Rubin and Orszag warn Biden: low interest rates won’t last forever

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A group of former senior Democratic politicians from the Obama and Clinton administrations are urging President-elect Biden to use the upcoming COVID relief legislation to create new automatic fiscal stimulus programs to combat future recessions and warn of the current era of tax rates. Low interest rates could end much earlier than many anticipate. “The era of low interest rates is teaching many people the wrong lesson,” said Peter Orszag, Lazard’s chief executive of financial advisory and former director of President Obama’s Office of Management and Budget during a virtual event hosted by the Peterson Institute for International Economics on Thursday.

“The lesson of the last five or ten years is more that we are very bad at predicting the future and less that we should project an era of low interest rates without end,” he added. Orszag was joined by Robert Rubin, former US Secretary of the Treasury and Goldman Sachs Group Inc. GS, co-chair of + 1.67%, and Joseph Stiglitz, a Nobel-winning economist and former chair of the Council of Economic Advisers. While all three have different views on the urgency with which the United States should address reducing the federal budget deficit once the economy recovers from the COVID crisis, they all agreed that “while low interest rates The contours of the tax debate change, they shouldn’t be supposed to persist forever, ”according to an accompanying policy brief. The yield on the benchmark 10-year US Treasury bond TMUBMUSD10Y, 1.129% has decreased from about 14% to about 1% over the past forty years. Low interest rates have not only made it less costly for governments to run larger budget deficits, but they have also increased the potential returns on government investment in things like infrastructure and education that can boost economic growth in the future. But even a modest increase in interest rates over time could vastly increase the budget deficit. Orszag, Stiglitz, and Rubin show that if interest rates rise just 0.25 percentage point a year more than the Congressional Budget Office currently projects, federal government outlays on interest payments could rise to $ 1.2 trillion annually by 2030. , compared to the currently projected $ 664 billion and roughly $ 338 billion spent in 2020. A much steeper rise in interest rates, therefore, could destabilize the US economy and government programs. Rubin warned, and lead to high inflation fueled by “excess demand, if you have an unsound fiscal policy or a drop in our currency.” “There is always the possibility of serious problems in the market,” he added. “These risks have not materialized, but all financial history suggests that markets that are out of sync with reality always adjust, and sometimes quickly.” Rubin, Stigliz and Orszag argue that policymakers should also include more “automatic stabilizers” in future tax legislation that would automatically increase budget deficits in times of recession and increase revenue or reduce spending in times of full employment. . On the spending side, they argue that provisions such as direct cash transfers, expanded food and unemployment assistance, and infrastructure financing should be triggered automatically by an increase in the unemployment rate to a certain level. The authors also suggest indexing fiscal programs such as social security to metrics such as life expectancy and economic inequality. As life expectancy increases, for example, it could trigger slight increases in payroll taxes or an increase in the payroll tax cap to pay the higher expected outlays. These automatic triggers would free lawmakers from engaging in contentious debates during times of crisis and increase long-term economic performance, but still provide the ability to change course if necessary, they argued.