Fed's Powell takes old-school view on U.S. borrowing capacity

Federal Reserve Board Chairman Jerome Powell testifies before a Joint Economic Committee hearing on "The Economic Outlook" on Capitol Hill in Washington, U.S., November 13, 2019. REUTERS/James Lawler Duggan

WASHINGTON (Reuters) - Federal Reserve Chair Jerome Powell likes to avoid any hint of politics in his public statements, but in a seemingly non-controversial response to a question about U.S. government borrowing on Wednesday, he weighed in on one of the core issues in the political debate over how to manage the economy.

Over the past year in particular, many mainstream economists have concluded that the current U.S. government debt level, north of $20 trillion and rising by $1 trillion a year, could grow much larger without crimping the economy - especially when the interest rate paid by the government is less than the economy’s growth rate on an inflation-adjusted basis, as it is now.

In answer to a question at a congressional hearing, Powell said that in his view, as long as debt grows faster than the economy, it is by definition unsustainable, leaving “our kids and grandkids ... servicing debt,” instead of funding good schools and hospitals.

That conclusion, however, is not considered as clear-cut as it might have been when Powell worked on debt and deficit issues for the Bipartisan Policy Center think tank, before joining the U.S. central bank in 2012.

The potential capacity of the U.S. government to sustain larger levels of borrowing is one of the chief arguments used by proponents of Modern Monetary Theory, a different approach to central banking, and has been cited as a reason why large, productivity-enhancing investments in schools, infrastructure or efforts to battle climate change might be feasible.

Would Powell advocate limits on those programs in order to reduce government debt?

It’s not clear from his often generic statements, which avoid evaluating specific ideas that may draw him into a more overtly political discussion.

But Powell himself suggested the government may need to spend more when the next recession arrives. And in the upcoming presidential campaign, spending on major programs like the “Medicare-for-All” healthcare plan proposed by some Democratic candidates may be a focal point.

Reporting by Howard Schneider; Editing by Paul Simao