The American largely Republican Party dominated fiscal conservative lobby of policy advisors, academics and commentators have begun once again to try to undermine the very sensible congressional policy spending and investment plans which Congress has passed and which the House has added to in the apparent hope of aiding President Trump‘s re-election.
This weekend‘s on line Wall Street Journal featured an opinion piece by Stephen Moore in which he argued this point of view. He maintained that there is a danger of government spending rising to over 10 trillion dollars or over 50 % of the economy. The US GDP is currently 21.2 trillion dollars. Moore goes on to argue drawing on CBO projections that this level of government spending will push the American deficit to 17.9% of the GDP and the debt to GDP to 101 % as compared to 106.1 % in 1946 and a deficit of 9.8 % in 2008. He suggests strangely that this will crowd out private investment and cause a shortage of capital in global markets.
But this is a very false argument when unemployment is running at very high levels close to 15% and the pandemic threatens enormous job losses due to lockdowns, indicating a surplus of uninvested savings and underutilized labour. Moore ignores the fact that the Fed is financing a significant fraction of the deficit by purchasing US treasuries. As the economy recovers the Fed will find a way to resell them back to the markets over time as the ratio shrinks as the GDP grows. Instead he cites Milton Friedman’s warnings about the risks of inflationary excessively loose monetary policy which for the time being when oil prices are low and animal spirits depressed seem not applicable, though they could be under different conditions at some time in the distant future. Moore also warns against the Democratic Party using the crisis to implement its policy agenda of more socially progressive policy. But that is as understandable as the Republicans in the Senate using their advantage to block policy. In the end a compromise will be necessary until the next election possibly alters the political arithmetic.