President-elect Biden’s formation of his economic “team” has been dominating the headlines. Unduly, I aver, because there are far more pressing issues than which Wall Street or otherwise pro-business cronies Biden ends up selecting. Most notably, of course, is the matter of another desperately needed stimulus package. Against all odds, it appears that moderate Senate Democrats and Republicans are working together on a compromise bill.
Just yesterday the group, led by Senators Collins (R-Maine) and Warner (D-Virginia), proposed a $900 billion compromise package that would provide money for small businesses – one hopes much more equitably distributed than the previous offering – and state and city governments. Additionally, it would add $300 per week to unemployment benefits for 18 weeks. As expected, majority leader Mitch McConnell submitted a counterproposal that amounts to a small fraction of the proposed amount, with tax breaks emphasized and no unemployment supplement.
But what nobody – again, not surprisingly – is talking about is how inconsequential even a $900 billion stimulus would likely be. My friends caution me that we should not never allow the perfect be the enemy of the good but applying the maxim here wrongly implies that the proposed sum is in some way “good.” The problem with caving to political pressure in order simply to agree on something it that it squanders valuable time that we simply do not have. The country is in crisis with many millions in varying degrees of economic distress, and the health crisis jeopardizes many more. It is no time for half-measures.
Consider that $900 billion amounts to only four percent of GDP. For comparison, annual government outlays are consistently in the double digits, sometimes approaching 20 percent of GDP. And the budget deficit for 2020 figures to be substantially lower as a fraction of GDP than it was in the four years following the financial crisis of 2008 (see Chart), even taking into account the $2.2 trillion stimulus package introduced in March.
This despite the fact that the 2020 economic collapse dwarfs the one following the financial crisis. GDP shrinkage for 2020 – projected at about six percent by the IMF is more than twice what it was in 2009. Even more important, it came at a time when – mainstream press accounts notwithstanding – the United States had not emerged from the previous recession a decade earlier. Or to be more precise, the majority of Americans had not yet emerged from it. Yes, inequality is alive and doing quite well.
All of which is to say that an unprecedented fiscal stimulus is needed. True, the March $2.2 trillion package was itself unprecedented. But it was insufficient, nonetheless. Businesses are still shuttering, and unemployment remains a major problem. Some of you will object that another multi-trillion fiscal package would only aggravate our already shaky debt situation. Here there are frequent misunderstandings, so it is important to clarify.
First, it cannot be denied that the country’s debt continues to mount. Look again at the Chart. While Federal debt was only 36 percent of GDP fifty years ago, it is presently over 107 percent. And note the trend: Over the past two decades it has been rising steadily. This is what happens to a country that regularly runs budget deficits, since the money to pay for them has to come from somewhere.
Why not just print the money instead of borrowing it? We do that too but doing so effectively puts us in debt to our own Federal Reserve, which buys our Treasury bonds. And it is not only the Fed. You will notice from the Chart that our external debt in relation to GDP (which means what percentage of our GDP we owe to foreign countries) has risen from five percent in 1970 to 33.5 percent today! We are increasingly in debt to foreigners – particularly Japan and China. How much this all matters is a matter of disagreement, and explaining the problem will require a longer and more detailed post on the relationship between production, profits, and global financial imbalances. Look for it.
Despite our growing indebtedness, the Democrats are mostly correct that our budget should take a back seat to our national wellbeing. And it is indeed heavy borrowing over the past 40 years that has mostly kept the U.S. economy out of severe recession. What neither of the mainstream political parties are saying publicly is that our decades-long deficit habit redistributes income to the rich. Compared to the period spanning the 1950s and 1970s, the wealthy today pay far less money in taxes, necessitating government financing from elsewhere, which the wealthy are happy to provide at interest.
It is emphatically not the case that national governments need to balance their budgets, at least if their accumulated debts are at manageable levels. While many fear that our debt has grown unmanageable, advocates of Modern Monetary Theory (MMT) – in brief, the idea that fiscal needs dictate monetary provision rather than the reverse – argue that, if unemployment persists, the Federal government should simply continue spending money. While necessarily a topic for a future post, Alexandria Ocasio-Cortez (D-NY) may be prescient in her pronouncement that MMT needs to be “a large part of the conversation.” Stay tuned.