WASHINGTON — Janet L. Yellen’s expected nomination as Treasury secretary will place the former Federal Reserve chair into a critical role overseeing President-elect Joseph R. Biden Jr.’s economic and national security agenda at an agency that has increasingly become a center of power.While Ms. Yellen’s views on monetary policy are well known from her time leading the central bank, her perspective on a range of issues that are part of the Treasury Department’s portfolio is less known.As Treasury secretary, Ms. Yellen will be the Biden administration’s chief economic diplomat and will face the challenge …
WASHINGTON — A surge in government borrowing in the face of the pandemic recession has put the United States in a position it has not seen since World War II: In order to pay off its national debt this year, the country would need to spend an amount nearly as large as its entire annual economy.
And still, economists and many fiscal hawks are urging lawmakers to borrow even more to fuel the nation’s economic recovery.
The amount of U.S. government debt has grown to nearly outpace the size of the nation’s economy in the 2020 fiscal year and is set to exceed it next year, as the virus downturn saps tax revenues, spurs government spending and necessitates record amounts of federal borrowing, the Congressional Budget Office said on Wednesday. Federal debt, as a share of the economy, is now on track to smash America’s World War II-era record by 2023.
The budget office report underscored the scrambled politics of deficits in 2020: It showed debt held by the public climbing to 98 percent of the size of the economy for the fiscal year ending Sept. 30. Forecasters had previously expected the nation to reach those levels at the end of the decade, a time frame that had already alarmed fiscal hawks in Washington, who warned ballooning deficits would consume federal budgets and chill private investment.
But the virus has upended those predictions, prompting even longtime champions of fiscal prudence to urge lawmakers on Wednesday to keep borrowing more for the time being, in order to help people and businesses survive the lingering pain of a sharp recession and now-slowing recovery.
“We should think and worry about the deficit an awful lot, and we should proceed to make it larger,” said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget in Washington, which has for years pushed lawmakers to take steps to reduce deficits and debt.
The turnabout on deficit fears caps several years of declining concern over Washington spending more than it takes in, particularly among Republicans. Lawmakers voted along party lines in 2017 to pass a $1.5 trillion tax cut that President Trump and Republican leaders insisted would pay for itself but has instead added to the deficit. The budget deficit surpassed $1 trillion in 2019 — before the coronavirus pandemic hit — a jump of 17 percent from 2018 as tax cuts and spending increases continued to force heavy government borrowing.
The pandemic has plunged the economy into its sharpest quarterly contraction in growth in nearly 75 years, ballooning the deficit in the process. With millions out of work and businesses shuttered, tax revenues have fallen for the federal government, along with states and municipalities.
Congress and Mr. Trump moved quickly to approve more than $3 trillion in new federal spending to help businesses and individuals stay afloat through the abrupt slowdown in economic activity. All of those factors necessitated large sums of government borrowing, sending deficits — which had grown steadily even in the middle of a record economic expansion — skyward.
The deficit — the difference between what the United States spends and what it earns through taxes and other revenue — is expected to reach $3.3 trillion for fiscal year 2020, the budget office said on Wednesday. That is more than triple the level it reached in the 2019 fiscal year.
That financial gap is exacerbated by additional borrowing over the past decades. At the end of the fiscal year, the budget office predicts, total debt held by the public will be about $20.3 trillion. By comparison, the total output of the American economy — its gross domestic product — is projected to be just over $20.6 trillion for the fiscal year.
Economic theory has long held that rising debt as a share of the economy would drive up the amount of money governments must pay in interest to borrowers. Like a household with a lot of loans, the theory went, creditors would demand higher interest rates to hand cash to a heavily indebted borrower. With its debt payments more expensive, the household — or government — would have to borrow even more to stay current on its obligations.
That would result in a debt spiral in which the government was not able to do anything but fund its debt, the economists said, though such a spiral did not materialize over the past decade, as debt climbed and interest rates stayed low.
