Biden Has More Room To Spend Than Conservatives Might Like

President Joe Biden has an ambitious spending agenda and a lot more fiscal room to maneuver than conservatives like to admit.

His $1.9 billion stimulus package is burdened by additional payments to households that have borne little loss of income. With the GOP worried about the size of the package and impact on the national debt, we are in for some lengthy bipartisan bridge-building 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 pandemic-related emergency spending and the hit on tax collections from layoffs and shutdowns were largely responsible. The Federal Reserve printed money to purchase about three quarters of the new bonds, and as EU governments boosted their debt, the European Central Bank did much the same.

person in brown pants standing near blue and white big big big rock signage

Image Source: Unsplash

Debt service

The important thing to grasp though is that the debt servicing burden did not increase a lot. The Fed also added other securities to its balance sheet, and it remits the interest received on additional bonds to the Treasury.

The money supply did increase but caused little inflation—now that’s a conundrum for the limited wisdom of conservative orthodoxy.

Americans working from home drove less, couldn’t attend sporting events, consumed delivered meals that cost less than those at downtown restaurants, and generally saved the extra cash if they weren’t unemployed.

Corporate liquidity also swelled. With the future so uncertain, many cut dividends and held back hiring and spending on new projects.

Biden can’t count on consumers and businesses sitting on their hands. However, with the vaccinations proceeding, the FY 2021 federal deficit is on track to fall to about $2 trillion with the passage of the bipartisan 2020 supplemental stimulus package and to $1.1 trillion in FY 2022.

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Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist. He is the five time winner of the MarketWatch best forecaster ...

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