Economist John Cochrane Is Still Worried About the Debt

The U.S. national debt held by the public is currently almost $22 trillion, or about $67,000 per citizen, surpassing the country’s annual GDP for the first time since World War II. The Congressional Budget Office predicted in March that the U.S. debt would grow to 102 percent of GDP by the end of 2021, to 107 percent by 2031, and to 202 percent by 2051. Those estimates came before President Joe Biden signed the $1.9 trillion COVID-19 relief bill, which made the long-term budget outlook even worse.

Fiscal hawks have been sounding the alarm about rising debt levels for decades, but their nightmare scenario of runaway inflation hasn’t come to pass. How do we know if this time is different? In April, Reason‘s Zach Weissmueller spoke with the Hoover Institution’s John Cochrane, an economist and self-proclaimed debt crisis “doomsayer.”

Q: At the end of World War II, the debt-to-GDP ratio was similar to today’s, the economy boomed, and we were able to slowly grow our way out of it. Is that a good analogy to the pandemic?

A: We borrowed a ton of money to save the world from fascism. Then we stopped spending money. The war was over. The U.S. after World War II ran steady primary surpluses—whereas right now we’re talking about at least 3 to 5 percent primary deficits forever, plus stimulus in every crisis, plus Social Security and Medicare.

After World War II, we had stronger GDP growth than ever seen in history, driven by productivity growth in a very deregulated, innovative economy. What we’re talking about now is starting at 100 percent debt to GDP, and then the big borrowing starts and continues forever in a very slow-growing, very regulated, high-tax economy.

Q: Some economists say low interest rates are the new normal, and so we shouldn’t worry about government borrowing.

A: The size of borrowing we’re forecasting makes this low interest rate argument completely irrelevant. The low interest rate argument says, “If we borrow a bunch and then stop borrowing any more, we can roll over the debt at a low interest rate, and over 50 to 100 years, the debt-to-GDP ratio will slowly come back.”

We have 5 percent of GDP that we’re borrowing on a regular basis, 20 percent of GDP that we borrow in every crisis. This whole business of “borrow once, and then just roll it over and wait 50 or 100 years for it to melt away” is just not what is going on in the U.S. right now.

Q: But aren’t we also in a special position where we can get away with issuing more debt because the dollar is the global reserve currency and everybody wants it?

A: There’s a lot of little nice things going for us. But let’s not overdo it. Foreign central banks want to hold some dollars, but they don’t want to double, triple, quadruple, quintuple the number of dollars that they hold.

And who knows how long it’ll last? We get that [reserve currency status] because of our great political stability, our unwavering commitment to low inflation, our unwavering commitment to always paying off our debts, our commitment to a strong dollar. Sooner or later, people are going to start looking around unless we shape up.

Q: What do you think of the argument that the doomsayers have been wrong thus far about a debt crisis?

A: Guilty as charged. But the nature of what we face is not an easily predictable thing. In California, we live on earthquake faults. We haven’t had a major earthquake for about 100 years. “What are you worried about? Why should we buy earthquake insurance?” That’s the nature of the danger that faces us. It’s not a slow, predictable thing. It is the danger of a crisis breaking out.

So I’m happy to be wrong for a while, but that doesn’t mean the earthquake fault is not under us and growing bigger as we speak.

This interview has been condensed and edited for style and clarity. For a video version, visit reason.com.