Congress is poised to pass President Biden’s spectacularly misnamed $1.9 trillion Covid Relief and Recovery Act. The bill will pass on a strict party line vote. And there is nothing moderate about it. Not only does the bill contain relatively little that actually addresses Covid-19, it will almost certainly delay the recovery, or at least make it less vigorous than it might have been.
The reason is fairly simple. The bill, which essentially represents the enactment of a progressive wish list, actually pays people not to work. For instance, by adding $300 per week to State level unemployment benefits Congress made sure that plenty of people get paid more by staying home than by going to work.
Not only that, the package is going to be financed by the issuance of more Treasury debt which the Fed is going to buy. In effect financing will be accomplished by monetizing the debt the way they do in other advanced economies. Like Zimbabwe for instance.
Lest anyone think this particular $1.9 trillion package of pork is either sensible or a one-shot, it is worth thinking about a few things. First, Senator Bernie Sanders (D. Rolling Stone) is now chair of the Senate Budget Committee. He has already promised an additional $2 trillion for infrastructure spending. Second, the bill provides $86 billion in relief to bail out union pension funds on the brink of insolvency, thus divorcing performance from reward. In addition, they are providing a couple of hundred billion in relief to state and local governments even though some, like California, have experienced large increases in tax collections. Third, most of the $1.9 trillion will flow to government unions, a portion of which will find its way back to the coffers of the DNC.
Thus far over the last year the Congress has appropriated something on the order of $3.4 trillion to Covid relief. Add this latest bill and the total comes to around $5.3 trillion. To put this in perspective, Covid relief, both real and in name only, now amounts to something like 25% of US GDP. Altogether the CBO now estimates that Federal outlays for 2020 will be around 32% of US GDP, up 11 percentage points from 2019. Public debt is projected to rise to 98% of GDP in 2020 and continue to rise through 2030 at which point it is expected to rise to 109% of GDP.
One of the arguments that the bill’s champions advance is that financing all this spending won’t be a problem. The reason often cited is that interest rates are at historic lows which makes it relatively painless to borrow. There are lots of reasons why this is simply incorrect.
The first is that market interest rates have risen substantially since that argument was first tested out. Back in August of 2020 the 10-year Treasury note yielded about 0.5%. Since then the rate has more than tripled to slightly over 1.5%. Second, if now is such a great time to borrow, private firms and individuals should be able to take advantage of the opportunity without being crowded out by government borrowing. Third, financing projects by borrowing doesn’t make them costless. It just shifts the time when the bill has to be paid in full.
Fourth, it is worth noting in passing that there is a great con going on here. Basically this gargantuan spending spree is not about the acquisition if goods and services. It just represents an enormous transfer of income from disfavored constituencies to favored constituencies. That is, to put it mildly, not a productive use of capital. Finally, by expanding its balance sheet to slightly over $7 trillion to accommodate the spending blowout, the Fed is planting the seeds of an upsurge in inflation, perhaps the cruelest tax on the poor that has ever been invented.
It bears repeating that this bill is being passed on a strict party line vote. It will not receive a single Republican vote. It will receive the votes of all Democratic Senators and all but a couple of Democratic Congressman. It is blatantly partisan and there nothing moderate about it.
The fantasy that there are moderate Democrats is belied by their actions. And there is more to come.
JFB
