Thread by @JWMason1

Watching Powell's testimony before the Budget Committee. These things are sometimes surprsingly interesting. c-span.org/video/?466218-…

Under prodding from Rep. Moulton, Powell agrees that paid family leave probably would increase labor force participation.

Poweel defines "unsustainable" debt as a rising debt-GDP ratio. Hmmm. On the other hand, he does note that many countries have higher debt-GDP ratios without any crisis.

"We're seeing historically tight labor markets now, and one of the things that tends to happen in tight labor markets is that companies start to raise wages all the way through the specturm, not just those at the top."

Rep. Stewart wants to know why the inflation target is 2% and not some other number. That's a good question! Powell's answer: You need that much space to cut rates in a recession.

Powell says that high health costs in the US are not the result of people getting too much care, but of high costs for "pretty average" care. "Our benefits are not better." I'm surprsed he's willing to go this far out of his remit.

"If something can't continue indefinitely, then it will not." Well then, nothing is really unustainable, is it? ONe of my first-ever blog posts over a decade ago was about my annyance with this so-called Stein's law. jwmason.org/slackwire/some…

Now we are talking. He says that thanks to the dollar's role of the world's reserve currency, any "day of reckoning" for the federal debt "is a long, long way off."

"You see countries with much, much higher levels of debt-GDP moving along without a financial crisis. There doesn't seem to be a bright line. The UK in its heyday as a global empire had very high debt-GDP. There's no identifiable line that gets crossed."

Pramila Jayapal in the house!

Rep. Jayapal: Is the fact that inflation is still below your target a sign that the economy is not operating at full potential?

Powell: It's certainly a sign that inflation is not under any pressure from tight labor markets, or that the economy is in any danger of overheating.

Jayapal: When you look at the labor market, you see the labor share of income is still below prior peaks, the prime-age labor force particiaption rate is below prior peaks, the racial wage gap is still wider than it was. Are these signs that we are still far from full employment?

Powell: If you go back 50 years, there was a tight link btween unemployment and inflation. That has not been the case for many years now. So we bring some humility to the question of what is maximum employment. But we think we're in the neighborhood now.

(I wonder how long it will take for economics textbooks to acknoweldge that the country's leading economic policymaker thinks "there has not been a tight link between unemployment and inflation for many years now" .)

Jayapal can't quite get him to agree that immigration, including unauthorized immigration, is good for economic hgrowth.

"There is fiscal space to react" to a recession. "Fiscal policy has been one of the key wasys that the government has responded to support the economy in times of weakness. We will use all our tools, but in times of low interest rates, need fiscal help - possibly."

Interestingy, when a Republic congressman (missed who) pushes him to say that Medicare spending needs to be cut, he won't do it, but pointedly pivots to the wastefulness of the US healthcare system as a whole.

Jan Schakowsky: Given the need for increased demand in the economy, as evidenced by your recent rate cuts, could there be macroeconomic benefits to an increase in the minimum wage?

Powell won't bite: Min wage "is a question for elected people."

Oh well, was worth a try!

"If there were to be a significant downturn, we would have other tools beside interest rates to support demand, including the tools we used in the 2007 crisis."

Oops, the post I meant to link to was this: jwmason.org/slackwire/stei…

One puzzle in this testimony: Several times Powell responded to questions about whether federal debt is "sustainable" by pointing ut that the debt is growing faster than GDP. This is true. But that's not the normal definition of sustainable!

To say that the debt is growing fasster than GDP is the same as saying that the debt-GDP ratio is rising. And that is the case - the debt-GDP ratio is around 76 percent now, compared with 72 percent five years ago.

But traditionally, we didn't say debt was unsustainable whenever the debt-GDP ratio was rising. That's like saying a car is going dangerously fast whenever it accelerates at all. Instead, we said debt was unustainable if, on the current trajcectory, it would rise without limit.

Now, as long as interest rates are lower than grwth rates -- which has been true for quite a few years now -- any level of taxes and spending is sutainable in the old sense. The debt ratio always converges to some finite value. So maybe we do need a new definition.

But that new definition would still have to be about the long-run path under current policies, not just whether the ratio is rising at all. You'd want to at least show that current tax and expenditure levels imply a future debt ratio a lot higher than the current one.

And that is just not the case. If you scroll back up the thread and look at the graph showing the debt-GDP ratio, you can see it's clearly leveling off, despite the tax cuts. The rate of increase, while still positive, has slowed to almost nothing.

When you look at the range of debt ratios around the world and over history, and the lack of any easily detected macroeconomic effects, it's very hard to say that a point or two increase a year is unsustainable. Especially when - as Powell himself said - there's no tipping point.

Uder current CBO forecasts, the debt ratio rises by 17 points over the next decade, or a rate of about 1.5 points a year. This is a much smaller increase than over the previous decade.

(It's unfortunate that so many people still use older forecasts with much bigger rises.)

And the current CBO forecast assumes that the 10-year Treasury rate rises to 3.2 percent over the next decade. Currently that rate is only 1.9 percent. If current low rates persist (or fall ever further) then the rise in the dbet ratio will be even smaller.

As I've pointed out, previous forecasts of an imminent rise in the interest rate on federal debt have been repeatedly wrong over the past decade. Maybe this one will do better - 3.2 is certainly more plausible than the 5+ they were assuming a few years ago - but maybe it won't.

So while Powell's claim is technically correct, what it really means is: If there is a large rise in interest rates, the debt-GDP ratio will rise modestly over the next decade. If interest rates stay where they are now, the debt ratio will not rise at all.