Biden’s Borrowing: A Problem For President Harris

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President Biden’s opening move has been to propose a $1.9 trillion pandemic recovery spending plan, on top of the $2 trillion approved in March 2020, $484 billion in April 2020, and the $900 billion in December 2020. All indications are that Mr. Biden plans to follow that with a $2 trillion “build back better” plan for spending on transportation, energy, infrastructure, health care, and countering climate change.

It’s easier to get Congress to approve spending than taxing, so the $4 trillion Biden spending binge is likely to be funded largely with borrowing. That is promoting some pushback from Republicans, who observe that the national debt is already at $27 trillion, a record in nominal terms.

Senator Rick Scott last week issued a letter to his Senate colleagues. “We can’t forget that this year’s federal budget deficit will be the largest in the history of our nation, in excess of the cumulative deficits for the first 200 years of our country’s existence. The United States has more than $27 trillion of debt and the highest debt to GDP in our history,” Mr. Scott wrote.

The Florida Republican is correct that it has reached a recent high. It amounts to $84,000 for each American, according to the Debt Clock maintained by the Peter G. Peterson Foundation. “We are maxing out our credit card, again and again, with no plan to pay it off. Congress can’t keep spending like this and borrowing off the backs of our children and grandchildren,” Mr. Scott said.

The senator’s press release about the letter, headlined, “Congress Must Get Serious About America’s Debt,” generated some snickering from Democrats, who observed that some $7 billion of the debt had been amassed under the Trump administration with support of congressional Republicans. Only when Democrats take control of the White House do Republicans suddenly rediscover the virtue of parsimony.

It isn’t only Senator Scott, though, who is sounding cautionary notes. Steven Rattner, a Treasury Department official in the Clinton administration who also served in the Obama administration, recently wrote, “we shouldn’t use the virus as an excuse to abandon any pretense of fiscal responsibility.” Wrote Mr. Rattner, “public debt still does matter.”

Even Mr. Rattner argues that “with interest rates low, we certainly have room to increase our borrowing.” Another former Clinton and Obama official, Lawrence Summers, said “the risks of doing too little are much bigger than the risks of doing too much.”

The conventional wisdom, embedded in Mr. Summers’s statement, is that borrowing and spending aggressively in a downturn will speed an economic recovery and growth. That will eventually make it easier to repay the debt. So long as those lending the government money believe that, so good.There is some risk, though, that the size of the debt itself becomes a drag on the economy, that it creates national security risks, or that it clashes with the constraints of the Constitution.

Five trillion dollars or so of the debt is held by Federal Reserve banks. That is nearly double what it was at the end of 2019. To a large degree, the Covid emergency relief appropriated by Congress has been funded by a central bank that has the awesome power to expand its balance sheet. The Constitution gives Congress the power to “to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures,” but Congress delegated those powers in the 1913 Federal Reserve Act, “to furnish an elastic currency.”

The risk of an elastic currency is that eventually it becomes so rubbery that it fails to meet the Federal Reserve Act’s statutory goal of “stable prices.” Right now, Mr. Biden and his team think deflation, or sinking prices owing to unemployment and a pandemic-induced economic slowdown, is a bigger risk than inflation, or soaring prices owing to an overheating economy and an excessively easy or accommodative monetary policy.

Conditions, though, can change. Misjudging the transition from gunning the growth engine to fighting inflation can lead to a boom-and-bust cycle rather than the “soft landing” to which central bankers aspire. President Biden seems to be betting that a big enough borrowing binge now will assure that any unwinding would be a problem for a Kamala Harris administration in January 2025, if not sooner.

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