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, 9/24/20.
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, 9/4/20.
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, 2019.
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, 12/23/19.
Mr. Powell has compounded the problem, moreover, by publicly advocating more government spending to stimulate the economy. The fiscal Federal Reserve, WSJ, 10/7/20.
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, 9/28/20.
•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, 9/28/20.
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, 10/7/20.
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, 9/12/20.