Does he have the ability to do this, do you agree with the decision . Sen. Schumer i agree with the decision and i know that he will check things out legally. Thank you, everybody. [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. Visit ncicap. Org] a we take you live to discussion on fiscal policy in the Incoming Biden Administration and congress, hosted by the brookings institution. Size i think is ambiguous and policy occur through a political process. I would rather see something that is a little bit smaller but that could pass this week or next week, rather than wait for something that is a little bit until, but will not pass february. If you look at the output gap, i think a trillion dollars is a reasonable figure for the next round of stimulus. I think democrats should be willing to take a couple hundred billion dollars less than that. Republicans should be willing to take a couple hundred billion dollars more than that. That is a lot of money, particularly on top of cares act , which was around 1. 8 trillion that passed in march. So we are talking about a sizable amount. I dont think 200 billion in december is better than one point 5 trillion in february, but in the range of consensus estimates, i think anything in tot range of 700 billion 1. 5 trillion, i think we should just take what we can get out of the political system as soon as possible, for the reasons that doug said. Now,u do not do this businesses and households that really need support in december, january, are not going to get it. That is a pretty long time. To take a quick step back, i think this is an unusual recession and that the needs of fiscal policy are unusual. A primary objective of fiscal policy in this situation in my view should be to preserve the productive capacity of the economy. That is not a typical objective in a typical recession. In a typical recession, there is a Macro Economic imbalance, policy error, something wrong in the economic system. It is in the economys interest that unproductive enterprises go out of business and that capital and labor resources can be allocated to better use. You really dont want the mucking up that process. In this case, the threat to the economy has happened outside of the system, the virus. Businesses that would otherwise be viable, that are healthy, are havective, that relationships and networks, all sorts of capital that can be easily replaced, they could go under because households dont have enough income to spend. Becauseld go under social distancing restrictions limit the ability for people to frequent them. You want to support Household Income, you want to support those businesses. Part of supporting Household Income in my view is supporting state and local governments, so they dont lay off a bunch of workers. You really want to keep everything that is good about the prepandemic economy in place. As much of it as possible, until we are on the other side of it, and people can take a vaccine. Then we can let businesses sink or swim once the pandemic is behind us. I think that really speaks to doing something that is in the ballpark of the optimal size, as quickly as possible. , and weeks is a long time a lot of damage can be done in that time. Thank you, michael. Wendy, maybe you have a different angle on this timing issue. I know you have written about issues of sustained fiscal policy, both in the context of this crisis, but in general. Maybe you can give a different perspective. Think thated, i do the support we need for the economy right now needs to be sustained. I do not want that to take the place, though, of doing something urgent. Let me start there and say we i dontent need see myself but im trusting the system is working. On screen and heard. Excellent. Wendy we have an urgent need for congress to act. I am in a near panic about the lasting unappointed benefits, that according to the department of labor numbers could mean that for upwards of 9 Million People on december 26, they abruptly lose all of their Unemployment Insurance benefits. That is just a crisis proportion. I do not want anything that im saying about a size of a package or how sustained the package should be, or my concerns about the long run economy, to crowd that point out. That is just an urgent issue that Congress Needs to take up immediately. That said, i want to make three broad points. One, i want to talk about where we think the economy is today. Where i think the economy would go if we did not see any additional stimulus. And then what i think additional stimulus could do. Re the economy is today both doug and michael have talked about what is happening in the labor market. We had many statistics that one could point to. Almost 4 Million People who now say their previous jobs are permanently gone. Those people are sometimes referred to as the permanently unemployed. They are not permanently unemployed. Hopefully someday they will find employment, but they will be in different jobs than they had previously. People who say that their previous jobs are permanently gone unlike those on temporary layoff are in much worse circumstances. They leave the market in higher rates and are slower to be employed. Numbers like that, we are on track to have the same number of people say that their previous jobs are permanently gone as we did post rate recession. Numbers like that are alarming. , thist fiscal support recovery, particularly in the labor market, is going to be painful and protracted, much like the recovery was post great wish and. Laborot a great Market Recovery we want to emulate. There is of course widespread pain in wide Small Businesses. Rate of closures for Small Businesses is running about three times its normal pace. Worrying. Course as michael stressed, will leave our economy with less productive capacity, once we are post pandemic, than we had prepandemic. That is an even greater problem given how many millions of people are going to be looking for employment post pandemic. We will have reduced labor demands that will take a long time to recover. Aboutnow, if you think what we have seen in terms of job openings, the number of Unemployed People per job opening right now is roughly double that it was prepandemic. We see a lot of pain in the labor market, a lot of pain in Small Businesses. We know there is a huge amount of heterogeneity, dispersion and who is feeling the pain. Some are basically back to financially speaking, back to their lives that they had prepandemic, in terms of labor income, wealth. Some businesses are doing well. We know of course, for millions of people, hundreds of thousands of businesses, the pain is quite acute. Lets talk about what the economy may look like without any additional stimulus. Even the more optimistic gaparios suggest the between where gdp might go in lets say 2021 relative to where we thought it would go, relative to what our projections look like prepandemic, that gap looks to be about a trillion dollars in 2021 in nominal dollars without any fiscal support. Size, inut half that 2022. Those are very large numbers. So here is the issue with what that means for how much fiscal support is necessary right now. A welldesigned package should be able to have a bang for the buck, which is to say, how much it will boost gdp per dollar of federal cost. A welldesigned package should have a bang for the buck of about one. We are lucky if we can get something bigger than that, also be2, but we could unlucky and get something smaller. Lets say for arguments sake, its an easy number and we have a bang for the buck of about one. Adam we are going to have to move to the next question in a moment. Wendy let me go quickly. The problem with a bang for the buck of about one, it doesnt happen right away. It takes at least a year and a half for us to get that effect on gdp. Of ader to fill a hole trillion dollars next year, we righteed a package passed of considerably larger than a trillion dollars. Aven what i just described, trillion dollar hole in 2021, half a trillion in 2022, that leads us to needing a package of about 2 trillion to fill the whole hole. Adam thank you, wendy. I just want to make sure we get multiple topics covered. Picking up on something wendy was saying, starting with aboutl, if we are worried speed and overdoing it, what kinds of design aspects would you want in this package . Some people talk about triggers. My colleague has written about this in the european context. Ont the stimulus should go until a certain benchmark in unemployment is hit. How realistic and useful do you think those proposals are . Do you have something else, should it be done on an ad hoc basis based on the conditions . I appreciate in theory the role that those triggers could play. I think it is difficult because every recession is unique in some important ways. This recession, for example, the Unemployment Rate has fallen significantly faster than professional forecasters and other economists thought it would. Even after the cares act past. If you look at forecasts of the Unemployment Rate that were may, even inil, august, months and months after the cares act past, they expected the Unemployment Rate to be higher for longer. There was a lot of talk over the summer about triggers that would keep on benefits extended until the Unemployment Rate had dropped low 7 below 7 . I dont think that is a trigger that a lot of people would want. I think the Unemployment Rate is in that vicinity but there is still a need for extending unappointed benefits. Triggers make some theoretical sense, but if you try to design that theych a way apply to recessions more broadly , for any individual recession, you will not get to the need. Theave a program in Unemployment Insurance system that has triggers. We have extended benefits that automatically kick in based on the unappointed rate in the Unemployment Rate in the state. There is wide agreement that that program has not worked well, and that is why congress in the Great Recession and in the pandemic recession passed a special ad hoc benefit program. I dont see why an Additional Program with different triggers would lead to a better result. So, i think what we need is just up thegress to size situation and pass something reasonable. To its credit, congress did a great job in march. What Congress Passed in march was a welldesigned, really appropriatelysized package. The compromise being