Because the pandemic hit the economy so quickly and painfully this year, lawmakers raced to borrow money much faster than they did during the last recession, when it took two years for the debt ratio to climb by a similar amount, in percentage-point terms: Debt as a percent of gross domestic product grew from 39 percent at the end of the 2008 fiscal year to nearly 61 percent at the end of 2010.
But it has been decades since the amount of federal debt was larger than the sum of the nation’s annual economic output. That came in 1946, shortly after the war ended.
The fiscal woes are not just confined to the United States’ need to borrow. In a separate report released on Wednesday afternoon, the budget office updated its forecasts for the solvency of the Social Security Trust Fund, showing it will run out of money faster than the office previously forecast in June.
The new estimates imply the fund will be exhausted by 2031, a year earlier than previously projected, forcing immediate benefit cuts, unless lawmakers intervene. Medicare’s hospital insurance trust fund is now on track to run out of money in 2024, instead of 2026.
The aggressive federal response to the pandemic in March resulted in trillions of dollars in additional government spending, as Washington looked to provide tax breaks, assistance for small and large businesses, direct checks for low- and middle-income individuals and supplemental benefits for the unemployed.
Those measures were widely supported, as millions of workers were suddenly unemployed and businesses were forced to close their doors. Most economists have continued to call for additional spending, as the pandemic shows no sign of abating.
Loretta Mester, the president of the Federal Reserve Bank of Cleveland, who has warned about previous deficits, told reporters on Wednesday that her own forecasts for the economic recovery hinge in part on continued fiscal support, and that without it, the United States might struggle to make it through shutdowns and onto a sustained growth path.
While Ms. Mester said that she was “not one of those people who think that deficits don’t matter,” the United States cannot worry about loading up on debt in the middle of a nascent recovery.
“This isn’t the right time to have that conversation,” she said.
In a sign of how unconcerned investors are about the deficit, stocks rose on Wednesday, with the S&P 500 rising 1.5 percent to set another record. It was the index’s best day since July 6.
Republican lawmakers who were little troubled by the increase have since cited debt concerns as a reason to move slowly on a new package of economic assistance amid the pandemic. Democratic leaders in the House drafted and passed a $3 trillion opening bid for a new rescue package this week, but they pared it back and dropped some members’ top priorities from the bill out of deficit concerns.
Yet while Mr. Trump, as a candidate in 2016, famously pledged to pay off the entire national debt in eight years, he and his fellow speakers during this year’s Republican National Convention did not raise the deficit issue at all. Mr. Trump’s most recent budget proposal, offered before the pandemic spread rapidly in the United States, did not include a balanced budget even if he were to win re-election.
For decades, analysts argued that an explosion of government borrowing risked devouring a large part of the nation’s savings, leaving less cash available for private businesses to use for investment.
Those companies would then be forced to pay higher interest rates to gain access to that smaller pool of funds. And those higher borrowing costs, it was argued, would curtail investment and hurt economic growth. The process is known as “crowding out,” and there is no sign that it is happening now. Interest rates remain low and inflation is muted.
“We’re in an era where more government debt is not doing so much crowding out,” said Douglas Elmendorf, a former director of the Congressional Budget Office and the current dean of Harvard’s John F. Kennedy School of Government.
“I think the idea that we should not let the debt constrain our response to the pandemic is exactly right,” he said. “But I think the idea that it never matters how much debt you have, because there’s always some way around that, is wrong.”
Even some fiscal hawks, like Ms. MacGuineas and Michael A. Peterson, the chief executive of the debt-focused Peterson Foundation, say lawmakers should continue to spend for now, while targeting their efforts more effectively to help the economy recover. Eventually, they say, that spending will need to yield to debt reduction.
“When this devastating pandemic is behind us,” Mr. Peterson said, “our leaders must come together to address our growing debt so the next generation can have better preparedness and greater prosperity.”
Matt Phillips and Jeanna Smialek contributed reporting.
Economists and deficit hawks have warned for decades that the United States was borrowing too much money. The federal debt was ballooning so fast, they said, that economic ruin was inevitable: Interest rates would skyrocket, taxes would rise and inflation would probably run wild.
The death spiral could be triggered once the debt surpassed the size of the U.S. economy — a turning point that was probably still years in the future.
