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(Committee for a Responsible Federal Budget, Mitch Daniels Leon Panetta Tim Penny President Maya Macguineas Directors Barry Anderson Erskine Bowles Charles Bowsher Kent Conrad Dan Crippen Willis Gradison Jane Harman William Hoagland Jim Jones Lou Kerr Jim Kolbe Marjorie Margolies Dave Mccurdy James Mcintyre, Jr. David Minge Michael Nutter June O’neill Marne Obernauer, Jr. Rudolph Penner Robert Reischauer Charles Robb Isabel Sawhill Alan K. Simpson John Spratt Charlie Stenholm Gene Steuerle David Stockman John Tanner Tom Tauke Carol Cox Wait, “Risks and Threats from Deficits and Debt ,” pg online @ https://www.crfb.org/sites/default/files/media/documents/Risks_and_Threats_From_Deficits_and_Debt_July_2022.pdf //um-ef)

After two decades of uninterrupted borrowing – including three years in which deficits surpassed 10 percent of the economy – the U.S. national debt is higher as a share of Gross Domestic Product (GDP) than at any time since World War II and is on course to breach that record. Yet policymakers have done little to contain our $24 trillion national debt, and most legislation has added to it in recent years. Additionally, there have been numerous claims that “debt doesn’t matter” and the United States should borrow even more than the $16 trillion it is projected to borrow over the coming decade. These claims are problematic and concerning. This does not mean there is no proper time to borrow. In fact, deficit spending helped to prevent an economic catastrophe and support the country through a pandemic in the recent COVID-19 crisis. However, even this justified borrowing comes with some consequence, and much of the recent borrowing before and since the COVID crisis was enacted for political rather than purely economic justification. Excessively high debt levels are damaging for many reasons. High debt levels: Threaten economic vitality: The recent surge in deficit spending has contributed to rapid near-term inflation and over time will result in higher interest rates, slower economic and income growth, and a small but increased risk of fiscal crisis. Place a strain on the budget: The federal government currently spends as much on interest payments as it does on most of our safety net programs combined, and interest is projected to become the largest government expenditure within the next 30 years. As interest and mandatory spending dominate a greater share of the budget, our government’s ability to invest in new priorities will be limited. Create geopolitical challenges and risks: With large portions of our debt held by foreign investors, a substantial share of our national income goes abroad. We are consequentially left with fewer financial tools to manage conflicts with other countries when they have increased leverage over our economy. Make responding to new emergencies more challenging: High deficits and debt – particularly if coupled with high inflation or interest rates – make it harder to borrow in response to a recession, pandemic, war, or other legitimate emergency. Are unfair to younger and future generations: The federal budget already favors consumption on seniors over investment in children. Failing to address rising debt also leaves future generations with an additional fiscal and economic burden. Given these very real threats and risks, policymakers should pursue the appropriate tax and spending adjustments to bring the fiscal situation under control.