discussed right now on capitol hill, the outlines of which have been clear for months, would also be a welldesigned package. Remove think we need to the legislative function of and put it on autopilot. In this particular case briefly i think the right trigger is for a lot of these programs is, after a vaccine is in wide distribution, and we want to return the economy to a situation where businesses sink , and wheretheir own households have to rely on earned income as they would in a normal situation. We are not going to meet that switch immediately once the vaccine is out, but shortly thereafter. That is not that far away in the future. I think there is even less of an argument for triggers, now that we are already so close to the vaccine. Adam i know that doug wants to come in, but let me go back to wendy. Based on your writing, you may have a different view on this trigger situation. Can you give us a different take . Wendy absolutely. I agree with michael that the triggers incorporated into the Unemployment Insurance system, at least the fallback ones that states have to use, are horrendously designed. The reasons states cannot adopt a more reasonable ones which they could adopt is because they cost the state money. What we see right now just to pause on this what we see is while the federal government is doing 100 funding of extended benefits, the states have actually adopted the better triggers. A number of states have adopted the better triggers to leave extended benefits in place. On december 30 one, once that federal financing goes away, drops back to 50 , four states are giving up on the more reasonable trigger and going back to the unreasonable trigger so that extended benefits immediately lapse. Triggers can work, they just have to be welldesigned. The financingove onto the Balance Sheets of states that are in dire straits right now. Doug talked about some of the terrible fiscal strings of 2008, and a lot of that was because of completely insufficient support for state and local governments. All of those issues are tied together. I strongly think that triggers make more sense than arbitrary calendar cutoffs. Adam thank you for that. Doug, you wanted to come in. Michael and wendy have seen this, but you in your term had to put up with a lot of proposals for fiscal rules, things like that. If you could give a mention to what you are experiencing with those types of proposals. You are muted. Doug thank you. Respectfully disagree with my friend michael about triggers. Michael has noted the forecast of what would happen over the course of this year has not been accurate. That is true for Macro Economic forecasts every year. I have spent about a dozen years of my life deeply engaged in or casting, first with the Federal Reserve board, later with the Congressional Budget Office. Time,endy for part of the but we seem to have trouble getting the forecast accurate. A lot of smart people are trying really hard to do a better job. It is just really difficult. At the same time, fiscal policy is just not nimble. We are having a discussion in december about a bill that might be passed. All of us and most economists and others studying this have said that four months ago, this should have been passed. Maybe the congress will now act with support from the administration, and that would be good. The cares act is a positive sign of fiscal policy reacting. Maybe we will get a second one, but maybe not. That is why we are having this discussion. I think the fact that recessions are all different is actually an argument for triggers. It emphasizes why it is so difficult for economists to predict how long recessions, how deep recessions will be. Even in other recessions, you mentioned, some have structural imbalances that need to be fixed. If you look back a dozen years, we were building too many houses in this country for the demand. There had to be some reallocation of workers. Even then, many people who lost their jobs lost them because they were not in one of the sectors that needed to change, but because the people within the sector could not pay any more for the appliances or whatever it was. There is always a spillover effect. Triggers are a great way of responding early, and also sticking with it until the problem is gone. I think this can be designed. Jason furman dowrote a paper about how set of triggers for medicaid. I think the ideas are out there. What congress doesnt want is they do not want to be taken out of the picture. Want to respond. They want to respond. Congress should still respond with policies that are specific to the given downturn. That could be housing finance, the paycheck protection program. But thetill there, question is can you complement that with a more regular response. I think you can do both. Congress is going to want to act. Congress wants to take credit for acting. So they will need things to do, but theres plenty they can do even if you had triggers in the system, now or in general and the system. Mr. Posen thank you, doug. We have come from talking about the immediate present situation and the risks, not just risks, the harm that you all agree on, to talking about some Design Principles and what each of you would want. In ongoing ways are very aware of the realities in congress. And the fact is that the Republican Senate majority in divided government seems at least likely to be objecting to or blocking a number of potential initiatives. Im not talking necessarily about the deal that may come this week or this month. I understand that deal might be done along the lines. But in terms of any large budget initiatives or simply the next budget that would be normally coming in just the next month or two. So, maybe we can talk a little bit about how you see that playing out, but also more what do youichael, think is possible to get, maybe not bipartisan, but at least an agreedupon and passed bill other than a continuation agreement . Wendy, do you see from a democratic or hamilton project kind of side, what pelosi or others should be advancing in the situation . And finally, doug, not that our colleagues are partisan, but you with your nonpartisan cpo, doesnt really matter that we have divided government in this sense . Im trying to keep the timing straight, so i will shut up now. Michael, over to you. There ain i expect that will be difficulty in passing another economic stimulus measure in february. I think that the odds of something passing in december are significantly higher than the odds of something passing in february. And i think that democrats in congress who are hoping that they can get Something Better with President Biden then they will be able to get with President Trump, and therefore are willing to wait, i think they are making a significant mistake. Republicans are going to be much less eager to give President Biden a win in his first few weeks in office than they will be eager to give President Trump a win in his last few weeks. By the time we get to late january, early february, we will already have 20 one million, 30 Million People vaccinated, at least according to what Public Officials are saying right now. And a vaccine and why distribution will be just a couple months away, a few months away. That is really going to make it difficult for a good number of republicans in the senate to support anything with a 1 trillion price tag on it. So i think congress should be eager to do this sooner rather than later. And ideally, this week or next. In terms of noncovid related spending, you know, i obviously could be wrong about this, but my expectation is that the Biden Administration, the biden white house, will scale their ambitions to the reality of a republicancontrolled senate, even if the georgia runoff gives us two Democratic Senators in georgia. It will still be difficult to pass many of the programs that the more progressive wing of the Democratic Party would like. And the people the president elect is selecting to be in the administration are all pros that understand that policy happens through a political process. So my expectation is that President Biden will get some significant wins. And i do not think he will get done everything he wants to get done. I think what he tries to get done will be different than it would be if there were 56 democrats in the senate. But i expect that by the time we are talking about the 2024 election, we will look back and see one or two significant legislative accomplishments. Mr. Posen thank you, michael. Its good to have an honest forecaster, despite all the difficulties that doug and others have mentioned. When the wendy, if you are advocating stuff not for biden but in the more back half, how do you think they should be responding to the divided congress, and do you share michaels, lets call it optimism, that there will be a couple of compliments before this term is out . Ms. Edelberg so, let me start where i think the urgent needs are, and i think they are all well known. And i am hoping that something happens long before january. Which is, getting more help to workers, to firms, to states, getting more money out to deal with the Health Care Crisis or lidded to the pandemic and the vaccine distribution, and help in food security. Those are all just urgent needs and will also offer fiscal support for the economic recovery. The one space where i can see something whether it is bipartisan support that will serendipitously also provide fiscal support and improve the recovery, is infrastructure. I can imagine a world where early in bidens presidency, all the sides were able to come together and agree on what i would hope to be a pretty big infrastructure package. Of benefits,t first of all, and primarily, it improves Public Infrastructure in this country, which definitely needs more investment. It also provides fiscal support at a time when the recovery may still be weak. And it comes back to your first question to me, which is sustained. Investment in infrastructure takes time. And so, the fiscal support that is created by more investment in infrastructure generally plays out over quarters, if not years. And that will benefit the economic recovery. So, my hope is that that is a place where congress and the president can come together and do something big. Mr. Posen thank you, wendy. Forecast on wish to what is going to be coming out of the fiscal process the next couple years, i