By Rudy Barnes, Jr.
There are conflicting signs in America’s economy. Thousands of pre-pandemic jobs are going unfilled while the Biden administration advocates creating new jobs and social programs that would add $4 Trillion more to a massive $28 Trillion national debt. Even if most of the unfilled jobs are minimum wage, the focus should be on filling them before creating new jobs.
Many who held those unfilled jobs now claim that they can’t live on their old wages. Their income expectations seemed to have increased during their pandemic layoffs. The Biden proposals go beyond a stimulus to restore the pre-pandemic economy. They are a preview of a socialist economy with ideal jobs and higher incomes for all Americans.
That would be a legitimate but debatable political objective if not for insufficient tax revenues to prevent America’s existing $28 Trillion national debt from becoming an unbearable burden on future generations. Even so, Keynesian economists console us that we need not be worried about adding $ Trillions more to an already unsustainable national debt.
Such a cavalier dismissal of increases to our massive national debt is unacceptable. Biden’s social programs might be justified if financed by tax increases, but sufficient tax revenues are not part of the proposed legislation. Democrats are using voodoo economics to justify their increased social spending just as Republicans used them to justify their tax cuts.
The monetary policies of the Federal Reserve are also contributing to an economic crisis. By keeping interest rates near 0% the Fed is providing more profits for megacorporations and affluent investors, fueling dangerous inflation on Wall Street and in the housing market; and that has exacerbated increasing disparities in wealth that threaten America’s middle class.
Soaring stock prices are the most dramatic evidence of runaway inflation; but increasing food and energy prices remind the less affluent of the reduced value of their dollars. Despite the evidence of inflation, the Fed has continued its inflationary monetary policies and assured Americans that increasing inflation is just temporary.
The government’s solution to orchestrated inflation is more stimulus to Americans in what is already an overheated economy for the affluent. Monthly payments are now being made to families based on the number of their children. It’s similar to the AFDC program of the 1970s that was terminated in 1996 by President Clinton and a bipartisan Congress.
The US economy has now recovered to pre-pandemic levels. Given America’s $28 Trillion national debt, Americans should resist expensive socialist programs that could undermine the economy, and focus on filling vacant jobs while regulating America’s predatory capitalism. That would strengthen the economy without increasing the national debt.
Jeff Stein has described Biden’s child tax credit program as “the biggest anti-poverty program undertaken by the federal government in more than half a century, delivering monthly payments to the overwhelming majority of American parents for the first time.” The Treasury Department said it has sent checks to households representing about 60 million children this past week under a provision in a stimulus package Democrats passed in March. The benefit, expected to cost about $120 billion per year, provides $300 per child younger than 6, as well as $250 per child age 6 and older. The administration previously said that about 88 percent of all children nationwide would receive the aid.” See https://www.washingtonpost.com/us-policy/2021/07/15/biden-child-tax-credit/.
John Cassidy has asked, Can the Democrats create a new economic model? Cassidy praised the Biden administration for “pushing for more than four trillion dollars in new spending over the coming decade. This is on top of the $1.9 trillion that was contained in the American Rescue Plan, which Congress passed in March. In another significant development, Powell’s Fed, unlike some of its predecessors has adopted a fairly relaxed attitude to the prospect of higher federal outlays and debt. The new approach to spending extends beyond budgetary arithmetic. A decade ago, many Democrats still paid lip service, at least, to the idea that giving more financial help to poor families would undermine incentives to work and save. This framework had a long history. In the nineties, President Bill Clinton promised to “end welfare as we have come to know it,” and then followed through on this pledge by imposing work requirements and time limits on welfare recipients, as well as shifting responsibility to the states, which led to a sharp fall in the number of people receiving assistance. Even now, though, the future of the revamped Child Tax Credit program isn’t assured. The cash payments authorized in the American Rescue Plan will run out at the end of the year. What happens beyond that depends on the outcome of two big spending proposals: a bipartisan physical-infrastructure package for six hundred billion dollars of new spending, and a $3.5 trillion social-infrastructure plan, which Democratic leaders are aiming to pass without G.O.P. support, through reconciliation, and pay for by raising taxes on corporations and the wealthy. In all likelihood, the social-infrastructure bill will provide some longer-term funding for the new monthly payments. Whether it will cover their full cost—about $1.6 trillion over ten years, according to the Washington-based Tax Foundation—isn’t clear yet.
