Reason Interviews

Economist John Cochrane Is Still Worried About the Debt

The U.S. national debt held by the public is currently almost $22 trillion, surpassing the country's annual GDP for the first time since World War II.

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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.

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  1. “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.”

    When the state creates legal money to cover its debt then the fact is that there is no longer a debt to be paid – merely the consequences of newly created money.

    1. Except those of us who go shopping or maybe want to buy a house would disagree about “no runaway inflation”. Official numbers are being juked by excluding important things people buy.

  2. God, grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to know the difference.

    This guy lacks either wisdom or serenity.

  3. The U.S. national debt held by the public is currently almost $22 trillion, or about $67,000 per citizen

    Obviously the solution is to allow each citizen to pay $67,000 to the U.S. Treasury for a guarantee that the government will leave xir alone afterwards.

  4. 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.

    I have yet to see a portrayal of exactly how this crisis breaks out, just moanings that the current situation is “unsustainable”.

    1. That’s a bit like taking a net, pulling it taunt, and saying, well no one has told me where the net is going to tear first. It must be indestructible.

      1. The truth is the net is already torn in several places. We see it in the massive disconnect in the price of houses vs the labor that it takes to build them. The rampant homelessness crisis is one of the tears, the difficulty of hiring for restaurants is a sign of the tears, the fact that the stock market went UP when our ability to produce went massively DOWN is a sign of a tear. Just because the tears are to people you don’t care about doesn’t mean the tears are not showing up.

  5. The deficit growth is on auto pilot with the entitlement shortfalls. Government is reactive not proactive. The debt will be dealt with one day after the inevitable bond crisis and the first response will be to point fingers at the other party.

  6. John Cochrane is worried about the debt whenever a Democrat is president.

  7. Correction to the article:

    National debt per citizen: Just shy of $86,000
    National debt per taxpayer: Just shy of $228,000

    https://usdebtclock.org/

    1. Clearly the taxpayers are not paying their fair share!

  8. Slow Joe said more debt and inflation is great. Don Lemon interviewed him so we know it’s legit.

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

    It’s because the doomsayers don’t see the end game so they are looking for the wrong crisis. The crisis has already started and is quite apparent. The increased federal debt is the base of the entire private/financial debt pyramid. The bigger that is the more those with assets can leverage up, convert asset value to income, and drive up those asset prices (which do not get recorded as inflation so thus distorts everything that has to be inflation-adjusted). That group is in the best of times. Those without assets are feeling the squeeze right now with rent costs and low stock price volatility that favors existing owners rather than people who are saving long-term. There is not even the recognition by those with assets that there is a gulf between them and those without assets – partially because of the distorted inflation measures.

    The crisis occurs when interest rates on the govt debt rises. That impacts the entire debt pyramid and esp mortgage interest. That will be the ‘tide going out’ moment for homeowners where they see how much they have been relying on ever-increasing house prices – and living beyond their real means. It’s great news – initially – for those without assets since finally those asset prices pull back and the bubbles pop. But the other result of interest rates going up is that govt expenditures will change. Everything will get squeezed – except payments to Wall St, foreign central banks, and other Tbond holders.

    So far, we’ve just kept kicking the can when that happens – and reflating the bubbles. At some point, we can’t do that anymore.

    1. Ding ding ding! We’re already seeing the separation of the “real” economy, in which you get rich by solving the problems of your customers, and the “fake” economy, where you just have to be friends with the people who run the literal money making machine.

      The fake economy is overtaking the real economy, and trillions of printed dollars will only widen the gap. We know what happens when the fake economy “wins”, everything falls apart quickly as they print more and more money and hand it out to the connected.

      1. Absolutely, we are now an anti virtue society and it shows. Savers get punished with the effective wealth tax of inflation (and any attempt to offset it is punished with capital gains) while those heavily in debt get their debt forebared and largely forgiven as it’s inflated away. Those renters who saved for a rainy day or kept working to actually keep paying their landlord are seeing their rents skyrocket while those who rode the gold plated unemployment and eviction moratoriums still have a roof over their heads and now a brand new, stimulus bought shiny 72″ flat screen with xbox and all the time in the world to enjoy it without the bother of a job. Politicians who promise the impossibility of everything for free are elected as opposed to candidates who have the balls to tell the truth and propose difficult choices and cutbacks.
        I don’t know when it’s going to happen exactly but we are setting up for an economic collapse that’s gonna make the great depression look like a joke when the disconnect between an insane supply of money and lack of supply of goods catches up with. The US is on borrowed time without question, and if the US collapses, the entire world will with it.

        1. Totally agreed. And you know they will extend the benefits again as flu season kicks into gear and the ‘cases’ start going up again. They can’t afford for the gravy train to end, because that will be ANOTHER segment of voters who hate them.

  10. Socialist Tony is still worried about Bezos’ billions.

  11. Oh for Christ sake! Nobody really gives a shit about the debt-you occasionally get some politicians and economists who complain about it-but at the end but of the day, it’s more of the same-dems keep spending on hiring more bureaucrats and GOP keeps spending on the military

  12. Him and five other people.

    Wait til interest rates hit 5% again and the Feds have to pay 1.5 trillion a year just in interest on the 30 trillion dollar debt.

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