Election issues: Deficits and debt

E minus 22 – As a rapid shutdown of major segments of the economy took effect in an effort to combat the coronavirus pandemic, it was generally agreed that some form of economic relief package was needed to maintain the basis for rapid economic recovery. After much legislative battling, a $2.2 trillion relief package (the CARES Act) was enacted in March on top of several previous relief measures.

House Democrats passed a $3+ trillion HEROES Act in May to provide for further coronavirus relief, but this bill was put on the back burner by Senate Republicans until July on grounds that lesser, more targeted relief would be appropriate. When the matter was eventually taken up, the negotiators – House Speaker Nancy Pelosi vs. Treasury Secretary Stephen Mnuchin & White House Chief of Staff Mark Meadows – seemed unable to strike a deal. The president blamed the stalemate on the Democrats and signed a series of executive orders to provide some stopgap relief (and portray his opponents as obstructionists). Phase four coronavirus relief battle,

•Continuing federal supplement for state unemployment payments ($300 per week vs. the previous $600 per week), to be funded temporarily by tapping Homeland Security’s Disaster Relief Fund (the balance involved might potentially be exhausted, in which case the payments would have to be stopped);

•Temporarily deferred collection of the employee portion of Social Security payroll taxes for the last four months of 2020, with a commitment to seek ways to make the deferral permanent;

•Temporary extension of homeowners and renter’s relief, e.g., moratorium on evictions for nonpayment of rent;

•Extension of the existing deferral of student loan payments and forgiveness of interest from Sept. 30 until Dec. 31.

Neither side was satisfied with this outcome, and there has been continuing talk about legislative coronavirus relief before the election. Whether Democrats truly want to strike a deal or not, they will blame Republicans if there isn’t going to be one. McConnell: Pelosi “never made a reasonable offer,” Susan Jones, cnsnews.com,

Senate Majority Leader Mitch McConnell (R-Ky.) told Fox News's Martha McCallum on Tuesday that Democrats refused to negotiate because they didn't want a deal that might work to Trump's advantage. McConnell noted that Pelosi and various Republicans have been negotiating for two months, but "the Speaker never made a reasonable offer."

For his part, the president posted two tweets on October 6, the second countermanding the first.

#2:48 PM - He was pulling the plug on the stimulus relief negotiations before the elections. This stance drew generally unfavorable reactions. By abandoning stimulus deal, Trump leaves the public (and his reelection chances) out to dry, Kaylee McGhee, Washington Examiner,

House Speaker Nancy Pelosi wants the federal government to allocate $2.4 trillion for its next aid package, but the Trump administration is only willing to spend $1.6 trillion, according to Treasury Secretary Steven Mnuchin. There is an easy solution: Trump should agree to spend more. Better to have an aid package that costs too much than no aid package at all.

#10:18 PM - If Congress would pass a second stimulus check ($1,200 per person) for US citizens he would sign the bill immediately. Trump calls on Pelosi to pass “stand alone” stimulus check bill after stalling coronavirus negotiations, Anthony Leonardi, Washington Examiner,
10/6/20. In other words, the president wasn’t opposed to a second round of stimulus payments to individuals, more aid for the airlines, etc. but he wouldn’t support a bailout for states and other features of the Democrat package.

The stock market fell after the president’s first tweet on October 6 and rebounded the next day after his second tweet. However, that’s not necessarily an informed reaction as opposed to a conditioned response. Pelosi’s taxpayer ransom demand, WSJ,

Stocks fell on the negotiation news [first Trump tweet], but that’s because Wall Street has become Pavlovian on the issue of so-called stimulus cash. But aside from money for beleaguered industries like airlines, there was very little stimulus at all. Both parties agreed on another $1,000 pre-election payment to millions of voters, but that would have little economic impact beyond a short-term fillip for consumer spending.

As we went to press, the gap between the two sides had reportedly narrowed (to a mere $0.4T) and it’s possible there will be a coronavirus relief bill before the elections after all. Republicans split on stimulus aid depending on their state’s economies, Nihal Krishan, Washington Examiner,
10/9/20. And if this doesn’t happen, the election winners will surely push through a big economic relief package afterwards.