It actually happened much sooner: sometime before the end of June.
The coronavirus pandemic, and the economic collapse that followed, unleashed a historic run of government borrowing: trillions of dollars for stimulus payments, unemployment insurance expansions, and loans to prop up small businesses and to keep big companies afloat.
But the economy hasn’t drowned in the flood of red ink — and there’s a growing sense that the country could take on even more without any serious consequences.
“At this stage, I think, nobody is very worried about debt,” said Olivier Blanchard, a senior fellow at the Peterson Institute for International Economics and a former chief economist for the International Monetary Fund. “It’s clear that we can probably go where we are going, which is debt ratios above 100 percent in many countries. And that’s not the end of the world.”
That nonchalant attitude toward what were once thought to be major breaking points reflects an evolution in the way investors, economists and central bankers think about government debt.
As levels of debt among rich nations like the United States and Japan have climbed relentlessly in recent decades, the cost of carrying that debt — reflected in interest rates — has tumbled, leaving little indication that markets were losing confidence in the willingness and ability of these countries to carry their financial burdens.
And since the 2008 financial crisis, traditional thinking about borrowing by governments — at least those that control their own currencies — has further weakened, as central banks in major developed markets became enormous buyers in government bond markets.
Critics repeatedly said this circular form of fiscal finance — in which one arm of the government, the central bank, basically creates the money needed to fund the arm of government that taxes and spends — would inevitably lead to a spiral of inflation, a spike in interest rates or a loss of confidence in the currencies. It didn’t.
“This is a 40-year pattern,” said Stephanie Kelton, a professor of economics and public policy at Stony Brook University and a proponent of what’s often called Modern Monetary Theory. That view holds that countries that control their own currencies have far more leeway to run large deficits than traditionally thought. “The whole premise that deficits drive up interest rates, it’s just wrong,” she said.
At the end of last year, the United States was about $17 trillion in debt — roughly 80 percent of the gross domestic product. In January, government analysts predicted that debt would approach 100 percent of the G.D.P. around 2030. But by the end of June, the debt stood at $20.53 trillion, or roughly 106 percent of G.D.P., which shrank amid widespread stay-at-home orders. (These numbers don’t count trillions more the government owes itself in bonds held by the Social Security and Medicare trust funds.)
That more than 25 percentage-point surge would represent the largest annual leap in American indebtedness since Alexander Hamilton founded the nation’s credit in the 1790s, outpacing even the debt growth at the peak of World War II, according to data from the Congressional Budget Office.
And it’s not over yet. The Treasury is expected to borrow over $1 trillion more through the end of the year — and that’s without counting another stimulus package. Republicans in Congress have pushed for a $1 trillion package, while Democrats have already passed their own plan with a price tag of more than $3 trillion.
“What’s very clear is that the U.S. economy has some room,” said Rick Rieder, global chief investment officer of fixed income at BlackRock, which manages over $7 trillion in investments for clients, including more than $2 trillion in bonds. “I would argue that we still have room now for another fiscal package.”
Talks on such a package are currently stalled, with the surging levels of debt often cited by Republicans lawmakers as a reason to oppose further fiscal action. But even the current situation would have been unthinkable not long ago.
Economists have long told a story in which debt levels this large inevitably ignited an economic doom loop. Towering levels of debt would freak out Treasury bond investors, who would demand higher interest rates to hand their cash to such a heavily indebted borrower. With its debt payments more expensive, the government would have to borrow even more to stay current on its obligations.
Neither tax increases nor spending cuts would be attractive, because both could slow the economy — and any slowdown would hurt tax revenues, meaning the government would have to keep borrowing more. These scenarios frequently included dire predictions of soaring interest rates for business and consumer borrowing and crushing inflation as the government printed more and more money to pay what it owed.
But instead of panicking, the financial markets are viewing this seemingly bottomless need for borrowing benignly. The interest rate on the 10-year Treasury note — also known as its yield — is roughly 0.7 percent, far below where it was a little over a year ago, when it was about 2 percent.
