Opinion: How deficit spending could hand Congress back to Republicans
President Joe Biden’s $ 1.9 trillion American Recovery Act marked 75% public approval, and it’s full of goodies for reliable democratic constituencies – money for state budgets, union pensions, the universities, and the like – often having little to do with the pandemic.
Now its infrastructure package is full of spending that has little to do with rebuilding roads, bridges and the like, but this time Democrats in Congress can prove More difficult to unite. And as the pandemic recedes, the Federal Reserve is less cooperative in monetizing record deficits as Biden seeks even more spending for Rebuild better.
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That’s a lot of bonds to sell, even with the proposed tax increases.
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The price to pay for repairing America’s infrastructure and electricity grid, speeding up construction of wind turbines, solar power and electric vehicles, reduce inequalities by making permanent the one-year boost from the stimulus package for children, tax credits for dependents and income from work and food stamps, tighten supply chains for medical equipment and semiconductors and stimulate R&D to meet the Chinese challenge at least $ 1 trillion per year.
A trillion here, a trillion there
The federal deficit was $ 3.1 trillion in 2020, or about 15% of gross domestic product. Prior to the passage of the $ 900 billion stimulus package in the dying days of the Trump administration and the ARA, the deficit for 2021 was on track to be a bit less than $ 1 trillion. Now it is intended to be $ 3.4 trillion this year and $ 1.6 trillion next year.
Committee for a Responsible Federal Budget
Add to that an additional $ 1 trillion for the infrastructure bill and the rest of Build Back Better, and that’s a lot of bonds to sell, even with the proposed tax hikes.
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Each month, the Fed prints money to buy treasury securities, mortgages, and other securities. During the pandemic he printed as much money as needed to fund the $ 3.1 trillion deficit and push the 10-year Treasury bill rate well below 1%.
We haven’t had much new inflation in the goods and services markets as households have used a large chunk of their stimulus checks to repay debt, strengthen cash reserves and invest. The latter has caused asset price inflation. Last year, SPX shares,
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DJIA,
jumped 16% and the prices of existing homes increased by 14%.
With Herd immunity in the United States in sight, many sectors of the economy are moving towards maximum capacity, and the Fed has a binary choice. He can tolerate households spend more of their cash reserves at stimulate inflation or dial his ticket printing machine.
President Jerome Powell tells us he expects a temporary spike in prices but not an inflationary spiral and is determined to maintain the flow of money to access full employment
The Fed is already tightening
The latter will be difficult, because for many workers, old jobs are not coming back anytime soon, and they may be stuck in a lower paying or part-time job. Employers in the hospitality, airline, entertainment and other industries are not returning to pre-pandemic levels anytime soon, and the economy would need a lot of accommodative monetary policy, demand surplus in other sectors and inflation to overcome this reality.
Powell’s actions belied his words. The 10-year Treasury bill rate is rising because he doesn’t buy so many bonds this year.
It is monetary tightening that will slow down the recovery.
A higher 10-year Treasury rate TMUBMUSD10Y,
and steeper yield curve are also important for the tariffs applied mortgages, car and student loans and credit cards as the overnight bank lending rate FF00,
the Fed announces its key rate and has remained close to zero since March 2020.
Over the months, unemployment, in particular U6, which includes people working part-time who cannot find a full-time job and those who are not currently looking who do not believe they can find a good job—could stay stubbornly high.
Then you will see sweat forming on MM’s eyebrows. Biden and Schumer as they contemplate midterms in congressional districts and states where Democrats have prevailed only by narrow margins over unpopular Donald Trump.
The pressure will mount for another big reconciliation bill. As much of the far left agenda in Congress – for example, the push to raise the corporate tax rate to 28% – does not enjoy 50-vote support in the Senate or even majority support in the House, this ballet of reaching an agreement on the final infrastructure package will be more like the rumble in “West Side Story“That” Swan Lake. “
High interest rates will slow the recovery, but not enough to stave off inflation. Minority leader Mitch McConnell may not have much to say in 2022 – manual labor and Democrat infighting could do the campaign for him.
Peter Morici is an economist and professor emeritus of commerce at the University of Maryland, and a national columnist.
More from Peter Morici:
Biden’s policies will help the working class less than he thinks
Biden to regret $ 1.9 trillion stimulus because it wastes the money he will need on other priorities
Biden has more room to spend than the Conservatives would like