am sure people would welcome that. But more generally as an observer, how do you think these kind of deadlocks play out . How much harm do they do . Or do markets just discount them and it doesnt really matter in the end . Mr. Elmendorf i think we have a divided government because we have a divided country. Right . And the precise number of democratic is republican senators and in the house depends on a whole lot of specific things that happen in individual states or districts, the way we draw district lines, who is an effective campaigner, and so on. But fundamentally, we have a country that seems pretty evenly divided between the democratic and republican parties. Problems withare divided government, but it is not just we need a technical fix in the way we vote or something else. We need to find a way to go forward in a country with our various positions. And i worry a lot about those positions. One is Immigration Reform from a half dozen years ago. There was a Bipartisan Group in the senate that put together a was nobodys individual idea of the best possible bill, but it was the best they could agree on. That bill had come to a vote in the house at that point, and it was widely agreed the bill would pass in the house. It could have passed the senate and the house and the president have signed it. It did not come to the floor on the house because the speaker thought, i think correctly, that the majority of republicans would not support that bill, and if he brought it up, he would risk his speakership. So i think the problem we have divided government is not people come with different bills views, but they are not willing to compromise on something that we can move forward with. In some sense, i think the Political Parties in the congress are being pulled too much by voices in those parties that are averse to compromise. And that we would be better off as a country if there was more legislation willing to be done that involved a bunch of republicans and a bunch of democrats in the house in congress and so on. I am not sure how to accomplish that, how to move us towards that, but i think that is what is important. I think there are some issues where this is at least possible. Wendy mentioned one important one, infrastructure investment. I think widely supported by people, by leaders. Infrastructure investment is now about the small share of gdp. So there are a lot of good reasons to do more. Another example, and something that is a more fundamental policy challenge in the country, is what to do to increase Economic Opportunities for low and middle income americans, many of them without college degrees, not interested perhaps and having college degrees, but who can contribute to our economy and our society, want to contribute to our economy and our society, and they deserve a better chance to do that with than an opportunity to support their families, to feel like respected and imported important numbers of our community. We have not done a give done a very good job. We have policy advisors and policymakers have not done a good job at providing those opportunities. That does not have to be a partisan issue. Credits have been expanded over a number of years in a bipartisan way. We can do more with the Child Tax Credit today. We can think about how to train people more effectively to link them to jobs. I do not take these things have to be democratic or republican. And they are a central need in this country. Communitiesruggling that are more democratic mr. Posen you are getting off our topic about what your personal preferences are. That is not the topic of today. Mr. Elmendorf i appreciate your indulgence. I think there are places where the parties might come together, and i hope that they do in the year or two ahead. Mr. Posen thank you. We do have a couple minutes left. I wanted to return to all three of you. When david wessel set up this the general sense but also in the opening remarks, he mentioned the unsustainability of current levels of deficits, the new universal agreement among economists and clearly by implication by all three of you, that we do not need to move into austerity in the next six months. But i would like you to discuss whether there are any things that, say, in the next three to 12 months, the shortterm, would cause you to worry on the debt side, or interactions with the Federal Reserve that might be worrisome to you. Because there is a lot of chatter if you go into the markets or on the conspiracy internet about worries about successive cooperation between the fed and congress on fiscal policy. So, if your answer is simply this is all fine, dont worry about it, that is very reassuring. To pesoout going problems, tiny probability things, are there things that might be concerning about the rise of the debt, or about the interactions of the with the fed . Wendy, lets start with the. Ms. Edelberg with you. Ms. Edelberg maybe i am spending less time on the dark web than you, adam. I dont see concerns on the horizon in the way that the federal the fed will respond to fiscal policy. I guess what i wanted to say, what i should have started with, is i think there are certain signs that we should be looking for and that we should be paying very close attention to, to see whether or not there are indications of worry on the horizon. I think that the clearest place to look is the 10year treasury yield, which is at historic lows right now. Seethat everything that i in treasury markets suggests that there is essentially no concern about the federal debt or even the trajectory of federal debt Going Forward right now. And so i would take a lot of comfort in that. I am looking carefully at what is happening exchange rates, to inflation expectations. So i think we have a lot of canaries in the coal mine that will tell us long before we actually have really urgent problems that will take draconian action. I think we have a lot of canaries in the coal mine that we can be watching. Thank you, wendy. And just for the record, i do not spend a lot of time on the dark web, but i do get a lot of weird emails. Let me turn to doug and then michael for the last word on this topic, then we will be shifting over to the next session. Doug . Mr. Elmendorf i basically agree with wendy. I think if Interest Rates rose by a lot this year, next year, and the year after, i would worry much more about federal debt. I do not think that is at all likely. Mr. Posen just to push you slightly, both you and wendy are speaking as though there could be a spike in Interest Rates maybe not a spike, but something in us you dont have to worry about them causing an untoward spike in Interest Rates . Mr. Elmendorf i dont think so, no. Ms. Edelberg i will take that bait and just say i think Financial Markets to respond to congressional actions. Congress possible that could start contemplating some package that spooks the Financial Markets. Not anywhere in the federal tendency of my forecast, but that is possible. But again, that would be something that then we can respond to. We have a lot of tools to respond to that if we see that congressional action is slipping Financial Markets. Mr. Posen michael, i am not asking you to say anything you dont want to for the sick of being contrary. Mr. Strain i dont really have a front view, but let me be contrarian even though you are asking me to be. If you want to look for something to worry about, the stock of money shot up dramatically during the pandemic recession in a way that it did not during the Great Recession. That theu believe price level will respond to the money supply, then there are reasons to be concerned about that were noty nearly as big a concern as they were in the Great Recession. Another reason to be concerned about inflation today that was much less of a concern in the Great Recession was of course that there were significant supply chain disruptions that have been a consequence of the pandemic. You know, that should put upward pressure on prices. Additional, an reason to be concerned is the divergence between asset markets and broader measures of Economic Performance like gdp and the Unemployment Rate. Arguevery reasonable to that we are introducing significant financial instability in our attempt to support aggregate demand during the pandemic. So, those are three reasons i think, if you are looking for things to be worried about, that you should be worried. Mr. Posen i am afraid we are going to have to cut it off there. That was very useful, but we want to keep this moving. We know how much zoom people like to be on and off on time, and we have an more superstar panel, perhaps if that is possible, to follow. So everyone join me in virtually, and sincerely thanking doug elmendorf, michael strain, and Wendy Edelberg for the discussion. Great. I think i am up next. I got disconnected. But i am very pleased to move to the next part of the discussion which is more about these long term issues. We are going to start with a onsentation by jason furman reconsideration of fiscal policy in the area of lowInterest Rates. Jason, all yours. Mr. Furman thank you so much for this great event. Thank you to the first panel which i thought was terrific. Larry and i released a discussion draft of a paper today, about 50 pages long. I will try to summarize some of the names and locations of it in the next 15 minutes using these slides to help out with that process. Our starting point is that we are in an era of lowInterest Rates. I think perhaps no charge better captures just how stunning, surprising, and important this fact is. In 2000 when larry was secretary of treasury, i was at the National Economic council, we were on track to pay off the national debt. Looking ahead 10 years, it was basically going to be gone. Real Interest Rates was 4. 3 . The economyof 2020, was in a similar cyclical position, about 10 years into an expansion. But now the debt was on track to exceed the economy a decade later. And despite all the additional debt, real Interest Rates had fallen to 0. 