Along these lines, since Classical Antiquity, there has always been a strong connection between wealth and military power and therefore, in the most simple and direct way, between economics and national security. Not surprisingly, modern times are not so different. (Friedberg, 1991). Therefore, the trends that rule the behavior of currencies are strikingly similar to those that govern the conduct of national states. They both seek dominance in highly hierarchical and dynamic systems where competition, conflict and confrontation are commonplace. They both gain and lose power and prestige at the expense of one another in zero-sum games (Cohen, 2003). Therefore, “the realpolitik balancing instinct would apply to currency politics as well as geopolitics” (Drezner, 2010). The evident overlapping parallel implies that, paraphrasing Robert Mundell (1993), powerful States have powerful currencies. In fact, history provides many examples that demonstrate that “currency can enhance the power of the state that issues it” (Cohen, 2009). Thus, it would be mistaken to disregard that “Money Rules – now more than ever – but those rules serve political masters [so] students of money in general and political scientists most particularly must return to that basic starting point – money is politics”. (Kirshner, 2003).Indeed, “World history demonstrates that there is a close relationship between monetary systems and war and peace”(Lips, 2004). Furthermore, since the dawn of human civilization, the issuance of currency has invariably carried heavy political connotations related to territorial considerations: “governments have been assumed to enjoy a natural right of monopoly control over the issue and management of money within their borders [and following a model akin to a]Westphalian model of monetary geography […whereby] each state was expected to maintain its own exclusive territorial currency” (Cohen, 2008). Consequently, not unlike nations, currencies rise and fall too. “An examination of the long history of reserve currencies shows the tendency for one currency to dominate, with any change in status often reflecting a shift or rebalancing of economic and political power” (Lee, 2010). Accordingly, “currency internationalization does indeed impact directly on the power position of issuing states” (Cohen, 2009). Hence, there seems to be a persistent symbiotic link between geopolitics and finance that represents an element which is considered by statesmen in order to properly assess national power. Indeed, it is known that nowadays Central Bankers and political leaders actively collect intelligence information on the behavior of currencies and periodically test their relative strength, in order to “adjust their strategies accordingly” (Stroupe, 2005). However, hegemonies, both geopolitical and monetary, are not perpetual: “historical experience demonstrates the speed and pervasiveness of changes in national economic power; since hegemony is transitory, so must be any international monetary system that takes hegemony as its basis” (Eichengreen, 2003), which indicates that “the international monetary system has always rested and depended upon political foundations” (Kirshner, 2003). The following graph, based on data from a study on the evolution of monetary hegemony (Dwyer & Lothian, 2002), shows the historic succession of dominant international currencies from the 5th century B.C. onwards. Not surprisingly, as can be clearly seen, currencies occupy a dominant position when the nation that mints them becomes a great power. However, “since states are no longer able to exercise supreme control over the circulation and use of money within their own frontiers, they must instead do what they can to preserve or promote market share. As a result, the population of the monetary universe is becoming ever more stratified, assuming the appearance of a vast Currency Pyramid — narrow at the top, where the strongest monies dominate; and increasingly broad below, reflecting varying degrees of competitive inferiority” (Cohen, 2003). At this point, it is important to emphasize that ‘reserve currency’ status is the highest position a currency can attain because it is “something which evolves over time through combination of international economic and political power and convenience to the greatest number of users rather than abruptly as the result of conscious decisions by a single country”(Eslake, 2009). Moreover, there are other evident advantages provided that “the issuers of currencies that are widely used by others as reserve assets […] can finance deficits simply by printing more of their own money” (Cohen, 2008). Therefore, there is a “link between the distribution of economic power and the allocation of reserve currencies” (Drezner, 2010). Hence, “the great bulk of reserves is held in the form of highly liquid assets denominated in one of the small handful of moneys at the peak of the Currency Pyramid” (Cohen, 2009). A reserve currency is thus defined by three essential attributes: a) It provides a store of value, i.e. “confidence that the currency will retain its value, so making it a safe place in which to invest official reserves or denominate contracts” (Dobbs, 2009). Confidence is critical because “economies operate on trust as a foundation” (Stroupe, 2006). Thus, “reserve assets serve as a store of value that can be used directly for intervention purposes or else can be more or less quickly converted into a usable intervention medium” (Cohen, 2009). b) It is employed as a “medium of exchange that offers the ability to transact globally in the currency in an easy and low-cost way” (Dobbs, 2009). As such, “a reserve currency facilitates trade and finance by decreasing the number of bilateral exchange markets that need to be created, thus reducing transaction costs” (Carbaugh&Hendrik, 2009). Therefore, it provides a reference to set the bilateral exchange rate quotations (Oxford Analytica, 2008). c) As a unit of account, it is “a widely held and recognized currency that can be used to denominate international contracts […and] to invoice contracts” (Dobbs, 2009) and it is the currency in which many commodities –including fossil fuels, strategic raw materials, precious metals– and financial instruments available in capital markets are priced and traded (Oxford Analytica, 2008). The latter is particularly important because there is a strong link between finance and hydrocarbons market, due to the fact that “black gold has other pseudo-monetary characteristics as an indispensable commodity that practically begs to be controlled. In an increasingly industrialized world, this fungible primary energy source is everywhere in demand [and, as result…] the spectrum of thought on national security and foreign policy [is taken] into the realm of high finance, capital flows and the trump asset of energy resources (Roby, 2010). Hence, this research paper must be understood in the context of the United States dollar’s decades-long role as the ‘first among equals’ in the international monetary system. The following graph, based on data from a paper written by a prominent scholar of International Political Economy (Cohen, 2009) illustrates the current hierarchical pyramid of currencies, classified as “top currency”, “patrician currencies” and “elite currencies”. In geopolitical terms, during the Cold War period, the Dollar hegemony “held the American alliance system and the world economy together… [because] America’s major allies and economic partners were willing to hold dollars for political as well as for economic reasons” (Engdahl, 2006). Therefore, the privileged position of the dollar has been “a key contributor to US global hegemony” (Oxford Analytica, 2008) for it provides advantages derived from the Federal Reserve’s absolute monopoly of the printing of a currency needed by countless national economies to survive (Engdahl, 2003). Thus, thanks to of its wealth, “America has been able to irresistibly influence all the other players on the geopolitical chessboard because it has led the global economy, and historically it could therefore greatly reward or severely punish in ways and to an extent no one else could” (Stroupe, 2006), attaining both political and diplomatic power, as well as formidable power projection capabilities. For this reason, “America’s dominant position as the sole superpower ultimately rests upon two pillars: its overwhelming military superiority and its control of the global economic system by the unique role of the dollar as the World Reserve Currency” (Clark, 2005). According to this reasoning, “it might be considered an elemental interest of the United States to maintain the system which also includes intense diplomatic and limited military operations in order to preserve its abundant financing for as long as possible. After all, there seems to be a strong interdependence among nations. The US is dependent on cheap financing from abroad and is even willing to apply some military power to protect these interests” (Schulz, 2009). Moreover, it cannot be denied that “the dollar’s leading role in foreign exchange transactions also is reinforced by this currency’s widespread use in the invoicing of international trade” (Goldberg, 2011). That is especially true about oil markets, given that “since oil trade was and still is noted, as well as traded in US Dollars, every nation has to purchase huge amounts of this currency for its national reserves in order to maintain its ability to purchase the required energy” (Schulz, 2009). Consequently, monetary dependence of others on the issuing country confers the latter significant geopolitical power(Cohen, 2003). The unavoidable reasoning that arises is that “a full challenge to the domination of the US dollar as the world central-bank reserve currency entails a de facto declaration of war [on American power]” and, as a result, the United States is willing to fight wars to defend its national currency (Engdahl, 2006) because “an end to the dollar’s reserve currency status would impose material constraints on the United States to finance its deficits, and lead to a major loss of prestige and power projection capabilities” (Drezner, 2010). A possibility is that “widespread oil pricing in alternative currencies or perhaps the bartering of oil would then threaten U.S. hegemony by crimping the relative global demand for dollars” (Roby, 2010). Nevertheless, perpetual hierarchic supremacy of the dollar cannot be taken for granted: “Sooner or later, confidence in the dollar is bound to be undermined by America’s chronic payments deficits, which add persistently to the