U.S. President Herbert Hoover famously observed that blessed are the young for they shall inherit the national debt. If ever there was a time when Mr. Hoover’s words had particular relevance, it has to be in today’s America. No longer does the country seem to have a serious constituency for a responsible budget policy or for doing anything meaningful to prevent our children and grandchildren from being saddled with an ever-growing public debt mountain.
Today’s seeming indifference to large budget deficits and high public debt would appear to be shared by both Republican and Democratic administrations. The only real difference between the two parties’ administrations is how they put us on the path to budget ruin.
Republican administrations tend to do so by engaging in large tax cuts without enacting corresponding public spending reductions, as President Donald Trump did with his 2017 unfunded corporate tax cut bill. Meanwhile, Democratic administrations do so by enacting large public spending increases without proposing corresponding tax increases, as President Biden now appears to be doing in spades.
Enabling the politicians to put our public finances on the most unsustainable of paths is the academic community, which either remains silent in the face of budget irresponsibility or worse yet comes up with new-fangled theories to justify budget profligacy. The latest academic flavor of the day is the so-called Modern Monetary Theory, which purports that in a world of low-interest rates, the government is capable of taking on very much debt than was possible before without getting the country into economic trouble.
The deep Covid-19 induced recession last year has provided further cover for budget spending largesse. To be sure, the country did need a large budget policy response to prevent last year’s recession from morphing into an economic depression However, it is highly questionable whether the country needed a cumulative 25 percent of GDP boost in 2020 and 2021 when at its peak the gap between the country’s actual output level and its full employment level was only some 6 percent. As a result of the excessive demand towards such budget, stimulus has given rise, we are already seeing troubling signs of inflation and there are growing indications that the economy could soon overheat.
Even more questionable is the appropriateness of President Biden’s Infrastructure and Family Plans that are currently making their way through Congress. At a time that the economy is recovering strongly and inflation is raising its ugly head, these two bills would increase public spending over the next 10 years by some $4.5 trillion. Particularly troubling is the fact that these bills are far from fully funded with proposed tax increases and would add significantly to the public debt.
According to the Committee for a Responsible Federal Budget, Mr. Biden’s Build Back Better initiatives could over the next decade add directly $2.1 trillion to the national debt and set the stage for a $3.9 trillion increase in the debt. That in turn could result in our country’s public debt to GDP ratio rising towards 120 percent by 2030, which would be a level considerably higher than that which we experienced in the immediate aftermath of the second world war.
All of this hardly bodes well for the economy that our children will inherit. Once interest rates normalize from their currently very low level, an ever-growing part of future budget spending will need to be devoted to interest payments leaving little room for non-interest public spending. At the same time, we could be revisited by the scourge of inflation since the Federal Reserve will be under intense political pressure to keep interest rates very low for fear of raising the government’s debt service burden.
Far from Building Back Better, Mr. Biden’s public spending initiatives risk accelerating the mortgaging of our children’s economic future. By inviting inflation, they also risk dealing a body blow to the most vulnerable part of our society, which is ill-equipped to protect itself against inflation’s ravages.
Desmond Lachman is a senior fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.