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Do government deficits matter? That’s a debate that goes back as far as Thomas Jefferson, and also has haunted a good part of my career. I covered the supply siders who said tax cuts would pay for themselves, and Bob Dole, when he cleaned up the mess that resulted. I was there when George H.W. Bush backed off his “read my lips” pledge—and forfeited a second term as a result. And I joined those who cheered on Alan Simpson and Erskine Bowles when they forged a bipartisan plan to achieve “fiscal sustainability” —with no result.
And as President Biden’s term begins today, the great debate returns anew. Even before getting sworn in, the new President has proposed a whopping $1.9 trillion rescue package. And that’s just the beginning. With education, infrastructure and climate change proposals all on their way, spending only will swell from there. Biden has said taxes on the wealthy will pay for some of this. But we’ve seen this movie before. The surest way for a divided Washington to reach compromise on big spending plans is the old-fashioned way—with debt.
Does it matter? Old-time Cassandras, myself included, used to argue that big deficits would “crowd out” private investment, soak up savings, and push up interest rates. But today, interest rates are effectively zero—and financial markets seem to believe they will stay that way for decades. Government debt has passed the pull-your-hair-out benchmark of 100% of GDP, but low rates have kept debt service comfortably below 2% of GDP. As former Treasury Secretary Lawrence Summers told the Economic Club of New York yesterday, the government, if it wanted to, could lock in low interest rates for the foreseeable future with 30-year debt.
Fortune’s Shawn Tully is one who warns that low rates won’t last forever, here. But Summers and his colleague Jason Furman say something fundamental has changed. The world is awash in capital. Spending it on long overdue investments in things like infrastructure, research, education and training is not just possible—it’s necessary. The big challenge of the next decade will not be balancing the budget—it will be absorbing the world’s excess savings. And because of that, smart government investments will pay for themselves, more surely than Arthur Laffer’s tax cuts. (You can read the Summers-Furman paper here.)
Biden’s Treasury nominee Janet Yellen seems to agree. In her confirmation hearing yesterday, she said now is the time to “act big” to shore up the economy. Just how big remains to be seen. But count on this being one of the most important debates of 2021, with the future of the U.S. economy hanging in the balance.
More news below. And at Fortune this morning, we have a couple of CEO commentaries worth your attention. HP CEO Enrique Lores, who was sworn in as a citizen just before the holidays, calls for sensible immigration reform, here. And Harvard guru and former Medtronic CEO Bill George lays out his agenda for the new administration, with a heavy emphasis on worker retraining and green energy, here. Spending on smart investments, George says—echoing Summers and Furman—will “help bring our deficit under control.”