Trump's Legacy: $7.8 Trillion Rise in Debt

Trump's Legacy: $7.8 Trillion Rise in Debt

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Plus, why Biden's big Covid recue plan could get cut in half
Friday, January 15, 2021

Why Biden’s Ambitious Covid Relief Plan Could Get Cut in Half

President-elect Joe Biden’s plan to "rescue" the American economy proposes $1.9 trillion in federal spending to fund a national vaccine program, boost unemployment benefits, provide additional direct payments to Americans, assist state and local governments, and more. (See more details here.)

"During this pandemic, millions of Americans, through no fault of their own, have lost the dignity and respect that comes with a job and a paycheck," Biden said in a speech Thursday night. "The very health of our nation is at stake."

Economists were largely supportive of the plan. Mark Zandi and Bernard Yaros of Moody’s Analytics projected that Biden’s proposal, if enacted in full, "would provide a large boost to the economy," leading to GDP growth of nearly 8% this year and 4% next year, while restoring nearly full employment by fall 2022.

Still, analysts at Moody’s and elsewhere were skeptical that Biden’s full plan can pass, given Republican opposition, slim Democratic majorities in Congress and potential procedural hurdles. A number of analysts said they expect the final price tag will be about half of the $1.9 trillion Biden proposed. Economists at Goldman Sachs raised their projections for additional fiscal support likely to be enacted from $750 billion to $1.1 trillion and said that they expected to boost their economic forecast as well.

Here’s how some other analysts, pundits and politicians are reacting to the Biden plan.

A new fiscal era for Democrats:
Centrist and liberal Democrats welcomed the proposal, with some to the left of Biden expressing relief that the plan was big, ambitious and unencumbered by concerns about increased federal borrowing. Bloomberg’s Jonathan Bernstein wrote:

"Biden’s speech drove the final nail into the coffin of mainstream liberal attempts to make Democrats the party of fiscal restraint, efforts that began in earnest after Republicans adopted big-deficit policies at the beginning of Ronald Reagan’s presidency in 1981. For almost 40 years, Democrats tried and failed to convince journalists and pundits that they were the party that cared about federal budget deficits. ... That seems over."

A big proposal for a big problem: "This package is at the scale of the problem," said Heidi Shierholz of the liberal Economic Policy Institute. State and local aid, unemployment insurance expansions/extensions, $400 billion to fight COVID, and more. They got the economics right. This is a very bright spot in a difficult time."

Good bang for the buck:
"Parts of President-elect Biden’s plan target constraints to faster economic recovery, including funding for vaccine rollout, testing and treatments, areas likely to have high bang for the buck," said Andrew Husby of Bloomberg Economics. Extending unemployment benefits past the mid-March cutoff will also ease burdens on the most vulnerable parts of the population."

Better too big than too small:
"One lesson from the financial crisis is that you want to be careful about doing too little," said Glenn Hubbard, chief economist in the George W. Bush administration.

Big Business supports – up to a point:
Some traditionally conservative groups such as the U.S. Chamber of Commerce also expressed support. "[W]e applaud the President-elect’s focus on vaccinations and on economic sectors and families that continue to suffer as the pandemic rages on," the Chamber said in a statement. "We must defeat COVID before we can restore our economy and that requires turbocharging our vaccination efforts. We look forward to working with the new administration and Congress on the details and in ensuring that any additional economic assistance is timely, targeted, and temporary."

And at least one Republican, Sen. Marco Rubio of Florida, said he could get behind the call for $2,000 relief checks for most Americans, though not other parts of the proposal.

Some early GOP resistance:
Politics being politics, though, not everyone was enthusiastic about the plan. Noted fiscal conservative and former Club for Growth president Sen. Pat Toomey (R-PA) said Friday that Biden’s proposal would be "a colossal waste and economically harmful," and decried the recent growth in government spending. "In less than one year, Congress has spent $3.4 trillion on direct COVID relief aid and nearly doubled the entire federal budget," Toomey said.

