President Joe Biden‘s $ 1.9 trillion American Recovery Act garnered 75% public approval and is packed with advantages for trustworthy Democratic constituencies (money for state budgets, union pensions, universities and the like) that often have little to do with it. with the pandemic. Now his infrastructure package is full of spending that has little to do with rebuilding America’s highways, bridges and the like, but this time the Democrats in Congress may prove harder to unite. And as the pandemic recedes, the Federal Reserve is proving less cooperative in monetizing record deficits as Biden seeks even more spending to build back better.
“It‘s a lot of bonds to sell, even with the proposed tax increases. ”
Pricing to repair America’s power grid and infrastructure, accelerate construction of windmills, solar power, and electric vehicles, decrease inequality by making permanent the one-year push from the child stimulus package, caring for dependents and tax credits for earned income and food stamps, tightening supply chains for medical equipment and semiconductors, and boosting R&D to meet China’s challenge would require at least a trillion dollars a year. Domestic product. Before the $ 900 billion stimulus package was approved in the final days of the Trump administration and the ARA, the deficit for 2021 was on track to be just under $ 1 trillion. Now it is projected to be $ 3.4 trillion this year and $ 1.6 trillion next year.
Committee for a Responsible Federal Budget
Add to that another $ 1 trillion for the infrastructure bill and the rest of Build Back Better, and that’s a ton of bonds to sell, even with the proposed tax increases. Breaking News: Biden Says “ No Evidence ” Higher Corporate Tax Will Drive Businesses Away As Democrats Demand Change. Every month the Fed prints money to buy Treasury, mortgage-backed and other securities values. During the pandemic, it printed as much money as was necessary to finance the $ 3.1 trillion deficit and push the rate on 10-year Treasuries well below 1%. We didn’t get much new inflation in the goods and services markets, because households used much of their stimulus checks to pay off debt, build cash reserves, and invest. The latter caused asset price inflation. Last year, SPX stocks, -0.10% COMP, -0.05% DJIA, -0.29% were up 16% and existing home prices were up 14%. With herd immunity in the United States in sight, many sectors of the economy are heading to full capacity and the Fed has a binary option. It can tolerate households spending more cash to drive inflation or downsize its money printing machine. President Jerome Powell tells us that he expects a temporary rise in prices, but not an inflationary spiral, and is determined to keep the money flowing to reach full employment, the Fed is already adjusting The latter will be difficult, because for many workers old jobs won’t. come back soon, and they may be stuck in a part-time or lower-paying job. Employers in the hospitality, airline, entertainment and other industries will not return to pre-pandemic levels anytime soon, and the economy would need a lot of accommodative monetary policy, excess demand in other sectors, and inflation to overcome that reality. Powell’s actions contradict his words. The 10-year Treasury rate has gone up because you are not buying as many bonds this year. That is a monetary tightening and it will slow down the recovery. A higher 10-year Treasury rate TMUBMUSD10Y, 1,644%, and a steeper yield curve are as important to rates charged on mortgages, auto and student loans, and credit cards as the rate on overnight bank loans FF00, the Fed announces as its policy rate and it has stayed close to zero since March 2020. As the months progress, unemployment, especially U6, which includes people who work part-time and cannot find jobs. full time and those who are currently not looking and do not believe they can find a good job could stubbornly remain high. Then you’ll see sweat form on Messrs. Biden and Schumer’s eyebrows as they contemplate midterm elections in congressional districts and states where Democrats prevailed only by narrow margins over unpopular Donald Trump. Pressure will build for another big reconciliation bill. Like much of the far-left agenda in Congress, for example, the push to raise the corporate tax rate to 28%, does not have the support of 50 votes in the Senate or even the support of the majority in the Senate. Chamber, that ballet to reach an agreement on the final infrastructure package will be more like the din of “West Side Story” than “Swan Lake.” High interest rates will slow the recovery, but not enough to prevent inflation. Minority leader Mitch McConnell may not have much to say in 2022; the manual labor and infighting of the Democrats can campaign for him. Peter Morici is an economist and professor emeritus of business at the University of Maryland, and a national columnist. More by Peter Morici: Biden’s policies will help the working class less than he thinks Biden will regret the $ 1.9 trillion stimulus because it wastes money he ‘Will need other priorities Biden has more room to spend than they would like to the conservatives