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Okay, we are going to start today's show by jumping into the old Planet Money Time machine.
Economic Destination 2009. A time when the government was spending lots and lots of money and the national debt was shooting up.
Yeah, back then the US was trying to pull itself out of the recession that followed the financial crisis.
One of the big strategies the government used was just to spend and spend and spend.
We bail out some banks, we lowered taxes. There was all this money for infrastructure.
Early in recession, I think a lot of people were very supportive of the big steps the government took to increase the government spending and reduce taxes.
That is Karen Dynan. She teaches at Harvard now. Earlier in her career, she worked at the Federal Reserve,
did a stint as the chief economist at the Treasury Department.
And Karen says it didn't take long for some people to question the wisdom of all that spending.
Attitudes changed. And there were some economists and some policymakers, I think particularly people we would call deficit hawks, who started to get quite concerned.
Karen, she was firmly in the deficit dove camp back then. To her, it seemed obvious that the economy was not going to get back on its feet without an ongoing infusion of government spending.
But she at least understood the thing the hawks were afraid of.
Sure, in pure dollar terms at least, the country had never taken on so much debt so fast.
In 2008, the gross public national debt was around $6 trillion. Then it was $7 trillion. Then $9 trillion. By 2012, it was $11 trillion.
And as most e-context books will tell you, Derek can be real dangerous in running up a big national debt.
One of the classic worries is how much the debt you take on now could cost you in the future.
So the scary thing about high debt is that you can get a snowballing of debt because of interest costs.
And when you're paying a lot of interest and then you're running a larger deficit because you're paying a lot of interest, that adds to the debt.
And then you get to the next period and you have more debt. And then you have more interest. And so it just keeps compounding and getting worse and worse and worse.
After the financial crisis, interest rates were low. But that didn't necessarily mean they would always be low.
The markets could look at these higher and higher levels of debt and decide, you know what? Maybe Treasury bonds, the IOUs, the US government has to sell to spend more than it takes in.
Maybe those bonds aren't such a great investment anymore.
Debt becomes costly for us when investors, the people that buy our debt lose their appetite to hold our debt.
Right because to keep investors buying that debt anyways, the government would then have to pay higher and higher interest rates on those IOUs, which would make the whole thing snowball even faster.
Now neither of those bad scary outcomes came to pass. In hindsight, it actually seems pretty clear that the people saying the government was right to spend all that money, that they ended up on the right side of history.
If anything, a lot of economists, including Karen, actually think that the government should have spent even more than it did, that it could have shortened the Great Recession. But that's hindsight.
Yeah, Karen says it could be really tricky for policymakers to make these huge decisions in real time without knowing for sure what's going to happen as a result.
You can't just look in the textbook to get the answer to your policy challenge that you're racing. You don't have evidence to go off of it and at least to this murkiness.
Which leads us to now to 2024 because once again, we have lived through a massive crisis this time, the pandemic. And once again, the government responded to that crisis by just pumping incomprehensible amounts of money into the economy and running up a huge tab.
In 2019, the gross public national debt was around $17 trillion. Today, it's over $26 trillion. And where after the financial crisis, Karen looked at the situation and said, you know what, it's worth the risk. We got to keep spending.
This time, she is not so sure because she thinks at some point we could get to a place where there is too much debt and it does start to hurt the economy.
But it's not clear to her where that line is. The uncertainty, the lack of evidence, the murkiness, that's feeling pretty real for her these days.
I mean, so the image that comes to mind is that the policymakers, I kind of think I imagine sort of like inching out on the ice and then if it cracks, that's when you stop and you hope you don't fall through.
I think that's right. I mean, I think that's the, I mean, the ice cracking, that's when you're in real trouble.
But when exactly that ice might crack when the debt will start to hurt the economy, we can't really say it seems like we don't have a good way of knowing whether we're 5% away from the ice cracking or 50% away from the ice cracking.
Yeah, that's a problem. That is a, that is a real problem.
Hello and welcome to Planet Money. I'm Keith Romer and I'm Nick Fountain. The idea that a lot of national debt is bad for the economy has been around for a long time.
But nailing down when exactly the bad thing is supposed to happen, economists have not been able to do that.