Copious red ink will follow in 2021 et seq. because, like it or not, SAFE’s ideas about fiscal responsibility – see, e.g., It’s time to balance the budget,
2/25/19 – are not in vogue right now. Unless and until the current mindset changes, our advice to fiscal conservatives would be to support the side likely to do the least damage. Discussion follows.

A. Current outlook – The CBO recently published an updated projection of the federal government’s public debt as a percentage of Gross Domestic Product (GDP); their chart shows this ratio matching World War II peak levels soon (thanks to the pandemic) and soaring to 195% (an unprecedented level) by 2050. Incidentally, the national debt limit (currently suspended) is set based on gross federal debt (currently including some $6 trillion in federal debt held by the Social Security, etc. trust funds). The 2020 long-term budget outlook, Congressional Budget Office, 9/21/20.


This outlook reflects the COVID relief spending enacted to date, but not the additional relief measures currently under discussion (infra). If any of said measures were enacted, whether before or after the elections, things would look that much worse.

Can anyone seriously doubt that such an outlook is untenable, and that serious corrective action will be needed? When the roof will cave in is hard to say, but it’s only a matter of time. New CBO report projects delusional spending levels, Veronique de Rugy, townhall.com,

Even those economists who aren't worried about our debt today recognize that there will be a point when we should start worrying. But they can't say exactly when that point will be reached. My question is this: If it's just a matter [of] "when" as opposed to "if," shouldn't everyone start worrying now, before it's too late?

The CBO report carefully avoids offering any policy advice, however, beyond identifying policy changes that might be considered to slow or reverse the growth of the “primary deficit” (excess of current outlays, exclusive of interest expense, over current revenues) in some fashion (e.g., raise taxes or cut spending). Surprise, surprise, the longer that corrective action is delayed, the bigger the adjustment needed to reduce the public debt to some given percentage of GDP. CBO budget outlook,
op cit.


What about the possibility of speeding up the rate of US economic growth? Said rate is shown or projected as less than 2% per year for every period after 2008, whereas historically it had been considerably higher (e.g., roundly 3% per year from 1983-2002). Ibid, p. 21.

Really, how can the CBO analysts be so sure about the maximum sustainable growth rate given the accelerating pace of technological change? Rightly or wrongly, the Trump economic advisers were previously predicting a 3-4% growth rate to be achieved by cutting tax rates for business and rolling back nonproductive regulations. As far as we’re concerned, these are sound policies that would make a lot more sense than reverting to a centrally planned economy.

Another interesting point is the growing share of projected deficits that is attributed to rising interest rates – which are currently at historically low levels.
Ibid, p. 13.

CBO expects interest rates to rise as the economy recovers and then [continue] to expand, particularly in the latter half of the coming decade. The agency expects the interest rate on 10-year Treasury notes to average 1.3 percent over the 2020–2025 period and 2.8 percent over the 2026–2030 period. Beyond 2030, the interest rate on 10-year Treasury notes is projected to rise steadily, reaching 4.8 percent by 2050. In CBO’s extended baseline projections, net outlays for interest grow from 1.6 percent of GDP in 2020 to 2.2 percent in 2030 and then continue to rise over the next two decades to more than 8 percent by 2050.

Currently, the Federal Reserve has tacked in favor of flooding the US financial markets with liquidity and viewing the 2% inflation standard as a target rather than a ceiling. It’s anticipated that such a policy will promote continued low interest rates for several years or longer. Jerome Powell pledges low interest rates for “years to come,” Nihal Krishan, Washington Examiner,

So long as such a policy remains in effect, the Federal Reserve will be able to pare the federal government’s interest expense by keeping interest rates low. To the extent that the Fed acquires Treasury debt, moreover, the interest payments thereon are negated since the Fed is an entity of the federal government. Carrying such a policy to an extreme, the Fed could theoretically buy all of the government’s debt – thereby cutting the government’s interest payments to zero – and according to recent balance sheets, the Fed’s holdings of Treasury securities were increased from $2.4 trillion at 12/31/19 to $4.4 trillion at 6/30/20.