Expectations for economic growth and inflation are the crucial drivers of interest rates, and such low rates very likely mean investors expect a long period of piddling growth. But they also signal that investors see almost no chance that the United States, which has one of the best track records of any borrower on earth, will stiff them by defaulting.
One big reason: As during World War II, much of the money the government has borrowed is coming from an arm of the government itself, the Federal Reserve. The central bank has increased its holdings of Treasury securities by more than $1.8 trillion since March, effectively creating all the new money it needed to buy them. For many years, such arrangements were viewed as something that was done in wobbly emerging market economies.
But since the financial crisis of 2008 and the deep recession that followed, central banks in the richest nations in the world — the Fed, as well as the Bank of Japan, the Bank of England and the European Central Bank — have printed large amounts of money to buy government bonds and spur economic growth by lowering long-term interest rates.
The bond-buying programs in the United States were some of the world’s most aggressive. Critics said they would lead to disaster, with the increase in dollars setting off a surge of inflation similar to the one that dogged the economy in the 1970s. But inflation has stayed low, consistently coming in below the 2 percent target set by the Federal Reserve.
That’s not to say conditions will stay that way. Earlier this month, the price of gold, typically bought by investors as a hedge against inflation, rose above $2,000 an ounce — a record — suggesting that some could be buying a bit of insurance against a sharp rise in the future.
There’s a debate about whether a large amount of government debt hamstrings economic growth over the long term. Some influential studies have shown that high levels of debt — in particular debt-to-G.D.P. ratios approaching 100 percent — are associated with lower levels of economic growth. But other researchers have found that the relationship isn’t causal: Slowing economic growth might lead to higher levels of debt, rather than vice versa.
Others have found that they don’t see much of a relationship between high levels of debt and slow economic growth for rich developed countries. But they do see such a relationship for poorer developing economies, which are much more reliant on foreign investors, who could be spooked by rising levels of debt. Such situations have repeatedly played out in emerging markets over the years.
Even so, the experience over the last decade has drastically shifted the way economists and investors think about how the United States funds itself.
“Fiscal constraints aren’t nearly what economists thought they were,” said Daniel Ivascyn, chief investment officer for PIMCO, which manages nearly $2 trillion in assets, mostly in bonds. “When you have a central bank essentially funding these deficits, you can take debt levels to higher debt levels than people envisioned.”
WASHINGTON — There is a growing list of detailed plans for how the federal government can bring the United States economy safely out of lockdown and back on a path to normalcy amid the coronavirus pandemic. Congress is not following any of them.
Instead, lawmakers who have spent the past two months rushing to respond to a public health and economic emergency with a series of ever-larger taxpayer-financed spending packages appear to be locked in a reactive cycle, as the toll and financial costs of the virus mount. They are placing an array of expensive bandages on a gaping wound, leaning on the hope that the economy will soon recover but offering no real blueprint for what to do if the recession lingers for months or more.
The approach could prove far more expensive and less effective than an ambitious, considered strategy for addressing the pandemic. But partisan divisions have made agreeing on such a plan all but impossible in Congress, which by its nature is better at responding to crises than preventing them or mapping paths to recovery.
“Congress has always been a reactive institution,” said Joshua C. Huder, a senior fellow at Georgetown University’s Government Affairs Institute. “It rarely looks forward.”
The $484 billion relief measure that President Trump signed on Friday is a vivid example. The impetus was an emergency: The small-business loan program created by the stimulus law ran out of money days after it was enacted, as distressed companies sought forgivable loans to help keep their operations humming. So Congress swooped in with $320 billion to refill its coffers. That would not have been necessary had lawmakers heeded original calls to devote far more money to small-business relief in the initial $2.2 trillion stimulus law.
The measure also contained $75 billion for hospitals and $25 billion for testing — but neither sum comes close to what experts project will be needed, which many of its proponents conceded.
Congressional leaders have not funded the significant scale-up in testing and tracing of Americans that experts say is necessary to give consumers and workers confidence to return to something resembling normal life while the virus still poses a deadly threat. Nor have they settled on a strategy to keep aid flowing should the virus continue to suppress economic activity through the summer and beyond. Those decisions could have damaging consequences — by not spending more on testing today, lawmakers could find themselves under pressure to continue support for people and businesses indefinitely.