So today on the show, a deep dive on what we know and what we don't know about when a lot of debt turns into too much debt.
Economists have been thinking about this and fighting about it for a long time now. We're going to take a look at some of that thinking and some of that fighting and we are going to try to figure out just how big a problem our 26 trillion dollars worth of national debt really is.
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When economists talk about the trouble that a country can get itself in by running up too much debt, there are a few bad scenarios they worry about.
One of them is that the country can end up so underwater that it ends up defaulting on its debt, stiffing its creditors, which tends to not go great. Sure. Or in order to escape its debt, maybe a country has to let inflation run wild and make its money worthless.
But things can also get bad without getting quite so dramatic. Sometimes having a lot of debt can just drag down the economy. Chop growth off at the knees. And this last concern was really what the fight was over in the US in the aftermath of the financial crisis.
Was all this money the country was spending ultimately going to end up causing more problems than it solved.
That relationship between national debt and slow growth also just so happened to be the subject of this famous paper that came out in 2010, right as US debt was really taking off.
The paper's authors were these two prominent economists, Carmen Reinhart and Kenneth Rogoff. They dug up all this data about debt for 20 advanced economies across decades.
And according to the paper, history had a thing or two to teach us about what levels of debt were okay and which levels maybe weren't okay.
The paper was short. It was just six pages. It was called growth in a time of debt. And it kind of took the world by storm. In a lot of ways, it defined the terms of the argument for the next several years.
In fact, this little paper had such a big impact that we are going to spend most of the rest of the show talking about it. The ideas it inspired. And also the fights.
Karen Dynan, the Harvard professor for before, says the paper was such a big deal in part because it seemed to offer an answer to that giant question on everyone's mind back then.
At what point will the debt start to limit economic growth?
The statistic that caught so much attention was that they had a result that suggested that when a country has debt that is equivalent to 90% of their GDP that their growth rate would be half of what?
It would be in times when debt was at a more normal level.
So just for a little context in the early 2000s, the debt to GDP ratio in the US was around 35%. Meaning the national debt was equivalent to 35% of the value of every good or service the country made for an entire year.
By 2010, when the paper came out, the debt to GDP ratio had gone all the way up to 60%. So not anywhere near that 90% line. But getting closer.
And sometimes when Ryan Hart and Rogoff would write about their findings, they would use a national debt figure that included Treasury bonds, the government held itself.
Which made the US debt to GDP ratio look like it had already crossed 90%. And so you can kind of see why so many politicians and people in the media latched on to that paper.
Here was this speed limit for debt that said, if your debt goes past 90% of GDP, then the wheels are going to fall off of your economy.
Even though we should say that is not exactly what the paper said. The claim was more, hey, here's this interesting pattern in the data that suggests that high debt is generally speaking worse for economic growth than having lower levels of debt.
But Karen says that 90% number, it got some real traction.
You know, it wasn't your average economist who was running around like things were on fire. It was more that the people who didn't like all this fiscal stimulus were starting to use it as a reason why the government needed to tighten its belt.
If you were a debt hawk, you had a good argument for your position.
Yeah, exactly.
Now up to this point, we've been talking about this grand debt experiment as if the US were the only country that was running up this huge bill. But of course, lots of countries were trying to spend their way out of the great recession.
That's a great deal.
And I think that was a big deal.
And I think that was a great deal.
And I think that was a great deal.
And I think that was a great deal.
Correcting the mistake in the paper weakened the effect that high debt seemed to have on growth, but it didn't make it go away.
And I think that the true contribution of this paper by Rynar Rogov was to open up a very large volume of research that started from their funding and tried to dig deeper and try to expand our understanding of how debt could affect the economy.
Because there were some really fundamental questions that that Rynar Rogov paper had left unanswered.
And Rynar Rogov, does that necessarily mean that high debt is causing the economy to slow down?
There are good theoretical reasons for why you might think that too much debt could slow down the economy.
There's also this phenomenon that economists call crowding out, which works like this.
And the sufferer says that causation here could also run in the opposite direction.
Low growth could be causing high debt.
You can really think a situation in which your economy is underperforming.
And US policy maker, you want to stimulate the economy.
Therefore, you want to do public consumption, public investment.
