Economists are rethinking fiscal policy

EVERY SO OFTEN a right-leaning economist raises the alarm about the apparently parlous state of America’s public finances. The subject gripped Washington in the early 2010s but has since been mostly disregarded. At 78% of GDP, America’s net public debt is high, if not yet huge. Thanks to President Donald Trump’s tax cuts, the federal deficit will exceed 4% of GDP this year, a level that is more typical after economic slumps than in the benign conditions seen today, with unemployment at 3.6%. What is more, unless taxes go up or spending on pensions and health care for the elderly is contained, public debt will rise to 92% of GDP in 2029, the highest since 1947, and go on rising for decades more, according to official projections.

Such warnings have fallen on deaf ears not just in Washington, but on Wall Street too. Financial markets, hungry for dollar-denominated safe assets, betray no concern about America’s debts. The risk of a crisis is not the only theoretical downside to public borrowing, but the others are looking unconvincing. For example, the argument that debt is crowding out private investment is hard to sustain when firms are awash with cash and can borrow at extremely low rates.

In January Olivier Blanchard, a former chief economist of the IMF, told the annual meeting of the American Economic Association that...

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