1 . This decline is something that cant be explained by a set of errors made by Central Banks that have artificially created lowInterest Rates, because the trend predates the financial crisis. The trend continued and was very strong with economies at or near full employment prior to the covid crisis. And seen across a range of countries and a range of times. There are a lot of different expo nations that were given to this. Inequality. More less demand for investment. Etc. Cial, the important things for the purposes of our fiscal discussion is that almost all of these are longterm trends that are likely to persist. Theing forward, Congressional Budget Office expects that the 10 Year Interest Rate will rise to three Percentage Points over the coming decade. This is in nominal terms. If the cbo is correct, that will still create area lowInterest Rates by historical standards. Has only made errors in one direction in forecasting Interest Rates for some decades now. Economic forecasters more generally, it is not a criticism of cbo, have only made these errors. When i was making forecasts, we only made those errors. W only projected Interest Ratese higher than it turned out to be. At most of the stages, Financial Markets were actually yelling out that they did not foresee the same magnitude of increase in Interest Rates. You look at market implied rates for the 10 year, the only rise to 2 at the end of the decade. And option prices imply a 72 chance the fed funds rate is still zero or negative, or becomes negative five years from now. The fed thinks the long run fed rate is 2. 5 . The market thinks it will get to Something Like 1. 4 , which is notable because it would be a negative real Interest Rate. As i said, the nominal 10 year is 2 a decade from now. Its an enormous amount of uncertainty in Interest Rate forecasts. An enormous amount of uncertainty in many aspects of budget forecasts. I will come back to that in the discussion. All the budget numbers i am going to show use the cbo forecasts. The interest is the starting point. This is just to say if anything, i think Interest Rates will be below that. And above that, at the very least Interest Rate risk is symmetric. Low Interest Rates pose three challenges. Is lesst challenge scope for Monetary Policy in recession. 650ee an average of eight basis point cut in past recessions. The fed funds rate is only 1. 5 or 2. 5 when the next recession hits, we will not be able to cut it yearly as much. We could rely on quantitative easing and Forward Guidance and other unconventional policies, but all of those have questions about the efficacy, when they rely on getting longterm rates even lower, which already start out to be quite low. And also their side effects. In particular the side effect of lowInterest Rate is increased Financial Stability rescue. As you get increased riskier assets to preserve your heels and increased fragility from banks which face squeezes on their interest margins. Finally, lowInterest Rates raise the possibility that we have demand shortfalls in even normal times. The experience of the u. S. In 2019nd 2019 in 2018 and is instructive. If i just told you what fiscal policy did and what Monetary Policy did in those two years, you would have thought we were in a recession. In fact, he would have thought we were in a decent sized recession. The fed funds rate was cut to 1. 15 Percentage Points. The fiscal expansion was 2. 6 the gdp. Those are among the largest we have done in response to a recession in the last 50 years. I should say imagine what would have happened if both symptoms were passed in 2010 with Interest Rates at zero for most of the period. Fiscal policy could not have made up for the drag on demand and fiscalve created policy would have essentially been hampered. Is forthe arguments Something Like locking and Debt Reduction now, is the claim it gives you more space to respond to future emergencies. And we have all seen and just discussed previously, the u. S. , even though it has a debt that is 100 the gdp, has had no limitations at all in the space it is needed to respond to the covid crisis. LowInterest Rates though are not just a bad thing. The term secular stagnation, which larry introduced or revived, was taken by some as sounding just dad. But lowInterest Rates create a lot of opportunities. If we make policy choices to take advantage of those opportunities. Im going to go through all three of these in greater detail, but just to quickly list them, the first is the active use of fiscal policy is essential to maximize employment and maintain Financial Stability. The second is that lower Interest Rates this acetate measures of a countrys fiscal situation. And the third is there is more scope for a need for Public Investment. Now let me take you through the three of these a little more in more detail. The first implication of lowInterest Rates for fiscal policy is that countries cannot afford not to undertake fiscal expansions in recession. You asked, our debt is high, can we afford it . The answer, this is based on the model the Federal Reserve uses, as run by david Roy Schneider when you do athat fiscal expansion in conditions like we are in now, debt goes up, gdp goes up, and as a result, the debt falls relative to gdp. So by this metric of fiscal sustainability, it improves. The result is not special to this model. You find it in the imf model. It in both of the largescale macroeconomic models the oecd uses. Find the result that fiscal expansions reduce the debt to gdp ratio. Paper also checked that this worked in countries even at relatively high debt levels. I said, is something that we are concerned about even in normal times. The Interest Rate that might be required to absorb all of the savings might be an unattainable negative nominal number. We need to gear the economy towards a greater demand to prevent that slow growth in normal times, to prevent the risks associated with lowInterest Rate. One way of doing that which was just discussed, is automatic recession insurance. I would love to spend hours talking about all the ways we can design triggers. Lets just say there is no shortage of ideas. We just need to do it. It is especially important in the u. S. , where the automatic stabilizers are relatively weak, largely because of the relatively small size of our government as compared to other ones. The second, this is a lot we can do to increase demand in a budget controlled manner. The balancedbudget multipliers says raise spending or taxes. More progressive fiscal policy would curb the amount of excess savings from high income households. Expanded social insurance would reduce precautionary savings by middle income households, all of which would take some of the downward pressure off of Interest Rates, create upward pressure for aggregate demand. Me now turn to the second implication, which is we need to rethink the way that we measure a countrys fiscal situation. The most common measure, and i have used it hundreds and hundreds of times myself, and my guess is i will continue to use it in the future, but always with a bit of guilt, is comparing the amount of debt a country has to the amount of gdp that a country has. Measure is sos misleading and problematic, and some of the misleading and problematic aspects of it are really exposed by the situation of low Interest Rates, is that debt is a stock. It is a total amount accumulated at a point in time, is backward looking. Gdp is a flow, a total amount of income earned over a period, usually a year. The net present value of u. S. Gdp not something you see in presentations every day. Or if r is permanently less than g, then the net present value of gdp is even larger. Its infinity. So if you take the debt, which is about 20 trillion, and compare it to gdp, you get 100 that the gdp ratio. If you compare to the present value of gdp, you get something more like 0. 5 of gdp. The reason this is important is that when Interest Rates come down, the present value of gdp goes up. This shows the debt as a share of gdp. It gives a familiar number that the debt has nearly tripled as a share of the economy from the mid1930s, when that first table i started showed you started, to around 100 to gdp now. If you look at this chart, you would think the United States was in a worse fiscal position today than it was 16 years ago. But now, just for illustrative purposes, and there are a lot of problems with these numbers and i have a lot of disagreements, and this would not be the featured number i would use, which comes one slide later. At eachke the debt point in time and divided by the present value of gdp at that point in time. That gives you debt as a percentage of infinite horizon gdp. And you see it is roughly flat. In some ways it is actually a little bit better than it used to be. The reason of course is that with Interest Rates lower, the present value of gdp has gone up, and it has gone up by as much as not more than the debt has gone up. And so when you compare the debt to it, it has remained roughly constant. Thats a sense of what it would take to repay the debt over time, because you do not need to pay the debt off all at once. That is what this picture is capturing. It is relatively easy to pay the debt off if you spread it out over time. Metric,not my preferred because the infinite horizon is incredibly speculative. So i would prefer, we would prefer to look at a flow flow metric. Again, you see the debt going up quite a lot, but now lets add in real debt service as a share of the economy, and those real Interest Payments are falling as a share of gdp, even as the debt is rising with the share of gdp. Becausereal interest, that is the economically relevant concept. It takes into account that some of the debt is inflated away each year. And so effectively that is like negative interest on the portion of the debt that is inflated away, and that is taken into account in this picture. We will see this on display strikingly over the next four years. Years,e of the next four nominal debt and the u. S. Will rise, but each one of the next four years, nominal interest on the debt is going to fall as more and more of the debt its refinanced at gets refinanced at lower Interest Rates. I can help but do a technical aside. If this is a concept you have not been thinking too much about, but all the numbers we use in the paper, all the numbers most analysts use overstate an interest by using analytically improper concepts. Its much better to look at debt net of financial assets. The u. S. Used to guarantee student loans. Now it makes direct student loans. In one case that as to the debt, and the other case it does not. Both of them are economically equivalent. If you take the value of those into account, the