The Koch-backed Freedom Works advocacy group also criticized the "leftist policies" in Biden’s proposal. "The recently announced ‘American Rescue Plan’ appears to be less about rescuing American families from their current economic problems and more about using the COVID-19 crisis as an excuse to ram through a laundry list of leftist policies," the group said.

What comes next:
The comments from the right suggest that Biden may have a hard building support for the proposal among Republicans. The negotiations ahead could stretch out for weeks or months. "This is an opening bid," Bill Hoagland of the Bipartisan Policy Center told the Associated Press. "There is a sense from Republican staff that $1.9 trillion is a little rich. But President-elect Biden is an astute student of the Senate and negotiations and I have a feeling that they would expect this to be the top and not everything would be accepted."

If negotiations go nowhere, Democrats could try to use budget reconciliation process to pass all or part of Biden’s plan with a 50-vote margin in the Senate. Analysts at Goldman Sachs poured cold water on that option Friday.

"While Democratic leaders might use the budget reconciliation process to circumvent potential Republican opposition, there are two arguments against doing this," the Goldman analysts wrote. "First, recent political events put a greater premium on finding areas of bipartisan support, if possible. Second, the reconciliation process has never been used before to pass discretionary spending, and it appears that around half of the proposal—state fiscal aid, education grants, public health spending, to name a few areas—falls into this category. While it is possible that congressional Democrats might find a way to do this, it looks more likely that the need to find bipartisan support might constrain the size of the package."

Will the New Congress Do Anything to Lower Drug Prices?

More than 100 pharmaceutical companies raised the prices of 636 drugs in the first week of January, according to the advocacy group Patients for Affordable Drugs. The vast majority of the price hikes, 95%, came on brand-name drugs, and the median price hike was about 5%, the group says. Nearly all of the price increases were above the rate of inflation. Pfizer raised prices on 93 of its products, the most of any company.

Why it matters: These are changes to list prices. "Patients with insurance don't pay those prices, and may not see any increase in their costs even when list prices go up," Axios’s Marisa Fernandez notes. "But price increases do affect the uninsured and people with high deductibles." And, as Fernandez points out, the price increases come at a time when millions of Americans have lost their health coverage because of the pandemic.

Where things stand:
President Trump spoke often about lowering prescription drug prices, but as Paige Winfield Cunningham of The Washington Post’s Health 202 pointed out on Thursday, "not much has actually been accomplished" — and the prospects of bipartisan action on the issue by the new Congress don’t look promising.

Sen. Ron Wyden, the incoming chair of the Senate Finance Committee, said this week that he wants to "take bold action on prescription drug prices." After a bipartisan reform effort that he worked on with Sen. Chuck Grassley (R-IA) was sidelined last year, the Post reports that Wyden now "is focusing on a wish-list item for Democrats but poison pill for the GOP: eliminating a ban on the federal government using its negotiating power to directly force lower drug prices under Medicare."

Winfield Cunningham says that a new Government Accountability Office report finds that such direct negotiations can bring down government costs for prescription drugs — with the Department of Veterans Affairs, which buys drugs directly from manufacturers, paying 54% less for a unit of drugs than Medicare’s drug program, which is restricted by law from direct negotiations.

"This effect is one reason the pharmaceutical industry — and thus many Republicans and some Democrats — hate the idea so much," Winfield Cunningham writes.

Trump’s Legacy: Why the $7.8 Trillion Rise in Debt Matters

Journalists, historians and others pondering President Trump’s legacy are likely to point to his historic impeachments, his generally divisive politics and his anti-democratic propagation of misinformation and disinformation as well as the roughly 400,000 Covid-related deaths that took place while he was in office. They’re already pointing out that his four years in office started with a vow to end what he darkly described as "American carnage" and ended with him urging a march on Congress that led to one of the most shocking examples of such carnage in the nation’s history.