Is this astute financial management, or is there something fundamentally amiss? Experience shows that the Federal Reserve and other central banks have made policy blunders in the past. See, e.g., Gold, the Real Bills Doctrine and the Fed, Thomas Humphrey & Richard Timberlake,

And we’re not the only ones who believe the Fed is playing with fire, ergo that if US inflationary expectations are ignited – as they were in the 1970s – double digit inflation may follow with exceedingly painful consequences. Here’s a historical reminder of what it took to cure a previous bout of “stagflation.” Taking a stand, Section II,

Mr. Powell has compounded the problem, moreover, by publicly advocating more government spending to stimulate the economy. The fiscal Federal Reserve, WSJ,

The Fed had to act forcefully in March when the virus first struck and financial markets began to freeze. But market function is no longer a problem, and neither is liquidity. Yet the Fed shows no signs of removing any of its special measures and it has forecast near-zero interest rates into 2023 with a goal of raising the inflation rate. This suggests that monetary policy will be enough of a challenge without adding tax-and-spend politics to Mr. Powell’s mandate. The Chairman is taking the Fed into uncharted waters, and the toast of the town one day can become the scapegoat the next.

B. Republicans – After four years, the Trump administration fiscal policies seem somewhat predictable. Here’s what we would expect in a second term barring unfortunate developments (such as the outbreak of a major war or an inflationary spike).

•Taxes wouldn’t be raised materially (although cuts already made might be extended), hopefully boosting the economic growth rate. Election issues: Taxes,

•Defense spending would remain high to maintain the credibility of the US military; proposed spending cuts in other areas would continue to face fierce opposition.

•Major new spending programs seem unlikely, with the possible exception of a boost in infrastructure spending that could yield economic benefits.

•Current monetary policies would continue to hold down government interest expense; indeed, it was the president who pressured Federal Reserve Chair Jerome Powell into adopting the current approach.

•After the coronavirus economic relief had been doled out, deficits would be stabilized in the $500 - $800 billion range, which would be defended as fiscally responsible.

All things considered, this is not a great fiscal outlook – but it could be worse. No wonder that accountants (aka “bean counters”) tend to support Trump. New survey shows a majority of accountants back Trump, Jay Heflin, Washington Examiner,

A clear majority of accountants, 63%, agreed that getting a vaccine for the coronavirus should the top goal for whoever wins the election. Coming in a close second was addressing the national debt, with 60%.

C. Democrats – The policies of a Biden administration could potentially be inferred from the former policies of the Obama administration, which normalized chronic deficit spending that had previously been regarded as somewhat risky but preserved a modicum of fiscal restraint. Such an approach might be misleading, however, as the Democratic Party has moved to the left in recent years and is now supporting policy changes that would be very costly to implement. Biden has moved further left than Obama on economic and spending policy, Nihal Krishan, Washington Examiner, 9/17/20.

•Many political analysts, including those in the Biden camp, say he has the most liberal platform in American politics since Lyndon Johnson ran for president in the 1960s.

•[Jared Bernstein, one of Biden’s top economists] added that there has been little to no pushback against Biden’s drift to the left within the party. Bernstein said that the entire party had shifted on major policy issues and there was much agreement between the different factions of the party, as evidenced by the Biden-Sanders Unity Task Forces.

Although Biden hasn’t promised to match the added spending that Sen. Bernie Sanders had in mind, he’s proposing a lot more new spending than Hillary Clinton did in 2016. Biden’s “Build Back Better” plan would be $1.3 trillion annual spending increase [and that leaves out 68 proposals that couldn’t be costed out due to insufficient details], Demian Brady, ntu.org,

Spending promises

The Biden campaign is also proposing to raise taxes on big corporations and the affluent to the tune of some $4.1 trillion over 10 years (a portion of this pick-up would likely be offset by slower economic growth). That would leave a net increase to deficits of roundly $1 trillion per year. Biden campaign touts analysis showing his policies would cost $7.3 trillion and add $3.2 trillion to deficits, Philip Klein, Washington Examiner, 9/24/20.

Would a Biden administration propose spending cuts in other areas? We wouldn’t be surprised by efforts to pare defense spending – as was done (unwisely in our opinion) during the Obama administration – but no such moves have been proposed to date and they would fall far short of closing the gap.

Bottom line, it appears that a new Biden administration would run up the national debt faster than a continued Trump administration. And Biden has cited low interest rates as making rising debt acceptable, with no apparent thought as to whether such rates will invariably continue. Biden sees opportunity to spend freely thanks to low interest rates, Washington Examiner, Nihal Kirishan,

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