative range by a few tenths of a percent, as some other central banks around the world have done, making those rates negative by several percentage points seems like a policy with risks of its own for financial stability.

Perhaps the main policy challenge here is that fiscal policy has traditionally been somewhat slow to adjust: that is, the economy slows down, Congress starts holding hearings, the economy is still slow, Congress passes a bill, the economy is still slow, the bill begins to take effect, the economy is (maybe) still slow, and the full effects of the stimulus bill percolate through the economy. Is there a way to speed the process? 

History has taught that it's hard for the government to have a bunch of "shovel-ready" projects on hand, just ready and waiting to ramp up if the economy tips into recession. Thus, a lot of the more recent thinking involves considering spending bills that would be triggered--perhaps only in specific areas or regions--by an indicator like an ongoing rise for several months in the unemployment rate. 

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