President Joe Biden has an ambitious spending agenda and far more fiscal room to maneuver than conservatives want to admit. Its $ 1.9 billion stimulus package is loaded with additional payments to households that have suffered little loss of income. With the Republican Party concerned about the size of the package and the impact on the national debt, a lengthy bipartisan bridge-building awaits us that could delay a much-needed extension of unemployment benefits and aid to state and local governments.
In 2020, the federal deficit jumped from $ 1 trillion in 2019 to $ 3.1 trillion in 2020; the CARES Act, other emergency expenses related to the pandemic, and the impact on tax collection from layoffs and closures were largely responsible. The Federal Reserve printed money to buy about three-quarters of the new bonds, and as EU governments increased their debt, the European Central Bank did more or less the same. The important thing to understand, however, is that the debt service burden did not increase by a lot. The Fed also added other securities to its balance sheet and remits the interest received on the additional bonds to the Treasury. The money supply increased, but caused little inflation; now that is an enigma to the limited wisdom of conservative orthodoxy. Americans who worked from home drove less, couldn’t attend sporting events, ate delivered meals that cost less than downtown restaurants, and generally saved the extra money if they weren’t unemployed. Business liquidity also increased. With the future so uncertain, many cut dividends and delayed hiring and spending on new projects. Biden cannot count on consumers and businesses on his hands. However, with vaccines ongoing, the federal fiscal year 2021 deficit is on track to fall to around $ 2 trillion with the passage of the 2020 bipartisan supplemental stimulus package and to $ 1.1 trillion in fiscal 2022. Three Trends Three major trends give American and European leaders more room to borrow than their predecessors. China may be creating a growing share of the world’s wealth, but its currency is heavily regulated and its weak legal protections combine to turn long-term Chinese government bonds into risky assets. Today, business assets are more concentrated in intellectual property than buildings and machinery. New projects require less capital to create value and is a major reason why corporate balance sheets were so fluid and share buybacks were so fashionable before the pandemic. The latter will resume after COVID-19 is eliminated. Even when companies require fewer investment funds from households, an aging population saves much more and needs low-risk assets (government bonds denominated in dollars, euros, yen and pounds sterling TMUBMUSD10Y, 1,190%) to balance investments in stocks during retirement portfolios. Biden won’t be able to run a $ 3 trillion annual deficit, but he will likely get away with doubling Trump‘s deficit before the $ 1 trillion pandemic long after stimulus spending is no longer needed. Without new taxes, the cost of Biden’s campaign promises, ranging from the broad expansion of the Affordable Care Act to skyrocketing spending on green energy projects, is about $ 10 trillion over 10 years. Given that central banks are likely to keep interest rates low, financing $ 1 trillion a year in additional debt will not have the same negative consequences as during the second half of the 20th century. But the wrong kind of spending or reckless regulations can discourage work, divert capital to unproductive uses, and significantly affect growth and wages. Cost Saving Projects It would be best if Biden focused on projects that save money as they spend. For example, comparing US medical, hospital and pharmaceutical services to the prices of the efficient German system to provide universal health insurance would free up chronically wasted resources. The same is the case with linking higher education reform and lower tuition to student debt relief. In general, projects that improve infrastructure – charging stations for electric vehicles and better roads, rails and airports – would drive efficiency and growth. The same is true for reversing the decline in support for federal R&D spending. Thanks to government policies, the minimum required return for renewable energy projects is as low as 3%. Overall investment in solar and wind power is outpacing the science of cost reduction and will leave the country with obsolete equipment within a decade. Biden should be careful with more projects like Solyndra. Constantly seeking higher taxes and waking regulations, Presidents Clinton and Obama suffered huge midterm losses and eventually handed control of Congress to the Republicans. Peter Morici is an economist and professor emeritus of business at the University of Maryland and a national columnist.