country’s looming foreign debt […] The exorbitant privilege obviously cannot endure forever; America’s spending cannot indefinitely exceed its income. In the absence of significant policy reforms to reverse the deficits, the world’s trust in the dollar is bound […] to be eroded. Dollar accumulations will eventually dry up and could even turn into massive sales” (Cohen, 2008). The feasibility of said scenario has been enhanced by recent events. Indeed, “the [2008 and 2009] financial crisis and its aftermath have triggered uncertainty about the future of the dollar as the world’s reserve currency” (Drezner, 2010) because it “revealed the inherent weaknesses of the current international monetary system that contributed to global financial instability and a weak global economy and [said crisis has also] hampered the long-term prospects of both the US dollar and the euro as reserve currencies. The crisis has compromised both currencies as safe-haven stores of value” (Lee, 2010). The following chart, based on official IMF data (International Monetary Fund, 2013) reflects the composition of foreign exchange reserves held on a global basis by early 2013. As can be seen, nowadays the US dollar still occupies a predominant position which is unmatched by other inhabitants of the world’s current monetary universe. At first, “it appears that the current system of dollar dominance will persist provided that geopolitical tensions do not become too important for policymakers – or not important enough” (Drezner, 2010), yet appearances can deceiving and potential challengers might become increasingly assertive: “several states around the world today are thought to harbor ambitions to amplify their monetary power – including, most prominently, the four BRIC countries (Brazil, Russia, India, and above all China). One way to do this is to promote internationalization of their currency” (Cohen, 2009) by “trying to establish their own financial regimes as the international payment vehicle” (Schulz, 2009). It is telling that, back in 2008, Vice Admiral J. Michael McConnell, then Director of National Intelligence voiced before the United States Congress Intelligence Committee his “concerns about the financial capabilities of Russia, China, and OPEC countries and the potential use of their market access to exert financial leverage to achieve political ends” (McConnell, 2008). The senior American official’s threat assessment is not mistaken: “influence might be increased directly through the use of newly acquired reserve stockpiles to threaten manipulation of the value or stability of a key currency such as the dollar” (Cohen, 2008). The Vice Admiral’s statement, which –needless to say– goes “beyond the conventional world of spycraft” (Shelton, 2008), implies that the US intelligence Nomenklatura has already acknowledged the threat posed by the geopolitical manipulation of financial forces by foreign powers hostile to American interests. It might be interpreted as the confirmation that “the United States may be expected to resist any compromise of the greenback’s historical dominance…” (Cohen, 2008). Indeed, McConnell’s concern is not unsubstantiated at all, taking into account that “[the] US increasingly came to rely on the governments of countries that were neither democracies nor US allies for financing […and since such States] with large quantities of reserves have more strategic freedom of action; they are less likely to be deterred from taking geostrategic risks by the possibility that their actions could precipitate a financial crisis (Setser, 2009). Actually, the unleashing of financial warfare seeks the infliction of economic damage as it “involves malicious acts in markets for stocks, bonds, currencies, commodities and derivatives” (Rickards, 2012). The same author points out that, unlike conventional warfare, it can be waged stealthily enough so as to obscure the identities of the attackers as well as their channels. Thus, it requires a remarkably high degree of sophistication. The aforementioned has engendered, paralleling Cold War terminology, a system akin to a “balance of financial terror” (Summers, 2004) whereby America’s overall stability could potentially be threatened due to the fact that “America’s partners in NATO are no longer the dominant holders of US dollars in reserve as they were during the cold war. The connection between dollar holders and security partners has been severed [and, as a result,] the dollar depends on the kindness of strangers” (Drezner, 2010). At this point, it is vital to underscore that “[regarding monetary concerns] politics will mater greatly [because] States do not typically (accumulate claims on) countries that are, or may be, their geopolitical competitors –if they can help it, that is, or if there is any credible alternative” (Jaeger, 2010). In the light of the above, based on data from the CIA World Factbook (Central Intelligence Agency, 2012) and the World Gold Council (2011), the following chart reveals the largest proprietors of financial assets, including foreign currency reserves, gold and holdings of SDR. The list includes industrial economies, emerging powers, world-class financial centers and oil exporters. Not many of them are staunch US allies, some might eventually reconsider their Foreign Policy vis-à-vis America and only one of them, namely Germany, is a NATO member, for the time being. It must be borne in mind that “for historical reasons gold is still included in the reserve stockpiles of many countries, despite the fact that it is no longer directly employable as a means of exchange. So too are SDRs [and that both of them] must be exchanged for a more utilizable instrument when the need for financing arises” (Cohen, 2009). Indeed, given the fact that the aurous metal “has been used as money to a greater or lesser extent for much of the history of civilization” (Michaud, et al., 2006), it “fulfills the unique function of a global store of value” (Faugère& Van Erlach, 2005). Incidentally, even though the US is not among the top ten holders of financial assets, most the US currency reserves are not denominated in dollars (!) but in gold: Its 8,133.5 tons represent 76.6% of its national currency reserves (World Gold Council, 2011). Even though this paper does not focus on the yellow metal, its significance in terms of monetary politics is deservedly acknowledged because “from the beginning of recorded history some 6,000 years ago, gold made a profound and lasting impression. Gold was, and still is, the ultimate symbol of wealth, power, beauty and prestige. It has been deeply rooted in the consciousness of man ever since” (Lips, 2001) and, as a result, “gold is a political metal” (Lips, 2004). As such, it is “highly susceptible to geopolitical factors [because…] during periods of fiscal or monetary mismanagement, crises of various kinds or fundamental changes in the dominant currency, gold may be a very useful asset for hedging risk” (Michaud, et al., 2006). In other respects, dollar hegemony went unchallenged during six decades because no competitive rival emerged, yet “ample evidence exists to suggest that the distribution of power in international monetary affairs is changing” (Cohen, 2008). Especially, the rise of the People’s Republic of China as an economic superpower has enhanced the possibility that the ‘Middle Kingdom’ could become, in the long run, a financial superpower (Makin, 2011). Naturally, “many PRC scholars and policy makers […] aspire for a world economic and financial order less dominated by the US and in which the PRC can play a more influential role” (Lee, 2010). Accordingly, by proposing alternatives to the US dollar as reserve currency –like Special Drawing Rights–, “China desires to decrease the financial and political power of the United States” (Carbaugh & Hendrik, 2009) and, it has to be taken into account that “If any nation is in a position to use its newly acquired influence in this manner, it is China. At any time, Beijing could undermine America’s money by dumping greenbacks on the world’s currency exchanges or even simply by declining to add dollars to China’s reserves in the future” (Cohen, 2008). Both options are not mutually exclusive and they can be advanced simultaneously. Indeed, the People’s Bank of China could covertly and progressively diversify its massive currency reserves by ceasing to buy American dollars and, simultaneously, stockpiling growing reserves denominated in other currencies and even in precious metals. This deceptive strategy is meant to preserve wealth without precipitating a sudden dollar collapse, along with some political consequences such move would recklessly unleash. Therefore, it is not surprising that the composition of its foreign currency reserves is one of the highest state secrets of the People Republic of China (Stroupe, 2006). Even if “China’s tactics suggest that it is not prepared to challenge the dollar’s hegemonic status at any point in the near future” (Drezner, 2010), it actually looks like, in the long term, Beijing is interested in forging a new monetary system in which the US dollar is no longer the only reserve currency available and overreliance on the American currency is not a necessary evil anymore. Chinese statesmen can accomplish such an ambitious objective through the application of two strategies: a) contributing to the strengthening of Special Drawing Rights (DSR)[1], in order to establish a multilateral reserve currency under which financial power will be, more or less, evenly distributed and b) unilaterally promoting the internationalization of the Renminbi as a growingly solid currency (Chin & Wang, 2010). Interestingly, the international monetary diversification away from the dollar is enthusiastically welcomed by Russia (Drezner, 2010), an utmost resourceful challenger of American geopolitical interests which, as such, would be more than glad to witness the accelerated decline of the US as the international’s system top power. If the economic rise of China is uninterrupted during the next few decades, there will be profound financial and, above all, geopolitical consequences: “If the yuan emerges as a reserve currency potentially rivaling the dollar, China will become more powerful and the US less powerful in international and financial affairs… [In that sense,] the emergence of the yuan as a major reserve currency will reflect the underlying shift in economic and financial power, even if it does, independently, provide tangible benefits to China [but] this is likely to have ramifications for Washington’s political position in the world” (Jaeger, 2010).