Now, Republicans and Democrats are clashing over the scope and timing of the next aid package — particularly whether it should contain relief for state and local governments whose budget pictures are dire — with no action expected until May. Republican lawmakers signaled they were returning to concerns about how much Congress was adding to the national debt with all of its government spending.
“It’s time to begin to consult with experts — people who make a living doing this kind of thing — and weigh the impact of all of this,” Senator Mitch McConnell of Kentucky, the majority leader, said in an interview. “Knowing full well this is necessary, nevertheless, that doesn’t mean you close your eyes to the impact you may be having on the country’s financial viability in the coming years.”
The Congressional Budget Office said Friday that it expected economic pain from the crisis to persist for years to come, even though it believed that activity would begin to rebound in the second half of the year.
In projections they cautioned were highly uncertain, budget officials said they expected the economy to shrink by 5.6 percent over the course of this year, with an unemployment rate of nearly 12 percent by year’s end. They predicted the economy would still be smaller at the end of 2021 than it was at the end of 2019, with unemployment dipping under 10 percent only near the end of 2021.
The budget office also projected the federal budget deficit would hit $3.7 trillion for the 2020 fiscal year, which would be its largest size as a share of the economy since World War II. By the end of September, when the fiscal year concludes, the size of the national debt is projected to exceed the annual output of the economy.
Several groups of experts have put forth plans to minimize that damage and hasten the reopening of the economy, most of which rely on Congress approving significantly more spending on widespread testing for the coronavirus.
Danielle Allen, the director of Harvard’s Edmond J. Safra Center for Ethics, said Congress had fallen well short of the $50 billion to $300 billion that her group said would be needed to fund 20 million tests a day — the amount her organization said would be required to “fully remobilize the economy” by August.
“There are no laws of physics that have to be overcome to do what we need to do,” Ms. Allen said. “There are laws of politics that have to be overcome. And the kind of law of politics that we need to overcome at this point is just, who is going to get credit for a good idea?”
The Nobel Prize-winning economist Paul Romer wants the country to be able to test every American for the virus once every two weeks, which works out to 25 million tests per day. He has called for $100 billion to begin building that capacity, four times what was in the law that Mr. Trump signed on Friday.
“No one is talking about the number I’m talking about,” Mr. Romer said, but he welcomed the progress. “This is a case of, the more the better. We should take anything we can get, in terms of tests.”
If the government is unable to scale up testing to the degree that experts are calling for, economists warn there is a good chance unemployment will remain high and thousands of businesses stay at risk of failing, putting pressure on lawmakers to continue building on what is quickly approaching $3 trillion in relief packages. That will undoubtedly provoke a partisan fight.
With simmering frustration from their left flank over a perceived failure to secure more concessions from Republicans, Democrats have signaled that they will work to ensure that the next package includes more substantial policy changes and funding. Republicans have previously rejected a number of those suggestions, including federal protections for front-line health workers, an expansion of food assistance, election security funding and another round of aid to state and local governments.
At a news conference on Friday, Speaker Nancy Pelosi said the House would not approve any future legislation without additional funding for state and local governments, adding that she would like funding to be on par with the nearly $700 billion that has now been directed toward small businesses.
“There will be a bill and it will be expensive,” she said. “And we look forward to doing it as soon as possible, because jobs are at stake.”
Senator Josh Hawley, Republican of Missouri, has spent the month working to build support for his proposal to preserve the country’s work force, which would have the federal government directly cover 80 percent of wages through refundable payroll tax rebates and provide rehiring bonuses for the duration of the pandemic.
“It’s unprecedented times,” he said in an interview on Friday. “We’ve got to be bold in getting the country back up on its feet.”
“At the end of the day, what senators and congressmen and women will respond to is their constituents,” he added. “There’s certainly a dawning bipartisan awareness that the depth of the economic crisis we find ourselves in is very deep indeed.”