debt would be lower. We should all shall think about the federal governments consolidated balance sheet. The federal government pays some interest to the Federal Reserve. That is just within the government. The Federal Reserve pays some interest to the public on its reserve. That goes outside the federal government, not counting the first, at any second, you basically get the feds remittances, and that lowers net anInterest Payments. An ideal measure would take this into account. The third issue with debt to gdp is you want to be forwardlooking. The latest cbo baseline says that over the next decade,. Debt is jumping up. But then it is relatively stable as a share of the economy. Over the next decade you dont see that spiraling. You see debt being relatively stable. You can look out over 30 years. In the cbo baseline you see the debt rising after about a decade. If you use a proper definition of current law that includes the fact that Social Security needs to be reformed because it cannot pay benefits among the amount it takes in, that is also relatively stable. Real net Interest Payments, same story. They are quite low compared to where they were historically. They rise up still comfortably within their historic range. Well talk hopefully on the panel more about uncertainty. What i want to show you here is if you are trying to forecast a budget deficit four years in advance, your forecast is going to be plus or minus about six Percentage Points of gdp. Just to get a 90 confidence interval. The deficit four years from now, we might balance the budget and have 10 to gdp deficit. If you add that up and look at the debt, the debt in 2050 could toanywhere from 180 to gdp nearly the lowest it has been in history. How we respond to the uncertainty depends partly on the cost of asking too soon. If you make larger reversible traces changes, you dont want to do that. Also the cost of delaying. There is some cost would not having smooth adjustments in taxes. In most cases that cost is relatively low. To me, this uncertainty is an argument for doing less, not for doing more. I think it is certainly not an argument for doing dramatically more. The third implication of low Interest Rates is that the scope and need for Public Investment has greatly expanded. Talk about how fiscal expansion is going to improve the debt to gdp ratio from a supply perspective. They can all, at low Interest Rates, repair themselves so that the upfront costs are eventually recouped in the form of higher taxes, or lower benefits. So, what do we do Going Forward . What larry and i recommend is that we have a fiscal framework that is a combination of something that is optimal, understandable, and achievable. We do not know exactly what is optimal, so we do place a certain amount of weight on what is understandable and achievable. To conclude our proposal is that the context of Interest Rates are dangerously low. The debt projected to be stable, real debt projected to be low. More fiscal expansion is needed. Our objective should be growth and Financial Stability including stronger longterm growth. We propose a new guidepost we look at real Interest Payments, and we try to make sure they are not rising sharply and not projected to exceed around 2 of gdp over the next decade. And we argued that this goal can be achieved in the u. S. With three sets of guidelines. Temporary emergency should not be paid for, as discussed on the Previous Panel. Take a broad definition of those. Second is longterm programs should be paid for, but we have room for broad exception because of our physical space and because many of them pay for themselves over time. We need to do more to improve the composition of government, collect taxes that are owed, improve the Health System to support demand and efficiency. So, with that, i look forward to the feedback that we get from the panel. Much. Nk you so now we are going to start our panel. Which is going to include jason and larry, although jason may have to leave for a little bit. Those three panelists of course need no introduction. So i will not waste time with an introduction. What were going to do is i have a memo of five minutes each to do some remarks about their views about how to think about the debt Going Forward. And then were going to just all get on together to have a discussion that i will moderate. In order to make sure we have time, lets try to keep those remarks down to about five and its. Were going to start with ben bernanke, then olivier and then ken. Thank you for a great presentation. I agree with the main conclusions about the accounting. I think we should be proactive as the Previous Panel said. And i think that Going Forward we should have a deficit bias sections for emergencies, everything jason was talking about. I will take a few minutes not surprisingly to defend Monetary Policy a little. Because there is a tendency to rule it out completely as not being of any interest whatsoever. Let me make two points. The first is Monetary Policy in the u. S. Has been pretty effective the last couple of years. We did actually reach 3. 5 unemployment with a positive federal funds rate and a trade deficit. So, were exporting aggregate demand. I think that powells fed with their pivot, insurance cuts, did bring us to full employment, and that was something that happened of course before the pandemic. When the pandemic hit, you would have expected they would be a situation where the fed would be pretty ineffective, because with shutdowns and health problems, our star is quite low. Obviously the fed cannot do anything about the virus. Also, centrally, the economy is in a very neutral recessions because instead of being led by housing and durables and investment, it being led by services, where the pandemic is creating the most problem. So again, you would think that this would not be a good recession for the fed to have some benefits on. But in fact, while i of course acknowledge we are still in a deep hole, and i once again reaffirm with the first panel said about the need for assistance, the recovery thus far has been a lot faster than june. Ticipated as of were only about 2 down real gdp for the year, which is a lot better than what was expected. And where has the strength been . The strength has been primarily in housing, capital investment, trade, durables, cars, automobiles, interest sensitive sectors. Part of that is due to the feds response, as well as the good functioning of the credit markets and the Financial Markets generally, which again, the fed can take some credit for. I do not want to overstate this, but i am reminded of the 1960s fiscal monitor debate. I think both extreme views are wrong. Athink good fallacy uses combination of monetary and fiscal response. That is the first point i wanted to make, is Monetary Policy, while certainly is confronting the problem of the zero lower bound, still has some ammunition left, and has been beneficial the last couple years. The second point is i think that in making these interesting normative discussions, larry and jason do not think hard enough about the political economy of fiscal policy. I mean, whatever you might say about Monetary Policy, it is run by a nonpartisan, independent, professional organization which can respond quickly and sensitively to changes in the Financial Economic conditions. Politicalicy is, for economy reasons, we all know about, can be slow, and in fact, can sometimes be very counterproductive, as we learned after the last recession. Onlyct, it seems like the time fiscal policy can respond to counter cyclically is in great emergencies like 2009 and 2020. The ability to sustain fiscal support does not really seem to be there. And certainly the unwillingness to have triggers or to have automatic stabilizers is also a question about the political economy. So, i just wanted to make that point. There are a lot of other things to talk about. I hope i will have a chance to talk about the global savings glut and how that saved us. But i will say that one way of thinking about this is, yes, maybe fiscal policy can become the go to stabilizer, but one benefit of fiscal expansion over a period of time is that the neutral Interest Rate will go up, inflation will go up, and one of the benefits of that should be to make Monetary Policy again or effective, both here and also in europe and japan. Anyway, i wanted to try and balance that discussion a bit while acknowledging the strength of the paper and a very good points that jason raised. Ms. Sheiner thank you very much. Olivia, are you going to try and share your screen . You see it . Ms. Sheiner yes we do. Very good. Going to try to make six points and five minutes. In five minutes. It is a tough discussion because i am basically in total agreement with jason and larry. The first three points are just sitting in a different way when i think the conclusion is. The first one is if you just have stagnation and no constraints on what you can do with Interest Rate, then this implies that has low opportunity cost both in physical terms and in welfare terms. Things anduple kate you have the these are distinguished these are different constraints. So that the Interest Rate cannot be as low as neutral rate, then they are arguing that there is the need for more spending. Deficit. Tool is fiscal would you have a combination of one and two, then you have lower cost of debt on one side and larger benefits of deficits. That is the world we are in now. So i think the implication for the u. S. At this point is we should be ready to run deficits with covid if needed. We dont know. There is a chance that demand is stronger but we cannot be sure. In this case we have to allow for further increase in debt. Seems to me that we cannot exclude that. So, with a footnote that jason mentioned, which is there might be other ways of increasing demand through structural measures, then we should probably be more creative there. Now, let me make two minor point s. I really do not like the stock stuff. Jason doesnt like it either. [indiscernible] i think the way to think about it when you start worrying is basically you have to finance that. So you look at that service, which is uncertainty in its moving forward. You say, can i generate the primary surplus so even if things goes bad, i will be able to finance it. I think that makes you think about the right issues and it