Today, citizens are unwitting participants in a covert policy experiment. It embraces the idea of higher government spending without the necessity of increased taxes. While modern monetary theory (MMT), the doctrine, has obvious appeal for politicians, irrespective of economic religion, the long-term consequences may prove problematic.

A state, MMT argues, finances its spending by creating money, not from taxes or borrowing. As nations cannot go bankrupt when they can print their own currency, deficits and debt don’t matter. Accordingly, governments should spend to ensure full employment, guaranteeing a job for everyone willing to work. Alternatively, though not formally part of MMT, governments can fund universal basic income (UBI) schemes, providing every individual an unconditional flat-rate payment irrespective of circumstances.

Sixth, there are implications for financial stability. Lower rates, the result of central bank debt purchases, and inflation fears might drive a switch to real assets, increasing the price of property and shares representing claims on underlying cashflows. It may encourage hoarding of commodities. This exacerbates inequality and increases the cost of essentials such as food, fuel and shelter. Fear of debasement of the value of paper money, in part, is behind unproductive speculation in gold and cryptocurrencies.

Seventh, MMT might undermine trust in the currency. Instead of spending the payments, citizens may question a world where governments print money and throw it out of helicopters.

(Romina, MA and BS degrees in economics from George Mason University, Romina Boccia is director of budget and entitlement policy at the Cato Institute, where she specializes in federal spending, budget process, economic implications of rising debt, and Social Security and Medicare reform. Boccia was previously director of the Grover M. Hermann Center for the Federal Budget at the Heritage Foundation, “The Debt Limit and the High Costs of Debt,” pg online @ //um-ef)

Increased risk of a sudden fiscal crisis. If lawmakers allow debt to continue to climb rapidly, the United States could be confronted with a worst‐​case scenario in which investors might become increasingly worried that the United States might service its debt by inflating away the value of its bonds. Eventually, bond holders could lose confidence in U.S. Treasury bonds and dump their holdings, triggering a quickly spiraling fiscal crisis. A sudden decline in the market value of outstanding Treasury securities would cause significant losses for mutual funds, pensions, insurance companies, and banks. These losses could cause major financial institutions to fail resulting in widespread economic harm.

Modern trade can involve many financial transactions. Today’s supply chains often see goods shipped across several borders, and that’s after they are produced using a combination of intermediate inputs, usually from different countries.

Suppliers may also only get paid after delivery, meaning they have to finance production beforehand. Obtaining this financing in the currency in which they invoice makes trade easier and more cost effective.

At the same time, the Fed tightening too much too quickly potentially increases the risk of a hard landing—a scenario that would likely cause Treasuries to rally sharply, given the negative impact to growth. In our view, the risk of recession in the United States over the next year or so seems limited. That said, some indicators suggest the risk of a recession is rising, and the recent sell-off did bring the risk/reward trade-off of holding longer-duration Treasuries more into balance. For example, assume ten-year yields increased another 60 bps to 3.5%, then ten-year Treasuries would return -1.4%. However, if ten-year yields fell 60 bps, essentially reversing the rise in yields so far this month, then ten-year Treasuries would return 8%. In addition, longer-duration Treasuries are finally beginning to look more attractive from a valuation perspective at current yields. According to our bond model, which is based on trailing ten-year nominal GDP growth and forward policy expectations, the ten-year Treasury yield is trading in line with its fair value.

While yields could go higher, particularly if future inflation data exceed expectations, yields have increased enough to warrant a neutral duration position.

The yield on the 2-year U.S. Treasury note dipped Wednesday as global bond markets stabilized following the previous session’s sell-off on the back of a surprise policy shift from the Bank of Japan.

The yield on the 2-year Treasury bond fell nearly 5 basis points to 4.221%, while the yield on the benchmark 10-year Treasury note traded about a basis point lower to 3.675%. Yields move inversely to prices.

(Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, is a former chief economist of the World Bank (1997-2000), chair of the US President’s Council of Economic Advisers, and co-chair of the High-Level Commission on Carbon Prices. He is Co-Chair of the Independent Commission for the Reform of International Corporate Taxation and was lead author of the 1995 IPCC Climate Assessment,.“The Myth of Secular Stagnation,” pg online @ //um-ef)

NEW YORK – In the aftermath of the 2008 financial crisis, some economists argued that the United States, and perhaps the global economy, was suffering from “secular stagnation,” an idea first conceived in the aftermath of the Great Depression. Economies had always recovered from downturns. But the Great Depression had lasted an unprecedented length of time. Many believed that the economy recovered only because of government spending on World War II, and many feared that with the end of the war, the economy would return to its doldrums. Something, it was believed, had happened, such that even with low or zero interest rates, the economy would languish. For reasons now well understood, these dire predictions fortunately turned out to be wrong. Those responsible for managing the 2008 recovery (the same individuals bearing culpability for the under-regulation of the economy in its pre-crisis days, to whom President Barack Obama inexplicably turned to fix what they had helped break) found the idea of secular stagnation attractive, because it explained their failures to achieve a quick, robust recovery. So, as the economy languished, the idea was revived: Don’t blame us, its promoters implied, we’re doing what we can. The events of the past year have put the lie to this idea, which never seemed very plausible. The sudden increase in the US deficit, from around 3% to almost 6% of GDP, owing to a poorly designed regressive tax bill and a bipartisan expenditure increase, has boosted growth to around 4% and brought unemployment down to a 18-year low. These measures may be ill-conceived, but they show that with enough fiscal support, full employment can be attained, even as interest rates rise well above zero.1 The Obama administration made a crucial mistake in 2009 in not pursuing a larger, longer, better-structured, and more flexible fiscal stimulus. Had it done so, the economy’s rebound would have been stronger, and there would have been no talk of secular stagnation. As it was, only those in the top 1% saw their incomes grow during the first three years of the so-called recovery.2 Some of us warned at the time that the downturn was likely to be deep and long, and that what was needed was stronger and different from what Obama proposed. I suspect that the main obstacle was the belief that the economy had just experienced a little “bump,” from which it would quickly recover. Put the banks in the hospital, give them loving care (in other words, hold none of the bankers accountable or even scold them, but rather boost their morale by inviting them to consult on the way forward), and, most important, shower them with money, and soon all would be well. But the economy’s travails were deeper than this diagnosis suggested. The fallout from the financial crisis was more severe, and massive redistribution of income and wealth toward the top had weakened aggregate demand. The economy was experiencing a transition from manufacturing to services, and market economies don’t manage such transitions well on their own. What was needed was more than a massive bank bailout. The US needed a fundamental reform of its financial system. The 2010 Dodd-Frank legislation went some way, though not far enough, in preventing banks from doing harm to the rest of us; but it did little to ensure that the banks actually do what they are supposed to do, focusing more, for example, on lending to small and medium-size enterprises. More government spending was necessary, but so, too, were more active redistribution and pre-distribution programs – addressing the weakening of workers’ bargaining power, the agglomeration of market power by large corporations, and corporate and financial abuses. Likewise, active labor-market and industrial policies might have helped those areas suffering from the consequences of deindustrialization. Instead, policymakers failed to do enough even to prevent poor households from losing their homes. The political consequences of these economic failures were predictable and predicted: it was clear that there was a risk that those who were so badly treated would turn to a demagogue. No one could have predicted that the US would get one as bad as Donald Trump: a racist misogynist bent on destroying the rule of law, both at home and abroad, and discrediting America’s truth-telling and assessing institutions, including the media. A fiscal stimulus as large as that of December 2017 and January 2018 (and which the economy didn’t really need at the time) would have been all the more powerful a decade earlier when unemployment was so high. The weak recovery was thus not the result of “secular stagnation”; the problem was inadequate government policies. Here, a central question arises: Will growth rates in coming years be as strong as they were in the past? That, of course, depends on the pace of technological change. Investments in research and development, especially in basic research, are an important determinant, though with long lags; cutbacks proposed by the Trump administration do not bode well. But even then, there is a lot of uncertainty. Growth rates per capita have varied greatly over the past 50 years, from between 2 and 3% a year in the decade(s) after World War II to 0.7% in the last decade. But perhaps there’s been too much growth fetishism – especially when we think of the environmental costs, and even more so if that growth fails to bring much benefit to the vast majority of citizens. There are many lessons to be learned as we reflect on the 2008 crisis, but the most important is that the challenge was – and remains – political, not economic: there is nothing that inherently prevents our economy from being run in a way that ensures full employment and shared prosperity. Secular stagnation was just an excuse for flawed economic policies. Unless and until the selfishness and myopia that define our politics – especially in the US under Trump and his Republican enablers – is overcome, an economy that serves the many, rather than the few, will remain an impossible dream. Even if GDP increases, the incomes of the majority of citizens will stagnate.1