WASHINGTON — President Trump’s budget proposals have been defined by a belief that the economy will grow significantly faster than most economists anticipate. The latest version, set for release on Monday, is a brief departure: It concedes, for the first time, that the administration’s past projections were too optimistic.
Then it goes right back to forecasting 3 percent growth, for the better part of a decade.
Mr. Trump’s $4.8 trillion budget proposal is slightly larger than last year’s $4.75 trillion request and calls for increased spending on the military, the border wall, infrastructure and other priorities, including extending the president’s 2017 tax cuts. It also includes trillions of dollars of cuts to safety-net programs like Medicaid and discretionary spending programs outside of the military, like education and the environment.
The White House makes the case that this is affordable and that the deficit will start to fall, dropping below $1 trillion in the 2021 fiscal year and that the budget will be balanced by 2035. That projection relies on rosy assumptions about growth and the accumulation of new federal debt — both areas where the administration’s past predictions have proved to be overconfident.
According to summary tables reviewed by The New York Times and interviews with administration officials, the new budget will forecast a growth rate for the United States economy of 2.8 percent this year — or, by the metric the administration prefers to cite, a 3.1 percent rate. That is more than a half percentage point larger than forecasters at the Federal Reserve and the Congressional Budget Office predict.
It then predicts growth above 3 percent annually for the next several years if the administration’s economic policies are enacted. The Fed, the budget office and others all see growth falling below 2 percent annually in that time. By 2030, the administration predicts the economy will be more than 15 percent larger than forecasters at the budget office do.
Past administrations have also dressed up their budget forecasts with economic projections that proved far too good to be true. In its fiscal year 2011 budget, for example, the Obama administration predicted several years of growth topping 4 percent in the aftermath of the 2008 financial crisis — a number it never came close to reaching even once.
Trump officials had considered their projections to be a break from that trend, writing last year that they were the first administration on record “to have experienced economic growth that meets or exceeds its own forecasts in each of its first two years in office.” That turned out to be wrong: In the middle of last year, the Commerce Department revised its accounting of the 2018 growth rate downward, to well below the rate Trump officials had forecast. Their predictions were similarly off in 2019.
Robust economic growth rates are not the only area where the administration’s renewed optimism appears in its latest budget. It has also revised down its estimate of the interest the federal government would pay to borrow money over the next decade, based largely on the assumption that the Fed, which began cutting rates in 2019, would raise them only modestly again over the next 10 years. The changes in rate assumptions reduce budget deficits by $1.5 trillion over the course of the decade, according to the administration’s projections.
Essentially, administration officials are contending that rising levels of debt in the United States will not drive up borrowing costs, as many conservative economists have long warned, at least for the next several years. They also believe, a rarity among economists, that a sustained stretch of 3 percent growth would not push the Fed to raise interest rates.
As a result, the administration sees federal debt held by the public — the national debt, essentially — declining from 79 percent of the overall economy this year to 66 percent in 2030. The budget office sees it rising, to 98 percent, a level not reached since 1946.
In order to justify that optimism, administration officials are contending that their overly optimistic growth forecasts of the past were a fluke of circumstance.
Mr. Trump’s first budget, in the spring of 2017, predicted growth of 2.3 percent that year using the administration’s preferred measure — the change in the size of the economy from the fourth quarter of the preceding year. It was a mild undershoot; growth actually hit 2.5 percent.
The next two budgets predicted 3.1 percent growth for 2018 and 3.2 percent for 2019. Both were off, badly. Growth was 2.5 percent in 2018, from fourth quarter to fourth quarter, and 2.3 percent in 2019, according to the Commerce Department.
Officials on Sunday attributed a half-point of the missed forecast last year to the effects of American trade policy — specifically, uncertainty over resolution of trade talks with China and congressional approval of a new trade agreement with Canada and Mexico. They said those uncertainties were now resolved and that growth would accelerate accordingly.
The senior administration official also said that a General Motors strike, aerospace giant Boeing’s struggles with its 737 Max aircraft and flooding in the Midwest had reduced growth by an additional three tenths of a percent last year.
