The new king of debt
Former President Donald Trump once said “the king of debt. “President Joe Biden will resoundingly dethrone him.
The Congressional Budget Office has published its half-yearly economic forecast for February 11, and the numbers are amazing. CBO estimates federal budget deficit this year will reach $ 2.3 trillion, which, believe it or not, wouldn’t be the biggest ever. Last year the deficit was $ 3.1 trillion, the largest in U.S. history.
But the 2021 estimate does not include the $ 1.9 trillion “US bailout” that Biden and his fellow Democrats in Congress are drafting. Add that measure and the 2021 deficit could reach $ 3.7 trillion, according to the Committee for a Responsible Federal Budget.
Deficits will remain near or above $ 1 trillion for the foreseeable future, with the national debt set to increase by at least $ 7 trillion until the end of Biden’s tenure. Debt has grown by about $ 5.6 trillion over Trump’s four years, more than half of which in 2020.
The essential question: is it important? Economists have changed their minds on this over the past decade, as the predicted devastation of massive debt never materialized. In theory, too much government borrowing can crowd out private borrowing, pushing up interest rates, slowing growth and causing inflation. Rising rates make borrowing more expensive, making the problem worse. A government caught in this trap can either print more money, which exacerbates inflation, or impose painful spending cuts and tax hikes that undermine living standards.
None of this has happened since the end of the Great Recession in 2009, despite many rumors of observations of “bond vigilantes”. “Economists now think it’s more important to flood the system with money during a downturn like the one we are experiencing, and deal with debt later. A lesson from the Great Recession was that it didn’t There was not enough stimulus from the government, which is why the recovery has been painfully slow.
If the Biden bill passes, fiscal stimulus this year and last year will be about 7 times what the government injected into the economy during the Great Recession. A faster recovery should get people back to work faster and increase production, raising tax payments on the other side and ultimately bringing in more federal revenue than without a massive stimulus.
The total national debt is now around $ 28 trillion, or about 30% more than the annual GDP. No sweat, say many economists. Jason Furman of Harvard, who was President Obama’s top White House economist, argues that real interest payments on debt as a percentage of GDP are well below the historical average, due to the very low interest rates. This would also be the case with Biden’s back-up plan.
“We have substantial fiscal room for maneuver, in fact more than what we have generally had in the past,” Furman wrote a Twitter thread on February 11. “We can afford the additional debt associated with the US bailout, as well as substantial additional debt afterwards. “
Biden will love to hear this because he has big spending plans after Congress passes the back-up plan. Biden is reportedly developing an infrastructure program, including a green energy attack, that could range from $ 1,000 billion to $ 2,000 billion. Since these would not be “emergency” spending, congressional rules say that taxes would have to be raised or spending cut to cover the cost. But there are ways around these rules, and an optimistic outlook on debt would ease the way.
None of this changes the fact that America has a long-standing habit of spending beyond its means. For years, health care spending for Medicare, Medicaid, and other programs has grown faster than the funding that supports it. The Health insurance trust fund will likely run out of cash at some point during Biden’s tenure. Social security is solvent until the early 2030s, but this problem could happen sooner given the drop in tax revenues during the coronavirus crisis.
Trump made the problem worse. Trump’s tax cuts in 2017 reduced government revenues and increased the annual deficit, when it should have fallen amid strong economic growth and full employment. Trump and other Republicans have promised the usual “trickle-down” magic, with more spending from those who pay less taxes, fueling growth and tax revenues reaching new heights. It never happened.
Then the coronavirus hit, and the spending madness was launched. Where it ends, no one knows yet. What we do know is that a gargantuan deficit won’t be the thing that stops it.
Rick Newman is the author of four books, including “Rebounders: How Winners Go From Failure To Success. “Follow him on Twitter: @rickjnewman. You can also send confidential advice, and click here to receive Rick’s stories by email.