And one way to do that is borrowing money.
If you borrow money, you're going to increase your debt.
So what you're going to observe in the data, you have low growth and high debt.
And exactly because of this example, really we cannot conclude that higher debt is causing lower growth.
If anything's the other way around.
The causality question is one that Andrea worked on himself.
In the end, he and his co-author concluded what pretty much everyone ended up concluding.
Based on the empirical evidence at least, you can't definitively answer this one.
Andrea thinks that depending on the situation, the causation can run in either direction.
Sometimes high debt causes low growth.
Sometimes low growth causes high debt.
Andrea and all these different economists around the world also looked into other questions.
Other ways of looking at the historical data that could help identify when exactly debt might become dangerous.
It's a sort of tip-in point if you want.
It's going to be potentially very different across countries. So it could be 90% for some economists.
It could be 45% for other economists. It could be 100% for some other economists.
Also, the debt a country has that can come in all of these different flavors.
There are many dimensions in which debt is going to be different.
One, for instance, is the currency composition.
One country can borrow into domestic currency and another country could have to borrow much more in foreign currency.
It's a sort of the Argentina problem.
Yes, let's think of the emerging market like Argentina, any other country who borrow in dollars.
When the currency depreciates, then the value, the dollar value of your debt, it becomes higher.
So you need much more money to pay back the debt.
Also, it seemed to matter who held the government's debt.
Was it banks? Was it investors from inside the country?
From outside the country? Was it short-term debt? Long-term debt?
Yeah, how much debt a country can safely take on?
Turns out to depend on all these different factors.
This is one where the simple-seeming result, you know,
countries that have debt to GDP ratios over 90%, see lower economic growth,
where that result just got more and more and more complicated, the longer people poked at it.
Which, Andreas sees as a good outcome.
Economists, they know more now than they did when all of this started.
Even if you don't get to perfection,
even if you do something to the extent that you are aware of limitation of your analysis,
I think you still provide a very valuable contribution.
But here's the thing.
After several years of this kind of scholarship,
the attention of macroeconomics kind of drifted away from the topic.
In part, this is because of how fractured the problem had become,
how many tiny pieces that one big, clean, seeming idea had turned out to have been made of.
But it was also because the real world itself suddenly seemed to be saying,
nah, maybe this isn't such a big important problem after all.
Because the thing that makes high levels of debt destructive to an economy
is not really the debt itself.
It's the interest a country has to pay on that debt.
And in the wake of the financial crisis, all around the world,
interest rates went down to basically zero and just kind of stayed there for years.
And so for a while, a lot of macroeconomics were like,
maybe we don't really need to worry all that much about debt after all.
And then the world changed.
Again, in two ways.
First, the pandemic and all the spending that followed,
pushed that way higher.
And second, and more importantly, in this case, interest rates went back up.
And so having a lot of debt today is going to cost the US and countries all over the world
a lot more than it would have five or six years ago.
Yeah, that question that economists put down for a bit,
how much debt we can get away with, it is starting to look pretty relevant again.
After the break, how dangerous is our $26 trillion of national debt?
We put that question to the OG of debt to GDP ratio ease.
It's kind of throw up. We're talking to kind of throw up.
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So I will start you off with the easiest question,
which is, can you identify yourself?
Yeah, my name is Kenneth Rogoff.
I'm a professor of economics at Harvard University.
And I've realized you've reminded me of one of my other questions,
which is Kenneth or Ken.
Oh, Ken is great.
Okay, so we'll go Ken.
I mean, but when I'm giving my formal name, kind of.
Formerly Kenneth and formerly Ken.
Yeah.
If you ask Ken Rogoff about that paper he wrote with Carmen Reinhart,
it is clear that 14 years on, he is still kind of annoyed
about the way it all blew up.
Back then, Reinhart and Rogoff were writing op-eds, warning governments
of the risks of debt levels above 90%.
But today, he insists he never meant for people
to take their groupings of countries into low debt,
medium debt, high debt, and very high debt to GDP countries
to mean that there was some bright red deadline
you couldn't cross.
One of our buckets was our highest bucket was 90%.
But we didn't say that suddenly you go to the devil
when you got to 91%.
