Deficit Hits Record $1.7 Trillion in First Half of Fiscal Year

By Yuval Rosenberg

Deficit Hits Record $1.7 Trillion in First Half of Fiscal
Year

Driven by unprecedented spending in response to the Covid-19
pandemic, the federal budget deficit rose to a record $1.7 trillion
in the first six months of the 2021 fiscal year, the Treasury
Department announced Monday.

The deficit numbers for the first half of the fiscal year —
covering October 2020 to March 2021 — were roughly $1 trillion
higher this year than during the same period the year before. In
March alone, the deficit came to nearly $660 billion, driven in
large part by $339 billion in pandemic-relief payments to
individuals.

This chart from the Treasury’s
monthly report shows the surge in outlays that
begins in April of 2020, the first full month of federal spending
authorized by the $2.2 trillion Cares Act, with another noticeable
spike in March 2021 following the passage of the $1.9 trillion
American Rescue Plan Act.

Biden Says He’s ‘Prepared to Negotiate’ on Infrastructure Plan
and How to Pay for It

President Joe Biden met Monday with a bipartisan group of
lawmakers as he begins what will be a weeks-long push to win
congressional support for his nearly $2.3 trillion infrastructure
plan.

“I’m prepared to negotiate as to the extent of the
infrastructure project as well as how we pay for it," Biden said at
the start of his Oval Office meeting.

As lawmakers return to the Capitol for the first time in two
weeks, Biden’s plan already faces opposition from Republicans and
even some members of his own party, and negotiations over the
coming month or so will be crucial to determining the size, scope
and ultimate fate of the proposal.

“I think everyone acknowledges we need a significant increase in
infrastructure. It's going to get down to what we call
infrastructure,” Biden said, adding that he believes that access to
clean water and high-speed broadband qualify. “It's not just roads,
bridges, highways, etc.”

Four Republicans and four Democrats met with Biden and Vice
President Kamala Harris: Sens. Maria Cantwell (D-WA),
Roger Wicker (R-MS), Deb Fischer (R-NE)
and Alex Padilla (D-CA) and Reps. Don
Young (R-AK), Don Payne (D-NJ), Garret
Graves (R-LA) and David Price (D-NC).

“The lawmakers in Monday's meeting are not the names usually
associated with Oval Office meetings on major legislative
initiatives -- no members of congressional leadership or
high-profile moderates are on the invite list,” CNN’s Kate Sullivan
and Tami Luhby
note. “Instead the guest list is made up of
lawmakers from both parties who have a history of working on
infrastructure and sit on the committees that will shape the
proposal as it moves through Congress.”

Among the lawmakers notably not in Monday’s meeting were key
centrists like Sens. Joe Machin (D-WV), Susan Collins (R-ME) and
Lisa Murkowski (R-AK) as well as Reps. Peter DeFazio (D-OR) and Sam
Graves (R-MO), the chairman and ranking member of the
Transportation and Infrastructure Committee.

Republicans remain opposed to Biden’s plan: Many
Republicans viewed Monday’s meeting skeptically, according to

Politico, seeing it as “an optics move intended to
obscure that the Biden administration has no plans to come to the
table and seriously whittle down the legislation to a point where
it can get GOP support.”

Senate Minority Leader Mitch McConnell (R-KY) on Monday
continued to criticize the Biden package, which he has labeled a
Trojan horse for tax hikes that uses the infrastructure label to
advance a Democratic agenda. Democrats, he
said Monday, are “embarking on an Orwellian
campaign to convince everybody that any government policy
whatsoever can be labeled ‘infrastructure.’”

Wicker, the Mississippi Republican who was one of the lawmakers
to meet with Biden on Monday, highlighted the challenges the
administration faces in winning GOP support for the plan. “This is
a massive social welfare spending program combined with a massive
tax increase on small-business job creators,” he said on ABC’s
“This Week” on Sunday. “I can’t think of a worse thing to do.”

White House releases state-by-state factsheets on
infrastructure needs: To try to overcome such objections and
help make the case for Biden’s plan, the White House on Monday
released
state-by-state summaries of infrastructure needs
that it said highlight the urgency of spending on roads, bridges,
public transportation, housing and other areas after what it
describes as a decades-long “systemic lack of investment.”

Josh Boak of the Associated Press
reports:

“Drawn from an array of private and public data, the reports
show there are 7,300 miles (11,748 kilometers) of highway in
Michigan alone that are in poor condition. Damaged streets in North
Carolina impose an average yearly cost of $500 on motorists. Iowa
has 4,571 bridges in need of repair. There is a roughly 4-in-10
chance that a public transit vehicle in Indiana might be ready for
the scrap yard. Pennsylvania’s schools are short $1.4 billion for
maintenance and upgrades.”

The White House summaries also include Infrastructure Report
Card grades for most states. “Of the states rated, the highest
grade went to Georgia and Utah, which each notched a C-plus,” Boak
writes. “The lowest grade, D-minus, went to the territory of Puerto
Rico.”

A ‘lobbying frenzy’: Lawmakers are well aware of the need
for infrastructure investment in their states and districts — and
many have begun lobbying the administration for funding for
specific projects, Emily Cochrane, Pranshu Verma and Luke
Broadwater of The New York Times
report:

“Senior lawmakers have started collecting lists of requests from
their colleagues for what should be included in the bill, while top
White House officials are fielding a torrent of calls from
rank-and-file lawmakers, all of whom have their own ideas.

