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Government Borrowing Doesn't Mean What It Used To

MARY LOUISE KELLY, HOST:

President Biden just signed a $1.9 trillion COVID relief bill. Now, the government would borrow all of that money on top of the trillions it borrowed last year. As Mary Childs from our Planet Money podcast reports, this has been made possible in part by a profound change in the government's ability to borrow money.

MARY CHILDS, BYLINE: In the early '90s, President Bill Clinton's administration was troubled by this looming problem. Year after year, both government deficits and interest rates were going up. Here's one of his top economic advisers, Laura Tyson.

LAURA TYSON: And then he said, oh, my goodness, if we don't get a hold of this federal deficit going forward, then those rates will continue upward. That was a very significant concern.

CHILDS: Higher interest rates mean the government has to pay more to borrow money, but they also mean higher rates for everyone else, which hurts the housing market and business investment and basically the whole economy. So Clinton gets the deficit all the way down to zero. Interest rates fall for everybody, and the economy booms. Cut to right after the financial crisis of 2008. Barack Obama has just been elected president, and he's figuring out how big of a stimulus bill to push. His aides worried that borrowing too much money for the stimulus could drive up interest rates and wind up hurting the economy. Jason Furman was an economist in both the Clinton and Obama administrations.

JASON FURMAN: The idea is you don't want to be helping the economy with one hand by pumping more money into it and then hurting the economy with the other hand by raising interest rates.

CHILDS: The stimulus wound up at $800 billion, and the deficit did go way up. But interest rates did not go up - in fact, they went down. And ever since then, basically, no matter what, interest rates have stayed really, really low, even as the deficit has stayed high. Laura Tyson says economists don't entirely understand why.

TYSON: We really - this is an area where economic science is not at its best (laughter) or where there's a lot of uncertainty.

CHILDS: But economists have been trying to figure it out and they've come up with a few reasons. Here are two big, important ones. For one thing, the Federal Reserve, America's central bank, has created trillions and trillions of new dollars to keep interest rates down. And reason No. 2 is what people are talking about right now - inflation. Inflation and interest rates are very closely linked because when investors expect inflation, they demand higher interest rates to make up for it. And over the last decade, inflation stayed really low. That's basically been our get-out-of-jail-free card. Jason Furman, the economist, says this decade of low interest rates and low inflation helped push Congress towards massive spending bills last year to fight the pandemic.

FURMAN: Many of the economists who were warning about the debt and deficit a decade ago this time around said if you need to spend 5 trillion, you need to spend 10 trillion, you should do it. There was much less reason to be concerned about interest rate risk this time than there was a decade ago.

CHILDS: Under the latest relief bill, the U.S. would borrow nearly $2 trillion more, but there is now more resistance than there was last spring. Several economists who worked in the Obama and Clinton administrations say borrowing so much could this time actually drive up inflation. And indeed, interest rates have gone up a little recently, but they are still really low by historical standards. And a handy thing about the market is you don't just have to listen to what people say. You can go look at what investors are betting on with real money. And they are betting that, for years to come, inflation and interest rates will stay low.

Mary Childs, NPR News. Transcript provided by NPR, Copyright NPR.