Jared Bernstein on Debt

Owing to a technical snafu, this transcript will b rougher than usual.TranscriptPK So hi, everyone. Paul Krugman talking with Jared Bernstein, formerchief economist, head of the Council of Economic Advisors under Joe Biden. Before we get going: What are you doing now, Jared?JB I’m a policy fellow at the Stanford Institute for Economic PolicyResearch. And that’s obviously in Palo Alto and the Center for AmericanProgress, which is in D.C. And I speak to you from Alexandria.PK Yeah. I lived there briefly, 44 years ago, anyway. And the reason I wanted to talk with you is, you know, there’s a lot of headlines now about debt. There’s interest rates, particularly at the long end are way up. You and Ihave both been substacking about it. And I think we mostly are on the same wavelength, but I’d like to go back and forth. I want to talk about some work that you’ve done, particularly with Bobby Kogan. So what’s your take right now? I mean, we had all these headlines about $40 trillion, or I guess I’m supposed to do that in a Dr. Evil voice: $40 trillion.But what’s your take on what’s happening now? This is... It’s very different from the way we were talking about it a few years ago, but what’syour take?JB Well, Paul, like you, for many years, I was pushing back on those whose hair was on fire about the urgency of the federal debt. I thought that that overheated. Everything was overheated and that as long as the growth rate surpassed the interest rate and we sort of kept our deficits within kind of a normal range, we could service our debt without breaking a sweat. But a few years ago, I began to become more hawkish and less dovish for a couple of reasons. One, the budget math became less favorable. The growth rate looked a lot closer to the interest rate and that was before this recent bump up in bond yields. But also, you know, I’ve been in government a lot lately and it looked to me like neither side really cared kind of much at all. The reaction function, as we say these days, a common phrase, seemed to be kind of dead in a way that I thought was problematic.This is not a pox on both houses. And by the way, here’s an area where you and I may have slightly tinted different views. The Republicans’ tax cuts, and Bobby and I have done a lot of work on this, are public enemy number one here, exhibit A in terms of why we’re in the mess we’re in.But, you know, Democrats have largely endorsed those tax cuts and, in my view, have done some irresponsible stuff too. So that’s kind of my first blush of where I think we are.PK Okay. So before I get into all that, I do want to, for listeners, so you know and I know this, you’re talking about r-g, but that’s kind of an important point, right? Why do we think about interest and growth and debt? Lots of people out there saying, oh, look, the interest on the death is now so huge, but that’s not quite the whole story, but it’s closer to the story. Anyway, your version of it.JB So a lot of this comes, at least for me, comes from paying a lot of attention to Olivier Blanchard’s work. He has kind of wedged into a lot of our heads this – and he’s not the first – but the notion that when the growth rate surpasses the interest rate, when the growth rate surpasses the rate of interest – It is possible to keep rolling over that debt and not get into a kind of a debt spiral because you’re generating enough growth and revenues and incomes to sustain. As soon as r is bigger … that’s not all the math. It depends on the size of your deficits as well. But broadly speaking, for many years, we had, you know, pretty good growth and pretty low interest rates. We can talk about how that growth was distributed. A lot of it didn’t reach working people, working class people. But the fact that growth rate was higher than the interest rate was one reason why I was less wound up about all this.PK Yeah, one of my favorite things is, you know, how did we pay off thedebt from World War II? And the answer is we didn’t. That the debt when John F. Kennedy was elected was about the same as it had been on VJ Day in dollar terms, but it was just vastly smaller as a share of the economy because we outgrew it. And that’s kind of – as long as debt doesn’t rise relative to GDP, not a problem. And that says if the economy is growing and interest rates are not too high, not only don’t you have to pay off the debt, you can actually keep it growing as long as it just doesn’t grow too fast, right?JB Exactly. So the problem we face is when our debt grows faster than our economy, the debt ratio or the debt to GDP just keeps going up and up and up, which is just what you said.PK Yeah. And so there’s a – yeah. For, you know,