Legislating Through a Crisis: A Ruse By Any Other Name.

“Don’t waste a Crisis—your patient’s or your own.” So wrote Dr. M.F. Weiner in the Journal of Medical Economics in 1976. Years later, the very politically astute Rahm Emanuel schooled President Barack Obama and his vice president on the same lesson. A crisis can be used as a grand ruse to justify spending on all manner of priorities. Never wasting a crisis has become political holy grail.  

It’s a lesson President Biden has now eagerly taken to heart. He, like his immediate predecessor, is no shrinking violet when it comes to federal spending. Keep in mind; President Trump had no problem running a pre-pandemic trillion-dollar deficit. At a projected $3.0+ trillion, President Biden’s federal deficit will be about 70% of last year’s entire federal budget. Let that marinate for a moment.

As a share of the economy, the deficit this year will be the greatest since 1945, the last year of World War Two. Now, to be clear, I am not a deficit antagonist. Quite the contrary. I believe the near historic low cost of borrowing represents a grand opportunity for the country to wisely invest in high-return programs such as 21^st-century infrastructure, pre-K and other early childhood education enhancements, and more universally available healthcare delivery systems.

The federal government is projected to spend about 6.8 trillion this year. That’s about $3.0 trillion more than the government’s tax revenue will produce. So, what is going on here? That’s not really a serious question because we all know the answer. No one ever lost an election throwing money at the electorate. That’s why former President Trump argued that the $600 per household second COVID relief payment toward the end of last year should have been $2,000 per household, and that’s why President Biden quickly accommodated Trump’s entreaty as soon as he took office with an additional $1400 distribution to most families. Keep in mind, $1200 per family had already been distributed early in 2020 at the outset of the pandemic.

According to the Federal Reserve, given the COVID relief payments thus far and the lingering hesitancy many families have to venture out to spend money, household checking and savings accounts jumped by nearly a trillion dollars in the first quarter of this year. In total, a record $15.5 trillion has been accumulated in these accounts. So far, the federal government has provided nearly a trillion dollars in direct payments to families. That helps account for an increase of $5 trillion in accumulated household wealth from the end of the fourth quarter last year through the end of the first quarter this year. And while this largess of accumulated cash in family accounts is not evenly distributed throughout the country, an analysis by the JP Morgan Chase Institute of 1.8 million family checking accounts found that as of the end of October last year, the median balance was up by about 40% from a year earlier. Median balances for families in the lowest economic quartile were up about 45%.

And, here’s the thing; there is another $3.5 trillion waiting in the wings, which the Republicans are simply not going to buy, and to which President Biden is now solidly committed, and which the progressive wing of his party protests is too little. This additional funding will only see the light of day through the arcane reconciliation process, which requires only a simple majority, assuming the Senate parliamentarian rules that this funding qualifies under the rules for reconciliation.

As of now, there is no assurance that President Biden can corral all 50 Democratic senators, which he would have to do to get the $3.5 trillion of additional spending through reconciliation. It’s also possible that Biden will lose the support of Senate Republicans for the infrastructure agreement if he is seen as too heavy-handed, pushing another $3.5 trillion through reconciliation, and he actually could lose some progressive Democratic support for the infrastructure legislation if the $3.5 trillion budget enhancement fails.

Meanwhile, Republicans and some Democrats are keeping a nervous eye on the nation’s burgeoning public debt, which now stands at about $28.5 trillion, about 70% of which is held by American citizens and institutions. Conventional wisdom once held that a nation’s public debt, which, in the case of the United States, now stands at about 104% of GDP, shouldn’t exceed 70 to 75 percent of GDP. That’s old school, to which fewer people seem to pay much attention anymore.  Green eye-shade economists traditionally took a dim view of excess debt to GDP because such a high debt load relative to the size of a nation’s entire economy brought into question a nation’s ability to service its debt. At least a dozen countries in addition to the United States have debt to GDP ratios at around 100%, or higher, including Japan, Belgium, France, and Singapore. On the other hand, Germany and China currently maintain a debt to GDP ratio hovering at about 55%.

Of course, one’s debt is another’s asset, and $21trillion of US treasuries held by American families is nothing at which to sneeze. Whether the economy needs or needed the level of stimulus the Trump and Biden Administrations have thrown at it will be debated for years to come. We are seeing inflation warning lights beginning to blink, and some prices have risen sharply. Most prognosticators believe inflation will tame to a steady 2.0% to 2.5%, which is quite manageable and consistent with the Federal Reserve’s objectives.

One thing, however, is certain. Far fewer economists will be paying much attention to debt to GDP ratios anymore.

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