can be done. To reinforceint is something that jason kind of said on Green Investment. This is the context in which Green Investment makes a lot of sense. It is useful directly, its Green Investment, it may help fight global warming. Its useful indirectly for engaging demand. Even if it is not financed by debt. Its in the paper and i think it is important. Government should not get a pasty finance all Green Investment by debt if there are no fiscal revenues. It is great stuff, but you still have to worry about the debt implications. I think there is a lot of space. Then last point i had to come up with some criticism, and the question is about future Interest Rates. Here, as we know, markets are very short. When jason get the numbers for option prices, i just checked them and they are exactly right. We have a long list of potential culprits of the last decreased over the last 35 years of the Interest Rate. But as i say, we have culprits, we do not have indictments. And we do not know whether it is saving an investment, low investment, or whether it is demand for safety, for safe assets, a mix of the two, we do not know the proportions. So the thing that we do not no worries me a little bit. I can think of things which might change. Two examples. We mightd is over, actually all feel good about life and start spending my crazy. Pent up demand. Would probably not last for very long, but would put pressure on rates. When i was going to the list i thought of something else, which came up in the discussion i was in yesterday, which is a lot of global savings from comes from accumulation of reserves in china. It is one of the reasons, not the only one. Here, china is putting in place insurance, all kinds of social insurance. Down, and itng could come down much more, and still very high relative to other countries. So what could happen. Technology may have major breakthroughs with large indications implications for investment. We cannot be quite sure that the markets are too sure of themselves. Withbeing said, i agree everything that was said by jason and larry. Ms. Sheiner thank you so much. Finally, ken . Thank you. Thank you to brookings for having me join this distinguished panel. And following the great earlier panel, this is an excellent paper by larry and jason. And i think it is a little bit provocative, which i think is very healthy and good. I nevertheless agree with a lot of their point. Rather than repeat everything that ben and olivier said, let me say a couple points maybe they did not structure. I think the maturity structure of that matters. What you would do in an emergency trying to stimulate the economy one way or the other, you are limited by congress and you make debt very shortterm great, but one might think as you are expanding the level of debt, you might want to extend the maturity structure. When you combine the Federal Reserve and the treasury as you balance should sheets are kind of short. So, debt is something that cannot change quickly. And Interest Rates might take five or 10 years to change, but i think Congress Might take 20 or 30 years to respond. Arehat is part of how we not ever going to default. I think deflation would be the outcome. It has been mentioned about pension liability. I think that has to be thought about in this venture, but i do not have enough time. I think the point ben made, fiscal policy is extremely political. I want to pick one thing in particular. A key element of larry and jasons proposal of automatic stabilizers, because the United States has less triggers, less automatic stabilizers than in europe. I dont know. When i was chief economist, we observed europe never let the automatic stabilizers work. They did not like it, because the parliament wanted to decide what was going on, and there was pushback from the public about how much debt was going up, and they responded. I think in every World Economic outlook i did during my years, europed have a phrase, needs to let the automatic stabilizers work. You cannot get around the fact that it is political, in a very small way, the Federal Reserve has done a great job of doing this, of using its fiscal arm, which is really what quantitative easing is, to do things that congress would like done probably, but they argue about it and it never gets done. The question is how much can you make it technocratic. Paper, larry and jasons it is very calm and logical. If they could be in charge, maybe things would run that way, but we have this very political system. Michael emphasized this in the Previous Panel. Just a couple other points. Infrastructure, we all agree with that. I was arguing that from the beginning, as people in the white house no, that would be a very good idea. It lasts a long time. I have to say and i still argue that and i agree with larry and jason. But, you must be aware that microautonomys have economists have a very different view than us macroeconomists. There was debate about what exactly is infrastructure, what is a good project. I think a very excellent proposal the Obama Administration had was for having a National Infrastructure bank to try and put some technocratic expertise in this. But i am in boston, home of the big dig. New york has the subway. We can go on and on. I think the big dig was still worth it that 10 times the original estimated price, personally. But it is one of the reasons it is very controversial. We do note need to understand why Interest Rates are so low is a global phenomenon. It is not just about what the u. S. Debt it, theres much more going on. Iviere a suspicion, as ol does, that the wave of asia growing has an enormous effect on this. Ben talked about this. There are many reasons, including demographics, why that could be different. Ms. Sheiner thank you all. Now we are going to start a panel with larry and jason, while he can be here. I actually want to start with what you just talked about, ken. Ben, to talk about a global savings glut. Clearly the most important question behind all this is how sure can we be the Interest Rates will stay low. Know thee do we reason they are low, and we know why they will persist . I want to know your perspective on that, ben. Keyword ine so, the global savings glut is global, as ken was saying. The way i think about this now is that there are three key elements. The first is that demographics and rapid growth of the middle class globally has greatly increased desire savings, one. Secondly, and this is something larry pointed out and jason and larry talked about, is to a historically unusual degree, productive investments in the world are public goods as opposed to private sector, which means to finance them, you have to have fiscal Borrowing Capacity. So, the third point is that for economic and political reasons, many countries either will not borrow, like germany, or cant borrow, like many emerging markets, in large quantities. So on net, you have a global savings glut which is driving down real Interest Rates. The u. S. Has a special role here. Any story that is u. S. Focused has to recognize we are the shock absorber because we are the low saving, high borrowing country. We have the physical capacity but we do not save much. We have the benefit of having the dollar, so we can borrow a lot, we have a trade deficit, capital inflows, and lots of fiscal space, which is what we are talking about now and why we should use that fiscal pace space. Youre asking about what could happen. I agree that jason had the interesting rates and so on, those things need to take into account term premium before you figure out what the implied future rate is. Putting that aside, the global savings glut story tells you how things can change. One is demographics and growth and emerging markets could slow in a way that reduces savings demand. Secondly, you could have increased Borrowing Capacity in other countries, which would compete with us. And then third, ultimately i think, there is some imperfect substitution. I think there would be satiation of holdings of u. S. Government debt. So i think there are stories in which real Interest Rate rise over a long period of time. These are just possibilities, but i would agree with olivier that we should have a plan that looks at what is the probability that our star is above a certain level as opposed to what is the median forward path that takes into account what do we do in those kind of tail situations. Ms. Sheiner larry, do you want to get in there . Youre muted, larry. Let me make a few points. First, with respect to the global savings glut, lucas rachel and i looked carefully at that issue. The the last 25 years, current account deficit or surplus of the oecd countries has moved within only a 1 range. So if you think about the real Interest Rate of the industrial world, there has not been a change that was significant. You think of that is an integrated economy. There is not been a significant change in its current surplus. It is possible i suppose, oli vier, china could go into current deficit. The less it is, whatever it did with respect to Health Insurance , would not have a on the Interest Rates in the industrial world. I think it is hard to tell convincing stories about likely changes in emerging markets that are quantitatively large for the average real Interest Rate in industrial countries. Second, the criteria that we emphasizesich looking at the real interest burden associated with debt, is precisely designed to allow for these contingencies. An approach that focuses fiscal policy on assuring that that does not get too big is a criterion that will push fiscal in theto be stabilizing event that real Interest Rates were to third, there is a fallacy that runs through much of this, which is the assumption that Interest Rates are plausibly an important source of uncertainty for the level of deficits and debt in the future. If you think back to jasons chart, highlighting that a confident over five or 10 10 for the level of deficits, suppose there was a 2 increase in the real Interest Rate, which would be a real significant move. That is a small way through that. The risks associated with stagnation attracted recession for accumulation of debt are much greater than the risks associated with fluctuations in Interest Rates. I guess the last point that i would want to highlight, because i think its important to understand that the points of agreement