Tag: Debt

Magical Thinking

Republicans complain that Democrats are hypocrites. Democrats reply that Republicans are hypocrites. They are, of course, both correct in a generic sense. All politicians routinely say things they know or suspect to be false, especially if they think it affords tactical advantage. In that sense, both parties are drenched in hypocrisy.

When all is said and done, it is reasonably clear that the Republicans don’t believe a word they are saying. So with respect to hypocrisy, they are guilty as charged; egregiously so. On the other hand, the Democrats appear to actually believe their talking points. If so, they are not the hypocrites that Republicans make them out to be. They are simply guilty of magical thinking. Unfortunately, magical thinking can be very expensive.

Consider for instance the Democratic outrage on display over the prospect that the Republican engineered tax cuts of 2017 would add $1.5 trillion to the national debt over 10 years. The proposed budget that the allegedly centrist President Joe Biden just released projects a deficit of $1.8 trillion this year and after that about $1.3 trillion every year for the next decade. This, by the way, from a President who vowed that he would not increase the deficit “by one penny”.  

This amounts to a proposed $15 trillion in deficit spending over the next 10 years. But now we suddenly discover this is not deficit spending at all—it is investment. And all this “investment” will drive publicly held debt from 79% of GDP in (pre-pandemic) 2019 to 110% in 2021 to 117% by 2031. By the end of the decade, debt service will more than double to 11% of GDP and that assumes that interest rates remain fairly stable. 

The Administration projects that revenues will average 19.3% of GDP even though historically revenues have averaged about 17.3% since the 1970s. Spending, which averaged 19.4% in the post-War pre-Covid era is projected to increase and remain just under an astounding 25% of GDP. Which begs the question: How can the Administration claim that it will collect revenues of 19% of GDP and spend 25% of same and not increase deficit spending? 

Even if the Biden Administration believed its own propaganda about tax collections it still wouldn’t bring revenues into line with expenditure—not by a long shot. There still remains a 6 percentage point gap between revenue and expenditure. 

To call this reckless would be an understatement. The Biden Administration is attempting a huge increase in entitlement spending; a large expansion of the regulatory regime, and political subservience of the Fed, both as regulator and as Central Bank, so that the Biden political agenda can be financed and enforced. 

We have seen this movie before and it never ends well. The longer it takes this one to come to an end, the messier it will be. 

JFB

The Enduring Fantasy of the Moderate Democrat

Congress is poised to pass President Biden’s spectacularly misnamed $1.9 trillion Covid Relief and Recovery Act. The bill will pass on a strict party line vote. And there is nothing moderate about it. Not only does the bill contain relatively little that actually addresses Covid-19, it will almost certainly delay the recovery, or at least make it less vigorous than it might have been. 

The reason is fairly simple. The bill, which essentially represents the enactment of a progressive wish list, actually pays people not to work. For instance, by adding $300 per week to State level unemployment benefits Congress made sure that plenty of people get paid more by staying home than by going to work. 

Not only that, the package is going to be financed by the issuance of more Treasury debt which the Fed is going to buy. In effect financing will be accomplished by monetizing the debt the way they do in other advanced economies. Like Zimbabwe for instance. 

Lest anyone think this particular $1.9 trillion package of pork is either sensible or a one-shot, it is worth thinking about a few things. First, Senator Bernie Sanders (D. Rolling Stone) is now chair of the Senate Budget Committee. He has already promised an additional $2 trillion for infrastructure spending. Second, the bill provides $86 billion in relief to bail out union pension funds on the brink of insolvency, thus divorcing performance from reward. In addition, they are providing a couple of hundred billion in relief to state and local governments even though some, like California, have experienced large increases in tax collections. Third, most of the $1.9 trillion will flow to government unions, a portion of which will find its way back to the coffers of the DNC. 

Thus far over the last year the Congress has appropriated something on the order of $3.4 trillion to Covid relief. Add this latest bill and the total comes to around $5.3 trillion. To put this in perspective, Covid relief, both real and in name only, now amounts to something like 25% of US GDP. Altogether the CBO now estimates that Federal outlays for 2020 will be around 32% of US GDP, up 11 percentage points from 2019. Public debt is projected to rise to 98% of GDP in 2020 and continue to rise through 2030 at which point it is expected to rise to 109% of GDP. 

One of the arguments that the bill’s champions advance is that financing all this spending won’t be a problem. The reason often cited is that interest rates are at historic lows which makes it relatively painless to borrow. There are lots of reasons why this is simply incorrect. 

The first is that market interest rates have risen substantially since that argument was first tested out. Back in August of 2020 the 10-year Treasury note yielded about 0.5%. Since then the rate has more than tripled to slightly over 1.5%. Second, if now is such a great time to borrow, private firms and individuals should be able to take advantage of the opportunity without being crowded out by government borrowing. Third, financing projects by borrowing doesn’t make them costless. It just shifts the time when the bill has to be paid in full. 

Fourth, it is worth noting in passing that there is a great con going on here.  Basically this gargantuan spending spree is not about the acquisition if goods and services. It just represents an enormous transfer of income from disfavored constituencies to favored constituencies. That is, to put it mildly, not a productive use of capital. Finally, by expanding its balance sheet to slightly over $7 trillion to accommodate the spending blowout, the Fed is planting the seeds of an upsurge in inflation, perhaps the cruelest tax on the poor that has ever been invented. 

It bears repeating that this bill is being passed on a strict party line vote. It will not receive a single Republican vote. It will receive the votes of all Democratic Senators and all but a couple of Democratic Congressman. It is blatantly partisan and there nothing moderate about it. 

The fantasy that there are moderate Democrats is belied by their actions. And there is more to come. 

JFB