(David, “Here’s why Larry Summers is wrong about secular stagnation,” pg online @ https://www.washingtonpost.com/news/wonk/wp/2014/07/14/heres-why-larry-summers-is-wrong-about-secular-stagnation/ //um-ef)

The question, of course, is why growth has been so sluggish. Larry Summers, for one, thinks that it's part of a longer-term trend towards what he calls "secular stagnation." The idea is that, absent a bubble, the economy can't generate enough spending anymore to get to full employment. That's supposedly because the slowdowns in productivity and labor force growth have permanently lowered the "natural interest rate" into negative territory. But since interest rates can't go below zero and the Fed is only targeting 2 percent inflation, real rates can't go low enough to keep the economy out of a protracted slump. Is secular stagnation just an illusion? But is this right? On the one hand, secular stagnation makes sense in theory, and even seems to in practice. Technological innovation—and with it, productivity—really have slowed down the past few decades, as Tyler Cowen, Robert Gordon, and John Fernald all point out. So has labor force growth now that the Boomers are starting to enter their golden years. And most telling, according to Summers, is the way that real interest rates have steadily fallen since the 1980s. But, on the other hand, there are real problems with the way we calculate real rates—problems that make it look like real rates have fallen more than they really have. And furthermore, today's techno and demographic pessimism both look overdone. In other words, there might not be any reason to think the economy is slumping into secular stagnation. Let's talk about everybody's favorite subject: measuring real interest rates. Now, when people say that inflation-adjusted rates have been falling the past few decades, most of them are just subtracting expected inflation from the nominal interest rate. Seems simple enough. But the problem is the resulting real interest rate is not the same as the natural interest rate at the heart of the secular stagnation story. That's because it still includes a risk premium. And that's particularly problematic, because the risk premium was highly elevated in the early 1980s—just when the secular stagnation story is supposed to have begun, as you can see below. The real story is about uncertainty. See, back in the early 1980s, inflation was at its most volatile and Fed Chair Paul Volcker engineered two sharp recessions to finally whip it. But at that point, it wasn't clear what the Fed was going to start using as a nominal anchor—what it was going to target. This pushed up risk premiums, because lenders demanded to be compensated for the higher levels of uncertainty and expected inflation. Now, over time these risk premiums declined as policy improved and the economy stabilized. So failing to account for this creates an artificial downward trend in the natural interest rate. Don't forget about risk! You can see this in the next few charts of the benchmark 10-year Treasury rate. The first shows the 10-year Treasury yield along with two of its key components: expected inflation and the term premium. The former measures how much annual average inflation is expected the next decade, and the latter how much the risk premium increases as a bond's duration does. (I constructed the expected inflation series using the data from the Survey of Professional Forecasters and the Livingston Survey. The term premium numbers come from the average of the Kim-Wright and Adrian, Crump, and Moench figures). As you can see, both expected inflation and the term premium started a long decline in the early 1980s. And if we subtract both from the nominal interest rate, we can see the real risk-free interest rate below. The economy is bad today, not forever Suddenly there doesn't seem to be so much secular stagnation. That's because the real risk-free rate is the same as the natural rate—and there's no evidence it's been falling. In other words, there's no evidence of secular stagnation. Instead, there's just a long-term trend around 2 percent. And, interestingly enough, the deviations around this trend seem to be explained, in part, by the business cycle. You can see this in the chart below, which plots the real risk-free rate against the CBO's estimate of the output gap. But just how does the state of the economy explain the state of the risk-free rate? Well, I scatter plotted the two against each other, going back to 1961 and 1983. In the first case, the business cycle explains about 41 percent of the risk-free rate's variation, and in the second, over 55 percent. This strong relationship is what standard finance theory tells us should be true. The 10-year real risk-free rate should be equal to the average of the expected path of short-term real risk-free rates over the same time horizon. The first five or so years of this driven by the business cycle, which explains the risk-free rate's correlation with the output gap. And the remaining years are driven by expected productivity and labor force growth.

(David, “Record government and corporate debt risks ‘tipping point’ after pandemic passes,” pg online @ https://www.washingtonpost.com/us-policy/2020/04/18/record-government-corporate-debt-risk-tipping-point-after-pandemic-passes/ //um-ef)

The United States is embarking on a rapid-fire experiment in borrowing without precedent, as the government and corporations take on trillions of dollars of debt to offset the economic damage from the coronavirus pandemic. The federal government is on its way this year to spending nearly $4 trillion more than it collects in revenue, analysts say, a budget deficit roughly twice as large relative to the economy as in any year since 1945. Business borrowing also is setting records. Giant corporations such as ExxonMobil and Walgreens, which binged on debt over the past decade, now are exhausting their credit lines and tapping bondholders for even more cash. To support such borrowing, the Federal Reserve has dropped interest rates to zero and added more than $2 trillion of loans to its portfolio in the past six weeks — as much as in the four years following the Great Recession. All this borrowing is required to plug the gaping hole the novel coronavirus has punched in the economy, as unemployment reaches levels not seen since the Great Depression. Few, if any, prominent economists or lawmakers opposed opening the government’s fiscal taps amid the current economic emergency. The Senate last month approved $2 trillion of crisis spending with a vote of 96 to 0. Yet high debt loads already are straining many corporations, which may be forced to choose between skipping loan payments and laying off workers. Millions of consumers, too, face sizable monthly bills for student loans and credit cards, a burden that could weigh on any economic rebound. The reliance on so much debt also will leave scars after the pandemic passes, economists say, making it difficult for policymakers to withdraw support and leaving the economy more vulnerable than before this crisis began. “We should be very worried,” said Atif Mian, an economics professor at Princeton University who has written widely on the subject. “We are talking about a level of debt that would certainly be unprecedented in modern history or in history, period. We are definitely at a tipping point.”

(Bill Dudley, a Bloomberg Opinion columnist and senior adviser to Bloomberg Economics, is a senior research scholar at Princeton University’s Center for Economic Policy Studies. He served as president of the Federal Reserve Bank of New York from 2009 to 2018, and as vice chairman of the Federal Open Market Committee. He was previously chief US economist at Goldman Sachs. He has been a nonexecutive director at Swiss bank UBS since 2019, “Budget Deficits Still Matter,” pg online @ https://www.bloomberg.com/opinion/articles/2019-02-19/budget-deficits-still-matter-sorry-mmt-proponents?sref=EP6bV7CS //um-ef)

