The latest economic research demonstrates why concerns about federal budget deficits and U.S. debt levels are overblown

April 1, 2021 Washington Center for Equitable Growth


A growing number of economists are reconsidering long-held views about the appropriate level of public borrowing and the consequences of federal budget deficits and debt on U.S. economic growth and well-being. Their cutting-edge research suggests that previous concerns about deficits and debt, such as increases in inflation and interest rates that affect U.S. Treasury bonds, are overblown.

Instead, the available evidence indicates that the United States boasts substantial fiscal capacity to make needed public investments that could power a more broad-based and sustained economic recovery and support more equitable long-term growth. And the current low-interest-rate environment is one in which federal budget deficits should be embraced as an appropriate and necessary tool to support a faster and more equitable recovery.

This issue brief highlights select studies in this line of new economic research. I first examine the role of fiscal policy in promoting economic recovery. I then review studies that examine the implications of low interest rates on deficit spending.

Austerity is Bad Economics: Why U.S. Fiscal Conservativism Does Not Hold
By Marokey Sawo
The Groundwork Collaborative

Marokey Sawo addresses four common arguments made by critics of deficit spending. First, critics argue that higher deficits lead to inflation. Consistent with other research literature, she finds inflation has been low and trending downward for the past 40 years regardless of the size of the deficit. Second, critics argue that higher deficits crowd-out private investment by pushing up interest rates. Sawo shows that the deficit and interest rates have no long-term relationship with each other, and there is therefore little reason to believe deficits will increase interest rates to the point of decreasing private-sector investment. Third, critics argue higher deficits increase the risk of a fiscal crisis because investors will supposedly become unwilling to hold public debt and require higher interest rates to compensate for the “additional risk” of solvency. Regarding this point, there is also a lack of empirical evidence for these concerns because interest rates have been on a downward trend even as debt has increased. Finally, critics argue higher deficits reduce economic growth. Sawo demonstrates that previous claims about increased deficits constraining economic growth have been thoroughly debunked by economists on methodological and theoretical grounds. As a concrete example, she notes that economic expansion failed to materialize in European countries that adopted austerity policies. In sum, the four arguments made by critics of deficit spending lack empirical support.

Read on Washington Center for Equitable Growth.