The financial environment evokes the aftermath of the great financial crisis in 2009 and 2010. Americans were furious as bailed-out banks rebounded with remarkable alacrity, repaid their government loans, and started paying big bonuses to their star traders. Today, the good times are once again rolling—at least for Wall Street. Just last week, JPMorgan Chase, Goldman Sachs, and Morgan Stanley between them announced more than twenty billion dollars in profits during the three months from April to June. “The pandemic is kind of in the rearview, hopefully,” Jamie Dimon, JPMorgan’s chief executive, said, after the release of his firm’s bumper results. What Dimon didn’t say was that, just as in 2009 and 2010, the Wall Street bonanza owes a great deal to the largesse of the Fed, which, in contemporary American capitalism, plays the role of a kind of fire brigade, putting out conflagrations with its fire hose of money. In the months after Lehman Brothers collapsed, in 2008, the Fed pumped about $1.25 trillion into the financial system through a series of emergency lending programs and asset purchases. Since the start of the coronavirus pandemic, the central bank has outdone itself, expanding its balance sheet by more than four trillion dollars, largely through purchases of Treasury bonds and mortgage securities—a policy known as quantitative easing. While the avowed (and worthy) aims of quantitative easing are to bring down interest rates and boost interest-sensitive spending, it also acts as rocket fuel for the stock market. Even after Monday’s drop in the market, the S&P 500 index has risen by more than thirty per cent since February, 2020. Because the richest ten per cent of households own more than eighty per cent of all stocks, they have benefited greatly. And the ultra-rich have benefitted most of all: Jeff Bezos’s Amazon stock, for example, has appreciated by more than eighty billion dollars. Still, the Fed’s response to the pandemic has undoubtedly accentuated wealth inequality, which was already extreme. In recent decades, it almost seems as if the best thing that can happen to the rich is for something to drive the economy into a ditch and prompt the Fed to turn on its money spigot. Such is the upside-down logic of a world in which the ownership of financial and industrial capital is so lopsided. See
Desmond Lachman has suggested that it’s time for the Fed to take away the punchbowl. He cited “William McChesney Martin who famously remarked that the job of the Federal Reserve is to remove the punchbowl just as the party gets going. With the clearest of signs that the U.S. economic party is in full swing, the least that the Fed should now be doing is to begin the process of winding down its present aggressive bond-buying program. One sign that the party is already getting out of hand is seen in the bubbles forming in the equity and bond markets. Fueled by the Fed’s ultra-low interest rate policy, U.S. equity valuations are now more than double their long-run average and at a level experienced only once before in the last 100 years. Meanwhile, fueled both by low interest rates and the Fed’s continued buying of $40 billion a month in mortgage-backed securities, the U.S. housing market is on fire. At a national level, housing prices are rising by 15 percent a year and are now higher than they were in 2006 on the eve of the housing market bust. Another clear sign that the party is in full swing is the very strong economic recovery and the rise in inflation to levels well in excess of the Fed’s target. The economy is now growing at its fastest rate in 40 years, while inflation is running at levels that have not been experienced in 30 years. This unexpected inflationary burst has forced the Fed to almost double its inflation forecast for the year.
While inflation has taken the Fed by surprise and now seems to be rising month after month, the Fed clings to the belief that these inflationary pressures are the result of supply-side problems that will soon be resolved. In focusing on supply-side issues and convincing itself that our current inflation problems are but a transitory phenomenon, the Fed seems to be turning a blind eye to the demand side pressures that are building in the economy and that could soon lead to economic overheating. It is not simply that the Fed is keeping its pedal to the monetary policy metal at a time that the economy is rebounding strongly. Rather, it is that the loosest of monetary policies is being accompanied by the largest peacetime budget stimulus on record. Over the past two years, U.S. public spending has been increased by more than a staggering 25 percent of GDP or by a large multiple of the estimated size of the so-called output gap.
By being slow to wind down its aggressive bond-buying program and repeatedly saying that it is not even thinking about raising interest rates, the Fed is adding fuel to today’s housing and equity market bubbles.
One of the disappointing aspects of monetary policy this year has been that it has barely changed even as the economic circumstances have changed dramatically. Despite faster than expected economic growth, a larger than anticipated budget stimulus, developing housing and equity market bubbles, and an unanticipated inflationary burst, the Fed has continued to buy $120 billion a month in U.S. Treasuries and mortgage-backed securities while assuring markets that it will not raise interest rates before 2023. See
Victoria Guida has echoed Desmond Lachman’s concerns, noting that “house prices are soaring and house prices are surging, stocks have continued their stratospheric rise, and banks have more cash than they know what to do with. Yet the Fed is still pumping billions into the economy. Why?
That’s what a growing number of lawmakers, investors and even some Fed officials themselves are demanding to know. They are warning that the central bank’s vast purchases of government bonds and mortgage-backed securities are feeding financial bubbles in the housing, stock and even cryptocurrency markets, and stoking higher consumer prices, with little apparent benefit to ordinary Americans.”
Guida cited Roberto Perli, who argues that the effect of the Fed’s purchases is misunderstood. Perli said, “If there was no quantitative easing today, and the Fed was considering, ‘OK, do we need to do it?’ Probably the answer is no,” Perli said. “But QE was necessary a while ago, like a year ago, and nobody ever thought that QE was going to end after a month or two months or six months, so the market built expectations of how much QE there would be. In fact, those expectations were all that mattered,” he added. “And at the time that was why QE was so effective, because people expected QE to be large.” See https://www.politico.com/news/2021/07/26/federal-reserve-economy-bubble-500683. See also, Fed now facing twin inflation, growth risks as virus jumps and supply chains falter, at https://www.reuters.com/business/finance/fed-now-facing-twin-inflation-growth-risks-virus-jumps-supply-chains-falter-2021-07-26/.
The US economy has now topped pre-Covid levels with GDP surging at a 6.5% pace. See https://www.marketwatch.com/story/the-u-s-grew-6-5-in-the-spring-gdp-shows-as-the-economy-rallied-from-covid-11627562450.
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