“‘My phone is blowing up,’ Pete Buttigieg, the transportation
secretary, said in an interview. Nearly every lawmaker ‘can point
to a road or a bridge or an airport” in his or her district that is
in dire need of repair.’”

Where the action is: Biden and the White House pushed
back on suggestions that any efforts at bipartisanship are merely
window dressing. “But even as the White House maintains it is
looking for bipartisan engagement,” Politico’s Megan Cassella

noted on Sunday, “the focus on Capitol Hill is
already shifting from winning over Republicans to gaming out what
will need to get cut if Democrats end up passing the sprawling
package through the budget maneuver known as reconciliation — a
move that would require keeping the caucus united in support.”

What’s next: As they approach
negotiations warily, both sides will have to decide how deeply they
want to invest in pursuing a bipartisan deal. “Democrats have the
biggest decisions to make,” Punchbowl News suggests. Speaker Nancy
Pelosi (D-CA) has set a July 4 target for passing the
infrastructure package in the House. “If Biden, Pelosi, and Senate
Majority Leader Chuck Schumer (D-N.Y.) don’t believe that
Republicans are bargaining in good faith or that a deal can be
reached, they’ll go the reconciliation route.”

Fed Chair

Powell Says Economy Ready to Boom

Federal Reserve Chair Jay Powell told “60 Minutes” Sunday that
the U.S. economy is turning a corner and on the verge of a
significant increase in growth.

“What we're seeing now is really an economy that seems to be at
an inflection point,” Powell said. “And that's because of
widespread vaccination and strong fiscal support, strong monetary
policy support. We feel like we're at a place where the economy's
about to start growing much more quickly and job creation coming in
much more quickly.”

Saying that “the outlook has brightened substantially” in recent
weeks, Powell also warned that the U.S. isn’t entirely out of the
woods yet, with Covid-19 still lurking as a serious threat. “[T]he
principal risk to our economy right now really is that the disease
would spread again,” he said.

Asked about the risk of inflation spiking as the economy
ramps up again, Powell said it wasn’t an immediate concern, in part
because of the lessons learned during the last recession. “The
economy has changed,” he said. “And what we saw in the last couple
of cycles is that inflation never really moved up as unemployment
went down. ... That means that we can afford to wait to see actual
inflation appear before we raise interest rates.”

Why the White House Isn’t Too Worried About Inflation

While Fed chief Powell has repeatedly downplayed the risk, some
economists and policymakers are worried that the U.S. economy could
stumble into a 1970s-style inflationary spiral produced by the
flood of relief and stimulus spending authorized by Congress in the
last year and the additional spending being proposed by Biden.

Former Obama economic adviser Larry Summers is one of the
leading critics expressing concerns. “It may be that a way will be
found to bring it under control,” Summers told Bloomberg two weeks
ago, referring to a sudden surge in inflation. “But as I look at $3
trillion of stimulus, $2 trillion of savings overhang, a major
acceleration coming from COVID in the rear-view mirror, rates
expected by the Federal Reserve to be at zero for three years even
in a booming economy, record growth this year, major expansion of
the Fed balance sheet, and much new fiscal stimulus to come — I'm
worried.”

The White House on Monday made its case against the inflation
hawks, issuing a briefing on what to expect on the inflation front
in the coming months. Written by Jared Bernstein and Ernie
Tedeschi, who serve on President Biden’s Council of Economic
Advisers, the
document says that while prices are expected to
rise in the coming months, the increase will be temporary and fade
relatively quickly — an outlook in accordance with those provided
by the Fed and the Treasury under Secretary Janet Yellen.

History as guide: Bernstein and Tedeschi say that while
the White House will monitor inflation carefully and act if serious
problems crop up, there is good reason to doubt that inflation will
emerge as a long-term problem. One reason to be confident is that
there have been a handful of similar experiences in the past that
did not produce long-term issues.

“The United States experienced short bursts of inflation in some
prior periods of pandemics or large-scale reallocations of economic
resources, such as in 1918—driven by the Spanish Flu and
demobilization from World War I—as well as the demobilization from
World War II after 1945 and the resurgence in defense spending due
to the Korean War,” they write.

The distortions of ‘base effects:’ The economists say
that the expected increase in prices over the next few months may
seem worse than they really are because they are being measured on
an annual basis, with a reference point based in the depths of the
pandemic, when economic activity was low.

“The issue with base effects is not that they make inflation
measures wrong,” they say. “Rather, the base effects distort our
understanding of how underlying, near-term trend inflation is
behaving right now, suggesting, for example, higher rates of
inflation than most analysts expect to persist.”

Over time, the base effect will fade as the reference point for
measuring price increases gradually improves.

Supply and demand out of whack: Other short-term issues
that could contribute to a temporary rise in inflation include
supply chains that need to be rebuilt, resulting in short-term
shortages, and a post-pandemic surge in demand for services as
Americans flock to restaurants and vacation destinations. Both
supply and demand problems should work themselves out in a matter
of months as the economy returns to something close to normal,
Bernstein and Tedeschi say.

Long-term view: The markets show that while price
increases are now baked into the outlook for the short-term,
investors expect inflation to drop back to pre-pandemic levels
relatively soon. “Over the longer-term,” the economists say,
“investors for the moment are assuming inflation that is consistent
with recent history as well as the Federal Reserve’s target” of
roughly 2%.

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