Some economists point out that in the long run, interest rates tend to be lower than the economy's growth rate. The IMF studied data for 55 countries over 200 years and found that more than half of the time, interest rates were lower than growth rates, on average, by 2.4 percentage points in advanced economies and even more in developing economies. That suggests most countries can run modest budget deficits and still reduce the cost of servicing that debt as their economies grow.

Among the skeptics is Valerie Ramey, an economist at the University of California San Diego. She said some economists see the gap between interest and growth rates as a "free lunch," enabling more borrowing, but that it was more like a "free snack." The gap tends to be relatively small over time, and now it is trivial compared with the growth of U.S. debt.

"What we are having here is just gluttony in terms of what the government is doing," she said.

The IMF study's authors have another warning about running large deficits. Fiscal-policy crises that push interest rates sharply higher tend to come out of nowhere, even when rates are low. "Market expectations can turn quickly and abruptly," the authors, Paolo Mauro and Jing Zhou, concluded.

While economists on the left and right acknowledge the government has more capacity to borrow than once thought, there is still no consensus on the limits of borrowing over the medium- to long-term, which is a key question facing Ms. Yellen and the Biden administration.

Mr. Summers and Jason Furman, who served as chairman of President Obama's Council of Economic Advisers, said policy makers should focus on the cost of borrowing rather than debt levels. The U.S. can afford to borrow more as long as net interest payments on the debt are expected to stay below 2% of output over the next decade, they argue. In the most-recent fiscal year, interest payments totaled 1.6% of output. By comparison, in the early 1990s the payments hovered around 3%.

Long-run challenges remain. Even before a new spending plan is launched, U.S. debt is on track to double to nearly 200% of GDP by 2050 because of soaring Social Security and Medicare promises, according to the CBO. Ms. Yellen has said such high levels can't be sustained.

Mr. Biden has proposed tax increases on high-income households to pay for some of his economic policy proposals, which include investments in clean energy and health care. But there is little appetite in Washington for cuts to Medicare or Social Security.

Write to Kate Davidson at kate.davidson@wsj.com and Jon Hilsenrath at jon.hilsenrath@wsj.com

(END) Dow Jones Newswires

01-18-21 1333ET