Mr. Trump has long asserted that his push to negotiate with the Chinese and reopen North American trade talks were helping the economy. In the 2016 campaign, his advisers said that tariffs on Chinese imports — even more aggressive levies than what Mr. Trump ultimately imposed on Beijing — would increase growth, by pushing multinational companies to invest in the United States instead of China.
Such an investment wave never materialized. Capital spending growth turned negative for the last three quarters of 2019. Many forecasters believe that decline was trade-related; the budget office, among others, is predicting a bounce-back in investment growth this year. But those forecasters also see growth slowing, over all, as the stimulus fades from Mr. Trump’s deficit-swelling tax cuts in 2017 and spending increases he has signed each year in office.
Partly as a result of those measures, and the administration’s inability to interest Congress in any of its most aggressive proposals for cuts, the federal budget deficit was nearly twice as large last year as the administration projected in its first budget: It topped $1 trillion last year. The Congressional Budget Office predicts it will continue to grow, hitting $1.3 trillion in 2025 as growth slows to 1.5 percent.
For that same year, the new Trump budget predicts the deficit will be less than half the size — and that growth will be just under 3 percent.
SAN DIEGO — The mood among economic forecasters gathered for their annual meeting last weekend was dark. They warned one another about President Trump’s trade war, about government budget deficits and, repeatedly, about the inability of central banks to fully combat another recession should one sweep the globe anytime soon.
Among the thousands of economists gathered for the profession’s annual meeting, there was little celebration of Mr. Trump’s economic policies, even though unemployment is at a 50-year low, wages are rising and the economy is experiencing its longest expansion on record.
Underlying their sense of foreboding was a widespread sentiment that the current expansion is built on a potentially shaky combination of high deficits and low interest rates — and when it ends, as it is bound to do eventually, it could do so painfully.
Those concerns were echoed on Wednesday by economists at the World Bank, who called the worldwide expansion “fragile” in their latest “Global Economic Prospects” report. The report forecasts a slight uptick in growth in 2020 after a sluggish year bogged down by trade tensions and weak investment. But it said “downside risks predominate,” including the potential escalation of trade fights, sharp slowdowns in the United States and other wealthy countries and financial disruptions in emerging markets like China and India.
“The materialization of these risks would test the ability of policymakers to respond effectively to negative events,” the report by the bank, which is led by David Malpass, a former Trump administration official, stated.
The bank’s warnings echoed the fears expressed by many economists in San Diego, both in small research-paper presentations and in ballroom discussions of the clouds on the global economic horizon.
Trade tensions between the United States and China have cooled at least temporarily, but they are escalating across the Atlantic as European nations begin to impose new taxes on technology companies that are largely based in the United States. Mr. Trump has already threatened tariffs on French goods in retaliation for a tech tax, and many analysts worry that separate trade talks between the United States and the European Union could end in a tariff war. Manufacturing is mired in a global slowdown, with the sector contracting in the United States.
At a packed room in San Diego last week, researchers presented estimates that tariffs imposed by the United States and China — which remain in place despite the recent truce in trade talks — have reduced wages for workers in both countries already.
The American economy appears to have grown by a little more than 2 percent in 2019, though the statistics are not yet fully compiled. That is likely to be the slowest rate of Mr. Trump’s presidency, and well below the growth he promised that his economic and regulatory policies would produce.
The World Bank estimates growth in the United States will slow to 1.8 percent this year and 1.7 percent next year. That would be nearly the lowest annual rate since the last recession ended in mid-2009. The bank said the forecast reflected fading stimulus from Mr. Trump’s signature 2017 tax cuts and from government spending increases he has signed into law.
The cuts, and to a lesser degree the additional spending, have helped push the federal budget deficit to nearly $1 trillion a year, even as unemployment lingers near a half-century low. Fiscal deficits remain high in several other wealthy nations, particularly given how far into an economic expansion those countries are.
Interest rates have been dropping across advanced economies, thanks to long-running trends like population aging. That leaves central banks — which usually stoke growth by making borrowing cheaper — with far less conventional power in a recession.