People from across the political spectrum are challenging a bit of long-held conventional wisdom: that if the U.S. government runs big, sustained budget deficits, its mounting debts will eventually cause grievous harm to the economy. They have a point — but it is important not to push that point too far. The arguments come in different forms. Some mainstream economists — such as Olivier Blanchard, former chief economist at the International Monetary Fund –- note that sovereign debt is more manageable in a world where economic growth exceeds governments’ very low borrowing costs. On the more extreme end, proponents of Modern Monetary Theory argue that because the U.S. borrows in its own currency, it can always just print more dollars to cover its obligations. Turning first to Blanchard, I agree that deficit spending looks less problematic than in the past. The government’s debt burden, measured as a percentage of gross domestic product, remains stable as long as debt and GDP grow at the same rate. This is easier to do now because the long-run nominal growth rate (around 3.5-4.0 percent) is well above the U.S. government’s borrowing cost (around 2.5 percent). So the government has some leeway: The debt can grow at nearly 4 percent per year, or 1.0 percent to 1.5 percent net of interest expense, without increasing the debt-to-GDP ratio. The low level of interest rates might help explain why markets have proven more tolerant of large, persistent budget deficits around the world, with Japan the most notable example. How and when the government spends the money also matters. Infrastructure investment, for example, can actually pay for itself by boosting the economy’s productive capacity. This is particularly relevant in the U.S., where dilapidated roads, ports and other public works desperately need an upgrade. (Imagine the benefits of a second rail tunnel between New York City and New Jersey.) Deficit spending in recessions can also be self-funding, because it engages unused resources — for example, by employing people whose abilities and skills would otherwise be wasted. Yet Modern Monetary Theory goes one big step further. It suggests that a government like the U.S. needn’t worry about debt at all. As long as it borrows in its own currency, there is no risk of default or bankruptcy. It can spend as much as it wants on any projects, such as education and health care, and just create additional IOUs to cover the cost. Alas, there is no free lunch. For one, the economy might not have enough resources — in the form of workers and industrial capacity — to meet the combined demand from the government and the private sector. The result would be inflation, as too much money chased too few goods and services. Beyond that, America as a whole consumes considerably more than it produces — and depends heavily on foreign investors to lend it the money needed to keep doing so. But they don’t have to make dollar-denominated loans or buy U.S. Treasury securities. If U.S. debts were to keep growing, at some point the Fed would face a dilemma. It could increase interest rates to maintain foreign (and domestic) demand for dollar assets, at the cost of damping U.S. economic growth. Or it could keep interest rates low and allow the dollar to weaken, which would push up inflation as imported goods and services became more expensive. Neither outcome would be pleasant. MMT hasn’t worked out well for other countries. Consider Germany in the 1920s, or Venezuela and Zimbabwe more recently. The U.S. tried a milder version in the 1960s and 1970s, when the government tried to pay simultaneously for the Vietnam War and Lyndon Johnson’s Great Society programs. The result was inflation, America’s withdrawal from the gold standard and the demise of the Bretton Woods system of fixed exchange rates. The Fed had to increase interest rates to double digits in the late 1970s and early 1980s, at great economic cost, to get inflation back under control. It’s no fun to be a budget scold. If you worry about deficits, you have to choose between increasing taxes or cutting spending. Desirable social goals such as better roads and universal health care are much more attractive if you can argue that they don’t need to be paid for. But the constraints are real. The U.S. economy is operating pretty close to capacity — especially in the labor market — and the government is already running a sizable deficit that is projected to keep getting bigger. So, if we want to spend more and, at the same time, keep our economy in good health, we need to find sustainable sources of revenue to do so, not engage in wishful thinking.

(Karl, a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina, “The Return of Deficit Economics,” pg online @ https://www.bloomberg.com/opinion/articles/2022-02-16/start-worrying-about-the-rising-u-s-budget-deficit#xj4y7vzkg //um-ef)

I would now like to make an announcement: I am beginning to be worried about the deficit. High U.S. budget deficits are not a problem yet, but it’s quite possible they will be in the near future. Congress should be looking for ways to end both excess spending and unproductive tax breaks for higher-income Americans. To get a handle on what has changed, and how concerned to be, it’s necessary to look at the two main arguments over the last decade for austerity — and why they were wrong. The first was that the U.S. was running deficits in excess of the cost of servicing existing debt. It was only a matter of time, according to this argument, before there would be exponentially rising interest costs that would burden future generations. In particular, the Congressional Budget Office forecast in early 2018 that, partially as a consequence of the Trump tax cuts, interest costs on the debt would nearly double from 1.4% in 2017 to 2.7% in 2022. Longer term projections had them skyrocketing from there, to 6.8% in 2048 (which, if accurate, would have been as much as the federal government was projected to spend on Social Security that year). In fact — after the Trump tax cuts, a repeal of the appropriations sequester and three multitrillion-dollar pandemic relief bills — interest costs on the debt are on track to be just 1.2% of GDP this year. This isn’t simply a fluke caused by the oddities of the pandemic. The CBO has consistently overestimated interest costs of the debt. It has failed to appreciate that in the last few decades the U.S. economy has been mired in what economists call secular stagnation, which is in part characterized by interest rates that are persistently below the growth rate of the economy. Which brings us to the second argument: Some deficit hawks acknowledged that the U.S. was in a period of extraordinarily low interest rates. But they warned that this phenomenon could reverse itself at any time. What they misunderstood is the effect that the response to secular stagnation would have on the overall economy in the short term. The transition to lower interest rates would require a rapidly accelerating nominal GDP — which in turn would require real growth, inflation or some combination of the two increasing at a much faster rate than at any time in the preceding 20 years. When that happened, both the tax base and the size of the overall economy relative to the debt would expand. In the near term, that would actually make it easier for the federal government to service the debt. It would also give policymakers some notice that they needed to adjust their expectations. This is precisely what is happening in the U.S. economy right now. After collapsing to negative 8% year-over-year in spring 2020, and then rebounding to a positive 16% year-over-year in spring 2021, nominal GDP growth was at 11% year-over-year as 2021 came to a close. Before the pandemic, the last time nominal GDP growth was above 11% was in 1984. Yes, that was in large part due to rapid inflation. But from a budgetary perspective, a burst of inflation also helps to ease the debt burden. That’s why debt as percentage of GDP has actually fallen over the last year. And the boost in nominal GDP should further reduce the overall debt burden in 2022 — but the effect won’t last much longer than that. The Federal Reserve has already started to raise interest rates. Doing so will slow inflation (and nominal GDP growth) — and raise the cost of servicing the debt. The rise in interest rates is likely to be gradual, because the Fed does not want to risk a recession. Congress has some time to act — but only some. Although the worst fears of budgets hawks didn’t come true, the carefree era of deficit spending is over. Washington needs to adjust to the new reality.

The last time the U.S. government went to the brink of defaulting on its debt — in 2011 — the stock market tumbled and there was something close to a panic across the economy before Washington came to its senses and cut a deal.

Much the same scenario is unfolding now, with potentially even more dire consequences, and there are major differences between then and now that make a bad outcome far more likely.

