Posted on 09/09/2020 11:01:52 AM PDT by Kaslin
The state of the federal budget, shaky to begin 2020, is being pushed to the brink by the COVID-19 crisis. This year’s deficit is expected to reach $4 trillion, which is almost as much as last year’s $4.4 trillion total budget. Total federal debt held by the public is on track to exceed GDP for the first time since 1946. Lawmakers are currently negotiating another multi-trillion-dollar fiscal response package. Despite all this, there are bipartisan efforts to use low interest rates as an excuse for yet more reckless deficit spending unrelated to the immediate crisis.
President Trump in late March tweeted, “with interest rates for the United States being at ZERO, this is the time to do our decades long awaited Infrastructure Bill.” House Speaker Nancy Pelosi (D-CA) concurs. When asked about how Congress would pay for the $1.5 trillion infrastructure bill, she remarked, “with the interest rates where they are now, there’s never been a better time for us to go big.”
They are not wrong about low interest rates. In June, the Federal Reserve announced that it would maintain the federal funds rate between 0 to 0.25 percent. The low federal funds rate, which serves as a benchmark for all interest rates, would in effect make borrowing more affordable for the federal government.
Sometimes it may be necessary for policymakers to increase deficit spending in response to an emergency. For instance, Congress passed the $1.7 trillion CARES Act because there was a genuine concern that without it the pandemic would result in a severe economic depression.
The argument based on low interest rates is different. According to the president and the House Speaker, the federal government should borrow money not because of a crisis but because the cost of doing so is low. It is this argument that shows some serious flaws.
One objection is that interest rates may not stay low for long. Economists at Morgan Stanley worries that inflation may rise due to the alarming rate of growth in the money supply. If they are right, then the Fed would be pressured to raise interest rates to hold down inflation. While recent fears about explosive inflation haven’t come to fruition, it is not wise to gamble based on the tenuous expectation that interest rates would remain low. The price of being wrong is too high: the cost of financing the debt before this crisis was tabulated at $6 trillion over the next decade.
Another objection is about the economic cost of maintaining a large debt-to-GDP ratio. Studies show that the more money a country owes, the slower its economic growth becomes. The Mercatus Center estimates that if the federal government were to continue business as usual, the growing debt would result in trillions of dollars of loss in the economy.
Deficit spending advocates may argue that the government should spend during an economic downturn such as this and worry about the debt once it is over, but the empirical evidence does not support the claim that Congress and the President can be trusted to pay down the debt after the crisis. For instance, the US racked up debt by an additional $9 trillion during the longest economic expansion in its history.
It is always hard to argue for fiscal consolidation because politicians are often incentivized to spend more even when doing so would be harmful overall. If the federal government fails to reduce its debt, then it would hamper the necessary responses Congress would have to take in addressing the looming entitlement insolvencies or any other unforeseen disasters down the road. Instead of using low interest rates to excuse unnecessary deficit spending, Congress should realize that the federal budget is in desperate need of reform and work toward fixing it.
as soon as the moron liberals stop the lockdowns we can fix that!
Nancy Pelosi is one of the most reckless spenders.
“When asked about how Congress would pay for the $1.5 trillion infrastructure bill, she remarked, “with the interest rates where they are now, there’s never been a better time for us to go big.”
They are not wrong about low interest rates.”
No they aren’t... for them. But they are killing people who save money, or retirees who would normally drive a little income from their investments without being heavily in stocks later in life.
Not gonna happen. Pres Trump and crew were spending almost a Tril a year more before covid.
Its kind of like saying: “Cheap Heroin Should Not Cause Addicts to Overdose.”
as soon as the moron liberals stop the lockdowns we can fix that!
These conservative deficit hawks never complain about the existence our endless wars. Why is that?
Only when the federal government spends money to help Americans in America - only then do the conservative deficit hawks get upset
They’re silent as we spend trillions to invade and “nation build@ in the Middle East. Actually, many of them SUPPORT those deficit spending boondoggles. They only complain when the money is spent in and on America First. C
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