Economists have been “going through the stages of grief” as they accept that such low rates are likely to prevail, John C. Williams, who leads the Federal Reserve Bank of New York, said at the weekend’s gathering.
After the 2007-09 recession, economists speculated that the conditions that plagued developed nations — low growth, low inflation and low interest rates — would be short-lived. Scars were still healing after the worst downturn since the Great Depression, they thought.
That view has slowly been replaced by a more pessimistic one, as the field acknowledged that economic gains were likely to remain muted across advanced countries. In 2019, the Fed had to step back from plans to raise rates further and cut borrowing costs instead, leaving its policy rate at less than half of its 2007 level and underlining just how diminished the new normal looks.
“It’s clear that more was, and still is, going on,” Janet L. Yellen, the former Federal Reserve chair said at the event. “Although monetary policy has a meaningful role to play in addressing future downturns, it is unlikely to be sufficient in years ahead for several reasons.”
Ms. Yellen emphasized that government spending would need to play a larger role in combating future downturns, calling for stronger automatic stabilizers, which increase government spending when the economy weakens and tax receipts fall. There is no imminent sign that Congress is ready to enact such policies, but hope for government action was a constant refrain in San Diego.
Sluggish growth in worker productivity has held back the economy, said Valerie A. Ramey, an economist at the University of California, San Diego. She called on lawmakers to increase spending on infrastructure and research and development in order to spur a productivity acceleration.
Ms. Yellen, who assumed the presidency of the American Economic Association at the meeting, oversaw its program of panels and presentations, assembling a lineup that included several papers assessing damage from tariffs and the trade war. She said she and her colleagues rejected four proposals for every five that were submitted, choosing some that showed the benefits to advanced economies of attracting immigrants, particularly highly skilled ones, in stark contrast to Mr. Trump’s hard line on immigration to the United States.
Few of the papers presented assessed Mr. Trump’s tax law, and none of them argued, as Mr. Trump’s advisers did at similar conferences in recent years, that the tax cuts were supercharging investment.
In an interview on Saturday morning, over a buffet breakfast in a hotel restaurant with a view of the swimming pool, Ms. Yellen said that she had a reason for picking the sessions she did, calling low interest rates the macroeconomic “issue of our times.” She said she shared other economists’ concerns about trade and economic policy in the current environment.
“You do see a number of sessions in the program about this,” Ms. Yellen said. “I organized the program, and I think it’s not an accident you’re seeing it. I think it’s very important.”
Ben S. Bernanke, who was Fed chair during the 2007-09 recession, told the conference that a juiced-up monetary policy arsenal should be enough to combat the next downturn.
But “on one point we can be certain: The old methods won’t do,” he said. The Fed will need to use bond-buying and other tricks to supplement rate cuts.
And even economists’ most hopeful takes had a gray lining. Mr. Bernanke’s relative optimism hinged on the idea that interest rates would not continue to fall. Ms. Yellen’s hope for the future turned on greater activism from politicians to fight recessions.
If those things do not happen? The United States could look more like Japan, where inflation has slipped much lower, rates are rock bottom and the budget deficit much larger.
In good times, said Adam S. Posen, president of the Peterson Institute for International Economics, that may not be the worst outcome. In a recession, though, the nation’s example may offer bad news. In the years since the financial crisis, Japan has rolled out an extremely active economic policy — both monetary and fiscal — to move its inflation rate back up, and it has succeeded only in averting outright price declines.
“It is wise to be cautious, and not assume that they will be as effective as we think,” Mr. Posen said of monetary policies. “We need to think about different ways of doing fiscal-monetary coordination.”
And while some economists, such as Harvard’s Lawrence H. Summers, extolled high fiscal deficits as a necessary weapon against slowdown or recession, others, such as Harvard’s N. Gregory Mankiw and Kenneth Rogoff and Stanford’s Michael J. Boskin, presented research warning that high levels of government debt could crimp growth.
Those papers echoed warnings that those economists issued earlier in the expansion that did not come to pass. But they argued that the large amounts of federal debt that have accumulated in the meantime posed a threat. In other words, the economists warned, it is only a matter of time.