(Jim, “Why Spending Cuts Likely Won’t Shake the Economy,” pg online @ https://www.nytimes.com/2023/05/29/us/politics/debt-ceiling-economy.html //um-ef)

The debt deal that President Biden and Speaker Kevin McCarthy have agreed to in principle is less restrictive than the one President Barack Obama and Speaker John Boehner cut in 2011, centered on just two years of cuts and caps in spending. The economy that will absorb those cuts is in much better shape. As a result, economists say the agreement is unlikely to inflict the sort of lasting damage to the recovery that was caused by the 2011 debt ceiling deal — and, paradoxically, the newfound spending restraint might even help it. “For months, I had worried about a major economic fallout from the negotiations, but the macro impact appears to be negligible at best,” said Ben Harris, a former deputy Treasury secretary for economic policy who left his post earlier this year. “The most important impact is the stability that comes with having a deal,” Mr. Harris said. “Markets can function knowing that we don’t have a cataclysmic debt ceiling crisis looming.” Mr. Biden expressed confidence earlier this month that any deal would not spark an economic downturn. That was in part because growth persisted over the past two years even as pandemic aid spending expired and total federal spending fell from elevated Covid levels, helping to reduce the annual deficit by $1.7 trillion last year. Asked at a news conference at the Group of 7 summit in Japan this month if spending cuts in a budget deal would cause a recession, Mr. Biden replied: “I know they won’t. I know they won’t. Matter of fact, the fact that we were able to cut government spending by $1.7 trillion, that didn’t cause a recession. That caused growth.” The agreement in principle still must pass the House and Senate, where it is facing opposition from the most liberal and conservative members of Congress. It goes well beyond spending limits, also including new work requirements for food stamps and other government aid and an effort to speed permitting for some energy projects. But its centerpiece is limits on spending. Negotiators agreed to slight cuts to discretionary spending — outside of defense and veterans’ care — from this year to next, after factoring in some accounting adjustments. Military and veterans’ spending would increase this year to the amount requested in Mr. Biden’s budget for the 2024 fiscal year. All those programs would grow by 1 percent in the 2025 fiscal year — which is less than they were projected to. A New York Times analysis of the proposal suggests it would reduce federal spending by about $55 billion next year, compared with Congressional Budget Office forecasts, and by another $81 billion in 2025. Editors’ Picks Restaurant Review: Raf’s Conjures Swirling Abundance from a Wood-Fired Oven In Too Deep Why Do Mosquitoes Like Me So Much? The first back-of-the-envelope analysis of the deal’s economic impacts came from Mark Zandi, a Moody’s Analytics economist. He had previously estimated that a prolonged default could kill seven million jobs in the U.S. economy — and that a deep round of proposed Republican spending cuts would kill 2.6 million jobs. His analysis of the emerging deal was far more modest: The economy would have 120,000 fewer jobs by the end of 2024 than it would without a deal, he estimates, and the unemployment rate would be about 0.1 percent higher. Mr. Zandi wrote on Twitter on Friday that it was “Not the greatest timing for fiscal restraint as the economy is fragile and recession risks are high.” But, he said, “it is manageable.” Other economists say the economy could actually use a mild dose of fiscal austerity right now. That is because the biggest economic problem is persistent inflation, which is being driven in part by strong consumer spending. Removing some federal spending from the economy could aid the Federal Reserve, which has been trying to get price growth under control by raising interest rates. “From a macroeconomic perspective, this deal is a small help,” said Jason Furman, a Harvard economist who was a deputy director of Mr. Obama’s National Economic Council in 2011. “The economy still needs cooling off, and this takes pressure off interest rates in accomplishing that cooling off.”

The average primary balance in advanced economies improved by 3.4 percentage points in 2022—for a cumulative improvement of 6.2 percentage points since 2020 (Figure 1.4, panel 1). The cyclically adjusted primary balance in these economies improved by 2.1 percentage points, on average, in 2022 (Figure 1.6). Even so, the average primary deficit as a share of GDP remained about 1.3 percentage points above prepandemic levels. These averages conceal important differences across countries, however. Fiscal tightening was significant in the United States, with a 4.6 percentage point decline in its cyclically adjusted primary balance in 2022 alone, reflecting the economic recovery from the pandemic. With rebounding private activity and households drawing on excess savings built up during the pandemic, overall demand weathered the withdrawal of governments’ support. The improvements in the cyclically adjusted primary balance in the euro area and the United Kingdom were smaller at 0.5 and 1.8 percentage point each, because further support measures were taken in response to a deterioration of the terms of trade stemming from Russia’s invasion of Ukraine. Japan announced a series of fiscal packages throughout the year, including measures to mitigate the deterioration in the cost of living. Other economies in Asia (Hong Kong SAR, Korea) also loosened their fiscal stances in 2022. The average debt-to-GDP ratio in advanced economies shed 10 percentage points between the end of 2020 and the end of 2022, thanks to favorable contributions from growth and inflation surprises. Nevertheless, the average current public-debt-to-GDP ratio of about 113 percent of GDP stands above its prepandemic levels. Over the medium term, fiscal tightening is projected to moderate or abate among advanced economies as a group. Under current projections for higher interest payments and lackluster growth, public debt would rise to about 118 percent of GDP over the medium term. Countries facing mounting pressures to engage in age-related spending (Japan), those contemplating further increases in public wages and other social spending (United Kingdom), and those expanding tax incentives, grants, and other fiscal measures to promote a transition to clean energy (United States) have steeper upward trajectories.

The chair of the Federal Reserve, Jerome H. Powell, has repeatedly undercut a central claim Republicans make as they seek sharp cuts in federal spending: Government spending is driving the nation’s still-hot inflation rate. Republican lawmakers say spending programs signed into law by President Biden are pumping too much money into the economy and fueling an annual inflation rate that was 6 percent in February — a decline from last year’s highs, but still well above historical norms. Mr. Powell disputed those claims in congressional testimony earlier this month and in a news conference on Wednesday, after the Fed announced it would once again raise interest rates in an effort to bring inflation back toward normal levels. Asked whether federal tax and spending policies were contributing to price growth, Mr. Powell pointed to a decline in federal spending from the height of the Covid-19 pandemic. “You have to look at the fiscal impulse from spending,” Mr. Powell said on Wednesday, referring to a measure of how much tax and spending policies are adding or subtracting to economic growth. “Fiscal impulse is actually not what’s driving inflation right now. It was at the beginning perhaps, but that’s not the story right now.” Instead, Mr. Powell — along with Mr. Biden and his advisers — says rapid price growth is primarily being driven by factors like snarled supply chains, an oil shock following Russia’s invasion of Ukraine and a shift among American consumers from spending money on services like travel and dining out to goods like furniture. Mr. Powell has also said the low unemployment rate was playing a role: “Some part of the high inflation that we’re experiencing is very likely related to an extremely tight labor market,” he told a House committee earlier this month. But the Fed chair’s position has not swayed congressional Republicans, who continue to press Mr. Biden to accept sharp spending reductions in exchange for raising the legal limit on how much the federal government can borrow. “Over the last two years, this administration’s reckless spending and failed economic policies have resulted in continued record inflation, soaring interest rates and an economy in a recessionary tailspin,” Representative Jodey C. Arrington, Republican of Texas and the chairman of the Budget Committee, said at a hearing on Thursday. Republicans have attacked Mr. Biden over inflation since he took office. They denounced the $1.9 trillion economic aid package he signed into law early in 2021 and warned it would stoke damaging inflation. Mr. Biden’s advisers largely dismissed those warnings. So did Mr. Powell and Fed officials, who were holding interest rates near zero and taking other steps at the time to stoke a faster recovery from the pandemic recession. Economists generally agree that those stimulus efforts — carried out by the Fed, by Mr. Biden and in trillions of dollars of pandemic spending signed by Mr. Trump in 2020 — helped push the inflation rate to its highest level in 40 years last year. But researchers disagree on how large that effect was, and over how to divide the blame between federal government stimulus and Fed stimulus. One recent model, from researchers at the Federal Reserve Bank of New York, the University of Maryland and Harvard University, estimates that about a third of the inflation from December 2019 through June 2022 was caused by fiscal stimulus measures. Much of that stimulus has already made its way through the economy. Spending on pandemic aid to people, businesses and state and local governments fell sharply over the last year, as emergency programs signed into law by Mr. Biden and former President Donald J. Trump expired. The federal budget deficit fell to about $1.4 trillion in the 2022 fiscal year from about $2.8 trillion in 2021. The Hutchins Center at the Brookings Institution in Washington estimates that in the first quarter of 2021, when Mr. Biden’s economic aid bill delivered direct payments, enhanced unemployment checks and other benefits to millions of Americans, government fiscal policy added 8 percentage points to economic growth. At the end of last year, the center estimates, declining government spending was actually reducing economic growth by 1 percentage point. Still, even Biden administration officials say some effects of Mr. Biden’s — and Mr. Trump’s — stimulus bills could still be contributing to higher prices. That’s because Americans did not immediately spend all the money they got from the government in 2020 and 2021. They saved some of it, and now, some consumers are drawing on those savings to buy things. Increased consumer spending from savings could be pushing the cost of goods and services higher, White House economists conceded this week in their annual “Economic Report of the President,” which includes summaries of the past year’s developments in the economy. “If the drawdown of excess savings, together with current income, boosted aggregate demand, it could have contributed to high inflation in 2021 and 2022,” the report says.

