By Peter Morici
Over the last 20 months the Federal Reserve has printed $4.3 trillion to purchase U.S. Treasurys to help finance $5 trillion in special pandemic relief and stimulus spending , because the bond markets can’t absorb that much new debt without pushing up interest rates and curbing the housing market and other private borrowing that keeps the economy going.
Pandemic relief enhanced entitlement benefits—for example, the refundable child tax credit , bigger food stamp checks and larger Affordable Care Act insurance subsidies —have contributed to a dramatic drop in the adult labor-force participation rate and worker shortages throughout the economy, an overhang in spending power and soaring inflation that businesses increasingly fear is structural—not transitory.
Making that kind of overspending permanent would spell stagflation, really engender fears that the value of U.S. Treasurys /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -0.02% could be eroded by 1970s-style inflation , push up borrowing costs, and create the mother of all fiscal crises. Then the half of all American households that pay no income tax would have to join the upper middle class and wealthy by paying for entitlements like their European brethren do .
That’s exactly what the Democrats want to do. Even a scaled-back reconciliation package would push up the annual deficit to at least $1.6 trillion. So many of the programs will have expiration dates within the 10-year tax-funding window that will be difficult for future Congresses—be they Republican or Democrat controlled—to let lapse.
Majority Leader Mitch McConnell and Republican senators should agree to increase the federal debt ceiling by just enough to permit a federal deficit of $1.3 trillion as the CBO projects for current law—not a cent more.
That may require a government shutdown to get the job done but unlike the 2013 affair , Republican actions properly explained could be a political asset.
Chastened by the Afghanistan debacle, rising prices and shortages, Americans are turning against bigger government and losing confidence in President Joe Biden.
The GOP needs to stand up for fiscal sanity.
<STRONG>Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.</STRONG>