and the ways in which we are largely in agreement on what the fundamental problem is, these goals, which is virtually everybody was in agreement that having Something Like simpson goals and fiscal policy path that went with simpson goals would be a good thing. Some people thought there was too much entitlement cuts, some people thought there were too many tax increases. There were many arguments about the components, but there was no appreciable argument at the time about the goal. If the goal had been achieved and if that goal had been maintained, the consequences would have been catastrophic. Had we had a 4 g. Contractionl sustained for the have to years years2011 half dozen after 2011, i would take your point about Monetary Policy, but i do not think you would want to argue that Monetary Policy would have been any position in any position at all to offset a consistent maintained 4 of gdp fiscal contraction in the years after 2011. Yes, the economy was strong in the last couple of years, but that had a lot to do with fiscal policy as well as with monetary world, and in todays fiscal policy stimulates demand. I believe the level of income is a much more important determinant of investment than anything about Interest Rates, once you are starting in a world where Interest Rates are essentially zero. Yousheiner to be clear, guys can jump in. There are not that many of us, so if you want to jump in, go ahead. We can keep this discussion going. For the record, i was for fiscal expansion in 2010. We often cited you, ben. Mr. Bernanke unfortunately. The fed chair is saying that same point now. I wanted to highlight go ahead, olivier. I am not going to disagree, but i think if you put yourself in 1985, i tell you a number of things about whats going to happen and i ask you to predict whats going to happen to the Interest Rate, i think you would have a hard time predicting what happened. When it comes to demographics, longer and longer Life Expectancy leads to more saving, a lot less saving. All kinds of issues. I was struck by one remark been made, which i think is very important. Thee is a decline in profitability of private investment, which seems to be part of the story. Ben made the point that the nature of technology has changed , it makes Public Investment more productive and private investment more difficult. This would be a very interesting angle not explored before. Ms. Sheiner jason . Yeah, i love the comments. Let me say three things. It comes off of what olivier just said. In some essence, we dont need but thewhat caused it, important threshold question is how likely it is to continue. If it was caused by the financial crisis, i think we can rule that out. If it was caused by mistakes by Central Banks, and once we get better central bankers they will stop making the mistake is not likely to continue. The fact that it was gradual across the range of places means it is that your best guess is it will continue. We can debate why that is. 100 , i am fat at lee agree that there is scope for Monetary Policy. I dont want to demean it at all. I think there is a big difference between someone who comes along and says there are limits to Monetary Policy, therefore do nothing and suffer, which would be an unfair caricature, but only slightly unfair. Versus the limits to Monetary Policy, so we need to do a lot of fiscal policy. That is certainly what we are trying to argue. Ms. Sheiner so can i talk a andle bit about stagnation this idea that we will need fiscal policy just to keep demand up . What you will hear from all the people who are worried about the debt as well, we need to fix the roof while the sun is shining. There is one way of characterizing your view on secular stagnation, that you dont think the sun is going to be shining anytime soon. How would you know. Ok, fine. Better than we thought, maybe we should address the data. The first thing is to repeat what i said. If we had done at the last time when there was a consensus that simpsond do it at the commission recommendations, it would have been a grave error in terms of what their consequences would have been, that is the first thing to keep in mind every time one hears that suggestion. Is thatnd thing to say i think there are good reasons, not certain reasons for believing that an economy with a positive neutral real interest a healthier, to be safer, more productive and financially stable economy then an economy with a negative normal real Interest Rate. Posture of fiscal policy that permits a positive is, Interest Rate believe, in general, the healthier strategy. Then, the only constraint, and i believe that the low real Interest Rate is also telling you something. The low real Interest Rate is a kind of measure of the riskadjusted productivity of capital. When it is zero, that is telling you that in private investment that you crowd out is not a very costly kind of investment to crowd out. Then the question comes to the question of sustainability. Aboutk one should worry sustainability. Withuestion for countries Flexible Exchange rates that do what i think we should do, and this is a sub point, but i agree ofh ken on the desirability issuing debt with longterm reliability. As a consequence, i would much rather have my stimulus come from fiscal policy finance with rather thanebt Monetary Policy that takes the form of q. Week, which reduces the horizon of the outstanding debt. Then it is a question of sustainability. Ultimately, while i am some pathetic to what olivia said olivier said about the instant horizon and such, i think a does a nationis, like the United States have the capacity with its tax base . If it is absolutely imperative to do so, to mobilize an extra two to 3 2 to 3 of gdp, notionrefore, i find the that there is some risk of an to bent financial crisis highly implausible. Worry that its going to be, that its a plausible scenario in which the ability of the nation to meet its debts is substantiale into question. Look, this experiment has been wrong. Has been run. That japan has run, which are a very large version of the kind of more relaxed approach to fiscal policy that jason is running, there would have been universal agreement 15 years ago that if you ran the debt up to 200 of gdp, you would be in a grave situation. Lowert, japan has unemployment, has done very well in terms of per capita out put relative to the rest of the world, and the reasons have to do with the fact that theyve been prepared to run very substantially expansionary fiscal policy. I think japan stands as an example of the use of fiscal policy. Now, should they have done things that were more efficient than a lot of the infrastructure they did, our candidates points our candidates points are kenneths points write about infrastructure . Yes. Could they change . Absolutely they could. If you ask me about the risks, world 12 years ago that had a huge financial crisis, that this year has had a massive pandemic, if you ask me about the risks to the fiscal position of the United States, i dont think that plausible fluctuations in real Interest Rates arent important are an important part of them. Olivier is right, in 1985i would not have forecast the downward that that happened and could happen again, but we need to maintain some robustness with respect to two standard deviation events. But that is very different from planning on the a stem should on the assumption of two standard deviation events. We should make our plans on the assumption that the economy would be catastrophically short of aggregate demand with zero Interest Rates and balance budgets, because that is what all the evidence is telling us right now. It may turn out to be different in the future, but we need to think about fiscal policy in the context of the idea that deficits are a necessity for achieving the goals of full employment and Financial Stability, and quite possibly, very substantial deficits. Can i ask you about how you think about the risks . 100 ofyou think about gdp as something we should be comfortable with . We are talking about the United States, which is different. There is a lot of evidence now that higher debt leads to lower growth, but i think what is more interesting as Interest Rates are even lower, so who cares . Risks of a crisis, we defaulted in the 30s. We had the inflation of the 70s, which was a screw up, i think, but it happened, and it could happen again. If we pull look at our if we look at our political system, assuming some technocratic thing is going to run it very smoothly, i want to come back to something jason had implied, this very important point that if you had more redistribution of income, more progressive policies, social insurance, that would a, directly address some of the underlying problems that we saw in the pandemic with inequality, and i suspect would have a strong boost aggregate demand. You will say, that cannot happen because there is not political consensus. I think approaching this from a technocratic point of view, that would seem like the first thing to try. On the Interest Rates being very low, it did drop a lot after the financial crisis and again after the pandemic. In a 70, 80two once back, ands back to lastly, i would challenge this notion that japan presents a model for how the United States should run itself. I think its per capita income is a fraction of the United States. The moment, and i think we need an emphasis continuing to be on things we do well. If infrastructure is done well, and we include the electric , makingtter education our economy green, this is a great use of the moment of low Interest Rates with debts. I dont think japan made great use of the moment, and i wouldnt want to trade futures with japan. Very quickly, i agree with theon everything he said on microeconomics of japan, i was only addressing the macroeconomics of fiscal policy strategy. Our calculations about Interest Rates all use february 2019, before there was covid. So it is before a period of expansion. There are all kinds of mistakes that are made going into crises. I think that among the most important things to do is to make sure that we dont have a sustained period of slow growth, which i think is a very substantial risk if we are providing insufficient impulse to aggregate demand, which looking at the judgments of markets, looking at the current level of Interest Rates, strikes me as being the largest