The last time the United States came perilously close to defaulting on its debt, a Democratic president and a Republican speaker of the House cut a deal to raise the nation’s borrowing limit and tightly restrain some federal spending growth for years to come. The deal averted default, but it hindered what was already a slow recovery from the Great Recession. The debt deal that President Biden and Speaker Kevin McCarthy have agreed to in principle is less restrictive than the one President Barack Obama and Speaker John Boehner cut in 2011, centered on just two years of cuts and caps in spending. The economy that will absorb those cuts is in much better shape. As a result, economists say the agreement is unlikely to inflict the sort of lasting damage to the recovery that was caused by the 2011 debt ceiling deal — and, paradoxically, the newfound spending restraint might even help it. “For months, I had worried about a major economic fallout from the negotiations, but the macro impact appears to be negligible at best,” said Ben Harris, a former deputy Treasury secretary for economic policy who left his post earlier this year. “The most important impact is the stability that comes with having a deal,” Mr. Harris said. “Markets can function knowing that we don’t have a cataclysmic debt ceiling crisis looming.” Mr. Biden expressed confidence earlier this month that any deal would not spark an economic downturn. That was in part because growth persisted over the past two years even as pandemic aid spending expired and total federal spending fell from elevated Covid levels, helping to reduce the annual deficit by $1.7 trillion last year. Asked at a news conference at the Group of 7 summit in Japan this month if spending cuts in a budget deal would cause a recession, Mr. Biden replied: “I know they won’t. I know they won’t. Matter of fact, the fact that we were able to cut government spending by $1.7 trillion, that didn’t cause a recession. That caused growth.” The agreement in principle still must pass the House and Senate, where it is facing opposition from the most liberal and conservative members of Congress. It goes well beyond spending limits, also including new work requirements for food stamps and other government aid and an effort to speed permitting for some energy projects. But its centerpiece is limits on spending. Negotiators agreed to slight cuts to discretionary spending — outside of defense and veterans’ care — from this year to next, after factoring in some accounting adjustments. Military and veterans’ spending would increase this year to the amount requested in Mr. Biden’s budget for the 2024 fiscal year. All those programs would grow by 1 percent in the 2025 fiscal year — which is less than they were projected to. A New York Times analysis of the proposal suggests it would reduce federal spending by about $55 billion next year, compared with Congressional Budget Office forecasts, and by another $81 billion in 2025. The first back-of-the-envelope analysis of the deal’s economic impacts came from Mark Zandi, a Moody’s Analytics economist. He had previously estimated that a prolonged default could kill seven million jobs in the U.S. economy — and that a deep round of proposed Republican spending cuts would kill 2.6 million jobs. His analysis of the emerging deal was far more modest: The economy would have 120,000 fewer jobs by the end of 2024 than it would without a deal, he estimates, and the unemployment rate would be about 0.1 percent higher. Mr. Zandi wrote on Twitter on Friday that it was “Not the greatest timing for fiscal restraint as the economy is fragile and recession risks are high.” But, he said, “it is manageable.” Other economists say the economy could actually use a mild dose of fiscal austerity right now. That is because the biggest economic problem is persistent inflation, which is being driven in part by strong consumer spending. Removing some federal spending from the economy could aid the Federal Reserve, which has been trying to get price growth under control by raising interest rates. “From a macroeconomic perspective, this deal is a small help,” said Jason Furman, a Harvard economist who was a deputy director of Mr. Obama’s National Economic Council in 2011. “The economy still needs cooling off, and this takes pressure off interest rates in accomplishing that cooling off.” “I think the Fed will welcome the help,” he said.

The bill that will raise the debt ceiling has passed the House and is headed for the Senate. It effectively ends weeks of handwringing over whether or not the U.S. was going to default on its debt. When it comes to the political implications, former Vermont Governor Howard Dean says President Biden and House Speaker Kevin McCarthy "cut the legs from out under the right wing," adding the deal was "a big win" for both leaders. Maya MacGuineas, President of the Committee for a Responsible Federal Budget agrees, saying the leadership exhibited on both sides was "masterful."

Video Transcript

(Scott, “CBO says debt ceiling deal would cut deficits by $1.5 trillion over the next decade,” pg online @ https://www.npr.org/2023/05/31/1178995328/debt-ceiling-cbo-house-vote-mccarthy-biden-spending-deficit //um-ef)

Congressional bean counters estimate that an agreement to limit government spending in exchange for raising the federal borrowing limit would cut federal deficits by about $1.5 trillion over the next decade. The forecast comes as House lawmakers are preparing to vote on the measure Wednesday after President Biden and House Speaker Kevin McCarthy agreed on the deal over the weekend. Absent congressional action to lift the debt limit, the government could run short of cash in less than a week, leading to devastating consequences for global markets and the global economy. Most of the estimated reduction in the deficit from the deal would come from caps on discretionary spending other than defense — a relatively small slice of the overall federal budget Limiting that spending for the next two years would save an estimated $1.3 trillion over the next decade, with another $188 billion in savings from reduced interest costs, according to the projections from the Congressional Budget Office released late Tuesday.