That's a little bit like saying,
if you're driving in a car in a 55 mile an hour speed limit
and you go to 56, you're going to crash the next minute.
And that interpretation, which was polimically used
in addition to a lot of polimic misrepresentation,
I think, so go, it's so crazy how can they say that?
And of course, we didn't.
And he says, yes, obviously there are a lot of factors
that contribute to when national debt becomes a problem
for a country.
And of course, different countries are going to be able
to tolerate more or less debt.
But I do want to qualify that a little bit by saying
to say, therefore there's no threshold.
Therefore, any level of debt is fine.
That's kind of nuts also.
Yeah, his basic intuition remains unchanged.
He says a country is playing with fire
if it just loads on more and more and more debt.
Eventually, all of that debt is going to slow down
the country's ability to grow.
And he thinks the US is headed in that direction right now.
I think if you look at where the United States is today,
we're probably on a trajectory that needs to get adjusted.
And it's not just our debt, it's our social security,
our medical care, everything.
But Ken says politicians on both sides of the aisle
have gotten really resistant to either raising taxes
or cutting spending enough to balance the budget.
Ever since the pandemic started,
the US has been running enormous budget deficits.
In 2020, it was over 14% of GDP.
But even last year was 6%.
The tendencies when the other parties in power
deaths a terrible problem.
And when you're in power, it's not.
According to the Congressional Budget Office,
the debt to GDP ratio in the US is on track
to pass 115% in 2033.
And get to 180% sometime in the next 30 years.
When Ken looks at all this, it's not like he thinks
we are headed toward some economic armageddon.
You know, barring something really horrible happening.
I don't foresee a massive problem.
But Ken says there are signs of trouble in the economy.
We've seen inflation spike, investors demanding higher rates
on US treasuries.
To him, those happen partly as a result of all the debt
we've taken on.
Anything spikes in inflation and interest rates might keep happening.
What I think is likely to happen over the next 10 years
is we'll probably have another episode of that.
So maybe until we've got punched in the face
a couple more times, we may not adjust.
And adjusting, finding a way to stop running
such a high deficit year after year,
that would involve some genuinely hard trade-offs.
Some mixture of cutting into how much we spend on programs
that Americans really value or raising taxes pretty significantly.
Now, Ken, he has been on the more debt hawkish side of things
for a long time now.
But even some of those economists who used to feel okay
about how high the debt was getting,
they are starting to see things differently.
Like Karen Dynand, the other Harvard professor we talked to
at the start of the show.
After the great recession, she thought all the spending
we were doing was worth the risk.
This time around, she's not so sure.
Policy makers need to be honest about what's on the horizon
in terms of national debt,
and the fact that we are on an unsustainable path.
My sense is that you did not use to worry
about the size of the national debt
to the extent that you do today.
And I wondered, are you maybe a born-again debt hawk?
Karen was not willing to go on the record as Team Hawk,
but it was actually this stray kind of hawkish comment
I heard her make at a conference earlier this year.
It inspired this whole episode.
She had been talking about all the stuff we've been talking about
in the show, how big the debt is, how higher deficits have been.
And she said something to the effect of, you know what?
I know there's no magic red line for debt.
But maybe we'd all be better off if there was one.
Having a benchmark like that is useful
because it can force action.
And even though I don't think there is a magic level,
I do feel like if there was some level we knew about,
it could then kind of be constructed politically
and get people to face up to the hard decision
so they're going to need to make.
You kind of wish there was one.
Yeah, yeah.
So you don't want me to ask you at what percentage
of GDP the national debt will cause a crisis?
No, I mean, I can't tell you that number.
Is it 125% of GDP?
You're still asking me.
Higher or lower?
Sorry, we're not answering that question.
Coming up next time on Planet Money,
President Biden recently announced tariffs
that he says would help create a China-free battery supply chain.
I'm going to keep part of that supply chain.
Graphite.
Is it kind of like the underdog critical mineral?
I think, well, I mean, I'm biased, but it is.
It has not been given its fair shake.
But announcing tariffs is one thing.
Actually moving a supply chain in the real physical world,
that is tricky.
That's coming up next on Planet Money.
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One final note, the economist Andrea Presbietaro
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Key works at the International Monetary Fund,
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