Is our national debt finally too much? (update)

Karen Dynan (0:01)

This is Planet Money from NPR.

Keith Romer (0:06)

Okay, we are going to start today's show by jumping into the old Planet Money time machine.

Andrea Presbitero (0:12)

Boop, boop, boop, boop, boop, boop, boop, boop, boop, boop, boop.

Keith Romer (0:16)

Economic Destination 2009 A time when the government was spending lots and lots of money, and the national debt was shooting up.

Nick Fountain (0:25)

Yeah. Back then, the US was trying to pull itself out of a recession that followed the financial crisis.

And 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.

Karen Dynan (0:41)

Early in the recession, I think a lot of people were very supportive of the big steps the government took to increase government spending and reduce taxes.

Keith Romer (0:52)

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.

Nick Fountain (1:01)

And Karen says it didn't take long for some people to question the wisdom of all that spending.

Karen Dynan (1:07)

Attitudes changed. And, you know, there were some economists and some policymakers, I think particularly people we would call deficit hawks, who started to get quite concerned.

Keith Romer (1:19)

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.

Nick Fountain (1:34)

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.

These numbers sound almost quaint now.

Keith Romer (1:54)

As most econ textbooks will tell you, there can be real dangers 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.

Karen Dynan (2:07)

The scary thing about high debt is that you can get a snowballing of debt because of interest costs. 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 interests. It just keeps compounding and getting worse and worse and worse.

Keith Romer (2:31)

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.

Karen Dynan (2:51)

Debt becomes costly for us when investors, the people that buy our debt, lose their appetite to hold our debt.

Nick Fountain (3:00)

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.

Keith Romer (3:10)

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.

Nick Fountain (3:32)

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.

Keith Romer (3:41)

I mean, so the image that comes to mind is that the policymaker, like 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.

Karen Dynan (3:54)

I think that's right. I mean, the ice cracking, that's when you're in real trouble.

Nick Fountain (4:00)

But when exactly that ice might crack, when the debt will start to hurt the economy, we can't really say.

Keith Romer (4:07)

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.