Tags: Joe Biden | biden | economic team | wrong | deficits | public debt

Biden's Economic Team Is Wrong: Deficits, Public Debt Matter

Biden's Economic Team Is Wrong: Deficits, Public Debt Matter
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By Wednesday, 02 December 2020 02:28 PM Current | Bio | Archive

Recently a panel of distinguished economists who will likely advise Joe Biden, met virtually at the Brookings Institute to discuss the impact of annual government budget deficits and the total public debt.

They essentially concluded that, at lease in the short term, the deficit and the debt really don’t matter. That means they will encourage the Biden administration to vastly increase government spending.

Former Treasury Secretary Larry Summers attacked the wisdom of the Obama-commissioned 2010 Simpson-Bowles recommendations that the deficit should be reduced immediately and that the federal government should work toward a balanced budget.

Summers said, “Everyone was in agreement that having something like Simpson-Bowles would have been a good thing. If that goal had been achieved the consequences would have been catastrophic.”

Summers and the rest of the panel said that deficits and the large public debt should be tolerated, at least in the short term and perhaps even longer, because of the current state of the economy. They do have a point, but the problem is that once deficits are incurred, it becomes extremely difficult to balance the budget in future years.

In fact, since 1963, when the Kennedy/Johnson tax cuts created a deficit, the budget has had a deficit for 53 of the last 57 years. As a result, the public debt, which is the total of all deficits, is now $26 trillion. Is that a problem?

The classic answer is that as long as the public debt is less than one year’s GDP, it is tolerable. Above that, the public debt is a problem. This year’s GDP will be in the $20.5 trillion range, meaning the debt far exceeds one year’s GDP.

The panel had a response to that, saying that the public debt should not be measured by one year’s total income (GDP). Rather, they argue, the debt should be measured against the present value of all future income. They say that even with today’s huge deficit, that measure has been relatively constant.

There is a problem when calculating present value. Two basic assumption have to be made. One is the average annual growth rate. What will the average long-term growth rate be? Is it 2% or 2 ½% or 3%, or higher? That assumption has a huge impact of the present value.

In addition, to compute present value an interest rate must be used. The panel will justify their argument by using low interest rates, which increases the present value. The higher interest rates that will eventually result form a huge public debt, also has a large negative impact on present value.

Because of the uncertainty in those two assumptions, it is very difficult to calculate a reliable present value.

Another issue is the interest payments on the public debt currently about $400 annually, which is almost 9% of government spending. That number will increase significantly as deficits are incurred and the total debt increases. That’s $400 billion of taxpayer dollars that can’t be used to fund valuable programs.

Yet another issue with the debt, is that there is no mechanism in place to ever repay it, unless the government runs a budget surplus. In other words, to finance the annual deficit long term bonds are sold. Interest is paid annually on those bonds. When the bonds mature and must be repaid, the government sells new bonds to pay off the old bonds, meaning the debt is never repaid

One more issue is that the Summers’ group measures the debt and the annual interest expense against total GDP, arguing that GDP shows the total income earned in the economy. But the debt is the federal government’s debt and should rightfully be measured against the federal government’s income.

In that case the current debt of $26 trillion is about 700% of the federal government’s annual income of $3.6 trillion. As interest rates rise the interest expense will increase and eventually the burden will crowd out other spending and lead to growth-slowing tax increases.

At present, economic policy should be geared to making sure that the V-shaped recovery from the deep, but short-lived recession, continues, so that some deficit spending makes sense for 2021. Beyond that, no analysis of alternative facts and measurements, can justify deficit spending into the future.

Assuming the virus is nearly eliminated by spring 2021, and that the current growth-oriented tax and regulatory policies are continued, 2021 should show strong growth. Future policy should be geared to substantially reducing deficits and controlling the public debt. The alternative could be very problematic for future generations.

(Many media outlets called the presidential election for Biden, who would take office Jan. 20. President Trump is challenging the election results, alleging widespread fraud, and has not conceded.)


Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.

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DrMichaelBuslerPhD
Recently a panel of distinguished economists who will likely advise Joe Biden, met virtually at the Brookings Institute to discuss the impact of annual government budget deficits and the total public debt.
biden, economic team, wrong, deficits, public debt
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2020-28-02
Wednesday, 02 December 2020 02:28 PM
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