January 09, 2020
Jim Tankersley and Jeanna Smialek had a column in the NYT talking about how economists seem to be worried about the economy, in spite of low unemployment and continued growth. The economists cited had a variety of concerns, but most seemed to center on the possibility that the government will lack the tools to respond to the next recession.
The basis of the concern is that the federal funds rate, at 1.5 percent, is already very low, leaving little room to fall further. In terms of fiscal policy, we already have deficits of more than $1 trillion (4.6 percent of GDP), which are high by historical standards. The argument is that both monetary and fiscal policy seem to be near limits, so that there is not much else the government can do.
The prospect of ending up like Japan, which now has a debt to GDP ratio of more than 250 percent, was raised as one possible bad outcome. It is not clear why this would be an especially bad outcome to fear. On a per capita basis, Japan’s economy has grown at an average annual rate of 1.4 percent since 1990. That is less than the 2.3 percent rate in the U.S., but hardly seems like a disaster.
Furthermore, the length of the average work year has been reduced by 16 percent over this period, which means that workers in Japan are enjoying far more leisure time than they did before the collapse of the country’s stock and housing bubble. The work year has only declined by 3.0 percent over this period in the United States.
As far as the burden of Japan’s debt, interest payments on Japan’s debt will amount to 0.005 percent of GDP this year, according to the I.M.F. That would be equivalent to interest payments of roughly $1.2 billion in the U.S. economy. (Our interest payments will be a bit over $200 billion this year, after netting out money rebated by the Federal Reserve Board.) The I.M.F. projects that Japan’s interest burden will turn negative next year, as investors are paying the country money to hold its debt.
In short, there doesn’t seem to be much of a horror story here. If the U.S. economy does fall into recession it seems the only obstacle to a large fiscal stimulus will be political, not any actual economic constraint.
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