of the risks for the next several years, though certainly not the only ones. Ms. Sheiner can we talk a little bit about infrastructure . The only thing i focus on a lot can i sayard something . Two things. What we need is to increase demand, private demand. The best way of doing that is the fiscal deficit. That is not the only way. It seems to be social insurance. If we provided health care to education, all kinds of things like this, this would make a fairly major difference saving. E we have to be somewhat creative about that. The other point that i would make, and i would suspect that i poke, we dont want to do it based on the baseline. We want to do it based on two standard deviations. We want to make sure that if the Interest Rate increases by 2 , two standard deviations, that we are ready. The conclusion is still the same, that we are fine, right . It seems to me that uncertainty is something we have to take into account. We cant go on the expectations of baselines. Say, and intended to may well have misspoken, we should focus more on the mean than on the two standard deviation outcome. Of course, as we focus on the mean, we should ensure that we have a robust strategy for dealing with the two standard deviation incomes. None of this is new. When cain posey came to the came to thekeynes treasury in 1942, he told everyone the Social Security is a terrific idea, because it would replace private savings with Social Security entitlements, retain demand, and prevent a postwar depression. This idea, which i have been saying, one way or another, for social, that tax finance insurance, or tax financed redistribution will provide aggregate demand, and that the correct conclusion is that you need to use the government budget to expand aggregate demand, which is a different proposition than the proposition that the government needs to run a larger budget deficit. Direct ande most obvious way of maintaining aggregate demand is through a larger budget deficit, but it is by no means the only one. We can also be referencing use of credit guarantees in various ways. If we were in a world where cost of capital were higher, taxe incentives would be something we would be mentioning. In current context i dont think they make much sense, but support matching grant type support for Public Investment by state and local government would be another use of fiscal policy to promote aggregate demand. The main point here, which i think we are all agreed on, is the maintenance of aggregate demand needs to be a crucial if wety for fiscal policy are going to absorb what is likely to be a chronic excess of private savings over private investment. Ms. Sheiner larry, you were talking about aggregate demand, that it is completely not consistent with a balanced budget, which no one is really contemplating. We are looking at increasing deficits over the next 30 years. I am surprised that your copier lobbying included Social Security reform. As the new administration is starting, if you were to give advice to them, you know, in Social Security, is there something you think they should be focusing on . How do you think about the longterm budget problems, whether or not we should be paying about the debt or worrying about austerity right now . Mr. Summers it is important to understand that if we do nothing, there will be Social Security reform, in 2033 or whatever the year is, there will be acrosstheboard deficit cuts. Our assumption was that they didnt implement the reform of general revenue financing from current Social Security. We were careful to be talking about current law. I dont think theres any case, really, for cutting benefits in the current context. I think there is plenty of room to raise payroll tax ceilings in ways that would finance the maintenance of current benefits, and there are probably some other ways of strengthening the social insurance function of Social Security, and those would be things that i would support. Whether this is the current political moment for those things, i believe i leave that judgment to other people. But what i think is most important is that we have the paradigm shift to the view that having a fiscal policy that absorbs all the savings and maintains demand and therefore we get to points of full employment without having the kind of financial conditions that we had in 2007. I think that is the central thing we need to understand, and then you can work through exactly what the right things are. The idea that our main problem is to save more in order to be more virtuous or to have Less Government borrowing in order to be more virtuous, i think what is crucial is that we moved beyond those. Ms. Sheiner we dont have very long, we have eight minutes left. What i am going to do is ask each of you the same question. Lets think about the advice you might give to an incoming administration. Would you tell them to go with this Interest Rate as an Interest Payment with the share of gdp as a guideline . Would you recommend that they start tackling the longterm notet problems, whether or it is higher revenues or Social Security or whatnot. Lets start with you, ben. Mr. Bernanke thats easy. No one on the panel is going to say that we are going to try to balance the budget anytime soon. There are some obvious priorities. One way of thinking about this in a more optimistic way, i am glad olivier liked my point about Public Investment, because you can think about a lot of things. You can think about climate, inequality, health care, infrastructure, there is any number of things that could have used those resources. Instead of saving investment, think about total demand and total supply, there is a lot of things that could use those resources. That is what they should be pushing for on the immediate horizon. The constraints on that are going to be political, obviously. There is nothing they can get through congress and the next couple years that is going to be threatening any kind of debt criteria. Ken, how about you . Would you tell them not to worry about the debt at all and worry about investment, or go down the Social Security reform route . What would you say . I think the risks are worse than the financial crisis and this is not over yet, and we will see how it goes. It could be just great, but for the foreseeable future, we are in a wartime situation still, particularly when it comes to Small Businesses. Im not hearing you, im sorry. Ms. Sheiner i mean after, once we recover from covid mr. Rogoff i mean, hopefully they will be looking very good in two years, that is so far away to be talking about it, i dont think it is a nearterm thing. Yes, infrastructure. I think its important that infrastructure ideally be productive, something plausibly productive, and have a broader notion going back with the micro economists they have been saying forever that the most efficient expenditures on transportation are on repair, because in the advanced economies, all the good infrastructure places have been built. There are not new projects. But there are things like, i think, the future of education,utting things online, the red green energy. I think it would be great to build up in these areas, and there might be bipartisan consensus. You dont need 20 senators to go along with you, just a couple. Ms. Sheiner olivier . I think first, the docket makes no sense. ,ou can announce if you want but zero percent. Two Public Investment, which makes sense. It doesnt say anything about debt. Maybe you finance some of it through taxes, some of it through that. That is not the through debt. That is not the issue. Finally, use fiscal policy to make sure you maintain output, ensure large deficits if needed, but there are other ways of pushing private demand. That would be my advice. Ms. Sheiner great, thank you. Larry, do you have any more comments you want to get in . Mr. Summers just to respond to your question. The central principle is that in a period of extraordinarily low Interest Rates that can be years in for 10 to 30 provides an unprecedented profoundty to address and longstanding investment deficits. Take advantage of that opportunity is putting our children at risk and is putting our longterm fiscal position at potentialakening our for inclusive growth. Low Interest Rates take advantage of the moment to address investment deficits exactly as olivier said. One observes what is happening and what is happening to Interest Rates, the fraction of that investment should be tax finance versus debt finance is a judgment that will need to be made on an ongoing basis. But there is only the most negligible of probabilities. That anything will happen in the next five years, that will call into question the proposition that a careful, thoughtful, attentive to the details effort to remedy the investment economy is what our requires right now. Ms. Sheiner terrific. You mentioned this in your talkingut we have been about investment as infrastructure. You talk about these very high rates of return we know we can get on investments and children and for families, and those are, in my view, clearly, they solve all the problems that we face, idea that you have brought into that. Goesdea youre proposing very, very strong on those kind of investments. They both affect inequality as well as have high return, so ok. We are out of time. I would like to thank all panelists for what was an interesting discussion. We had a lot of agreements, which is interesting. I hope it will influence what happens in washington. I would like to thank the Peterson Institute for this firstbetween the two of us. And thank you very much to the studio audience for watching. Thank you. [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. Visit ncicap. Org] [captions Copyright National cable satellite corp. 2020] watch cspan for live coverage of the election process and the transition of power. Cspan, your unfiltered view of politics. Tonight, a discussion on fiscal policy under the upcoming Biden Administration and the 100 congress. Hosted by the brookings institution, it is at 8 00 p. M. On cspan two. Also coming up, testimony from treasury secretary Steven Mnuchin and Jerome Powell on their agencys response to the coronavirus. And what an economic recovery could look like in the future. We will show you the entire hearing tonight starting at 9 00 eastern on cspan. 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