Writing for The Washington Post and ProPublica, Allan Sloan and Cezary Podkul argue that Trump’s legacy will include another a "lesser known but profoundly damaging" Trump legacy is the nearly $7.8 trillion increase in the national debt over the last four years (the debt held by the public has grown by about $7.2 trillion):

"The growth in the annual deficit under Trump ranks as the third-biggest increase, relative to the size of the economy, of any U.S. presidential administration, according to a calculation by Eugene Steuerle, co-founder of the Urban-Brookings Tax Policy Center. And unlike George W. Bush and Abraham Lincoln, who oversaw the larger relative increases in deficits, Trump did not launch two foreign conflicts or have to pay for a civil war. …

"The combination of Trump’s 2017 tax cut and the lack of any serious spending restraint helped both the deficit and the debt soar. So when the once-in-a-lifetime viral disaster slammed our country and we threw more than $3 trillion into covid-related stimulus, there was no longer any margin for error."

The effect of that surge in debt, they argue, is that the United States — with an aging population and rapidly rising Social Security and Medicare expenses — will be strained when it comes to investing in the future — "things like research and development, education, infrastructure and workforce training," which have already declined sharply as a share of federal spending.

And even with interest rates at historically low levels, federal interest costs are already set to be the fastest-growing budget category. "The government’s interest cost (including interest paid to government trust funds) was around $523 billion in the 2020 fiscal year," they note. "That outstrips all spending on education, employment training, research and social services, Treasury data shows."

Orszag, Rubin and Stiglitz Call for a New Fiscal Framework

The consensus on the dangers of rising debt has shifted dramatically over the last decade. Economists have been reexamining how best to spur recovery and encourage wider-spread prosperity as persistently low interest rates defy earlier warnings about the cost of massive government borrowing.

"The facts have changed and economists have, sensibly, changed their minds," the Financial Times editorial board noted yesterday. "Inflation, economic growth and interest rates failed to recover as anticipated after the financial crisis. This not only kept borrowing costs down but demonstrated that cutting spending may have had a bigger negative impact than expected."

Against that backdrop, three prominent fiscal policy experts — Peter Orszag, former director of the Congressional Budget Office; Robert Rubin, the Treasury secretary under President Bill Clinton; and the Nobel Prize-winning Columbia University economist Joseph Stiglitz — are calling for a broad revamping of federal tax and spending policies.

In a paper published this week by the Peterson Institute for International Economics, they warn that, in our uncertain world, the current low interest rates shouldn’t be taken for granted and propose a number of changes to make fiscal policy more responsive to economic conditions.

"The goal is to streamline the decisions policymakers must make and curb potential sources of budgetary instability while preserving an ability to make corrections on top of such adjustments," they write. "To move in this direction, we propose reducing the budget’s exposure to interest rate variation while also making it respond more automatically not only to short-term economic conditions but also to drivers of long-term fiscal pressures (for example, in health care and pensions)."

They make five key recommendations:

* Relying more on automatic stabilizers such as unemployment benefits.

* Creating a "permanent" new infrastructure program that spends more when the economy turns down or when the expected returns on investment are high.

* Lengthening the maturity of U.S. debt to lock in the long-term benefit of low rates and reduce the impact of any sudden rise in rates. The authors say they support the creation of bond maturities longer than 30 years. "At today’s yield curve, I’d do as much as I could" to extend the maturity, former Treasury Secretary Rubin told Bloomberg.

* Indexing Social Security to changes in life expectancy as part of a goal of having the government’s long-term fiscal commitments tied more directly to their drivers

* Allowing policymakers to streamline their decision-making and focus more on budget adjustments in response to changing circumstances.

"These five points are admittedly more a sketch than a full fiscal plan," the authors write. "But our main point is to highlight the problems in being too certain about fiscal prognostications in a world that continuously surprises all of us, and this five-point architecture points the way toward a more resilient budget policy."

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